Direct and indirect costs in Islamic finance – opportunities for research

This is an exploratory conceptual paper that attempts to highlight some potential research areas related to the aspects of direct and indirect costs in Islamic finance. Questions on whether indirect costs should be included in compensation calculation and in computing mudarabah profit, as well as the issue for indirect costs in the context of Islamic banking windows, are deliberated upon. The paper articulates a comparison of costs of Islamic banks vis-à-vis conventional banks in terms of cost of funds, general cost efficiencies, regulatory costs, asset-liability management and risk management costs, operational costs and costs of bad debt. The risk of non-Shari’ah compliance and how it may impact costs are also highlighted. Finally, the paper briefly discusses some cost aspects relevant to Islamic capital markets

Heads we win, tails you lose: Is there equity in Islamic equity funds?

We made the first estimate of the proportion of fund alpha statistically attributable to luck rather than skill for a sample of Malaysian Islamic equity funds. Broadly, the funds do not outperform market benchmarks. In the limited instances where performance is superior, based on a contemporary methodology, as much as 47% of the observed positive fund alpha is statistically attributable to luck. Thus, at 5% significance level, we find only 1.95% of our funds to be genuinely skilled. Our findings raise questions regarding the equitability of these funds levying fixed fees, making a case for potential innovation in fund remuneration structure

Investment of endowment funds in the higher educations: best practices, performances and issues

Purpose – The role of endowment funds in higher education across countries in last decades has been important as one of the major funding sources to finance academic activities. Many well-known universities in the world have implemented different strategies for investment management of endowment funds in order to achieve their long-term objectives. The main purposes of this paper are to perform an analysis of conventional endowment funds of higher education and to articulate some benchmarks or best practices related to the financial management of endowment funds. Besides, the paper identifies some unique issues or challenges faced by endowment funds. Design/Methodology/Approach – The study evaluates the current practices of conventional endowment funds management of universities based on secondary sources of information, including published reports, journal papers, articles and books. Findings – The model of endowment fund investment differs from one university to another. The paper reviews the current practices and strategies of the largest universities’ endowment fund investment activities. Originality/value – By providing a general review in the conventional endowment funds of higher education, it is expected to have valuable input, which delivers lessons to be learned for contemporary waqf institutions and Islamic third sector. However, the main issue is comparability, where the majority of conventional endowment fund is invested in form of financial assets, while waqf is mostly in the form of real assets, but there is similarity in nature between endowment and waqf funds. Keywords Investment, Endowment Funds, Higher Education Paper type General revie

Information content and informativeness of analysts’ report: evidence from Malaysia

Purpose This study aims to document the influence of information content and the informativeness of analyst reports towards cumulative abnormal return (CAR) in the Malaysian market. Design/methodology/approach Samples of analyst reports for the period 2010, January 4th until 2015, December 24th were collected from the Bursa Malaysia’s repository system for daily basis information. The study employs market adjusted method for the calculation of CAR and panel regression to test the research objective. In addition, diagnostic tests which include the Variance Inflation Factor (VIF), correlation analysis, heteroscedasticity tests, serial auto-correlation and the Hausman test were also performed to ensure the validity and reliability of the data. Findings Result from the unbalanced panel data reveals that not all of the information contained in the analyst reports are able to detect stock returns movement. Only five variables are shown to have strong association with the returns, and these are; target price, earnings forecast, return on equity, cash flows to price, and sales to price ratio. The R-Square value has also been shown to be relatively low (0.79%), indicating the low predictive power of information content and the informativeness of the analyst report in explaining stock returns. In order to support the findings based on the knowledge obtained, a descriptive analysis on whether the analyst reports were able to predict the recommendation accurately or not was performed. Result from the descriptive analysis shows that only 57 percent of the recommendations are accurate, evidenced by the differing target price and ending price. This outcome appears to contradict the theory of signalling hypothesis. Hence, it can be concluded that analyst reports have less informational role among investors Originality/value This paper has thus provided insight into how information disclosed in the analyst report influence the return of stocks, further extending the limited research on analyst report in the context of Malaysian market. The paper has also added to the existing literature by providing several implications to practitioners and researchers alike

Islamic venture capital – issues in practice

Purpose – This paper aims to explore the structure and underlying contracts of Islamic venture capital (IVC) and to evaluate its prospects. VC can be perceived as an investment vehicle possessing most of the desirable attributes of a Sharīʿah-compliant investment vehicle. There are certain issues involved in the formation, operations and exit strategies of these investments that are discussed in detail in this paper. Design/methodology/approach – A detailed review of relevant literature is performed to identify how IVC investments can bemade and how related issues may be resolved. Findings – IVC investment has potential of incorporating Sharīʿah-compliant investment modes. Additionally, it may offer higher than average returns. These attributes can be desirable for Islamic finance industry that is currently in need of equity-based financing products. The major causes of lesser growth of IVC investments are lack of awareness among the investors and the absence of viable investment opportunities for small- and medium-scale investors. IVC may attract general public if established after extensive research aimed at introducing innovative products. Originality/value – This paper provides an overview of a truly Sharīʿah-compliant investment vehicle, furnishes a synthesis of various suggestions made by industry and academia and suggests viable solutions for valuation, risk management and exit strategies

Information Content of Analysts' Report: A Literature Survey

The objective of this paper is to survey the literature on the information content of analyst report from three essential dimensions, namely, target price, earnings forecast and trading volume. The method employed is following the qualitative approach by reviewing and examining the past literature from the view of theoretical and empirical researchers. The initial result from existing literature, reveals that the research in analyst report mainly focused on empirical research rather than theoretical perspective. Secondly, there no clear consensus on the consistency of results regarding how well the information contents involving target price, earnings forecast and trading volume influencing the stock return. Thus, the views whether analyst report transmitting information to the investors still remain unambiguous when making an investment decision. This study is expected to enrich the existing literature in the area of analyst report and propose several areas for future researchers related to this topic.DOI: 10.15408/etk.v17i1.666

Strategic direction setting of DFIS: A qualitative review based on performance model

DFIs are specialized financial institution, appointed by the government and been entrusted for specific mandated roles on socio-economic development. In Malaysia, the mandate of DFIs is merely similar to Islamic economic objective that is for society benefit. Hence, the study been carried out to analyze on the Islamic economic objectives coverage by the DFIs and to explore on the involvement of the Shari’ah committee member of DFIs in the direction setting of the institution. All six Malaysian DFIs which prescribed under DFIA 2002 been included in the study. The result from content analysis shows that there is one Maqasid dimension which not been covered in the DFIs’ vision and mission statement. Furthermore, there is none DFI covers all nine PMMS model’s dimensions as the most covered is six dimensions. Based on interviews, it is found that the Shari’ah committee member is not involved directly in the direction setting of the institution but rather involved in the supervision and assisting the DFIs in Shari’ah matters. It is recommended the DFIs to shape their direction towards fulfilling the Islamic economic objectives since they are mandated so besides their intent to be as full-fledged Islamic. In ensuring the truthful attainment of Islamic economic objective, it is also suggested the Shari’ah committee member to be included as they could contribute on Maqasid Shari’ah perspective in determining and shaping the strategic direction of the institution

A critical look at an Islamic Gold investment account

This article assesses an Islamic gold investment account offered by an Islamic bank in Malaysia and analyses its pros and cons. We look into the product’s relative advantages and disadvantages compare to some other Islamic deposit products and conventional gold accounts. In process of the assessment we also come across some Shari’ah compliance related issues and some practices which needs to be scrutinized from Shari’ah, economic and social perspectives. Overall, our findings suggest the account to be worthwhile investment instrument for long-term saving instrument and promising venture at times of boom in gold prices. However, the account is considered as a risky and unfavorable investment when gold price is on fall or if the customer intends to keep his deposits for a brief period. Finally, we pose some questions to the reader to ponder upon about some possible implication of the product for the Islamic bank, its customer or the society at large

Tawarruq and Wa’d as main ingredients of Islamic structured investment: food for thought

This article discusses in detail one example of an Islamic structured investment product. The said product is used as an illustration to highlight some issues deemed critical in the development of the wider Islamic finance space. The author humbly submits that convoluted structures, quite common in contemporary Islamic finance, are generally not healthy for the industry and its stakeholders. Opacity in financial dealings not only increases the cost of doing business, it makes risk assessment and management that much more challenging, to both transacting parties and regulators. Some additional perspectives related to the polemic on the practice of tawarruq are also offered. Finally, some thoughts on the widespread usage of wa’d as a somewhat indispensable tool in structuring contemporary Islamic financial instruments as well as the attitude towards risk inherent in structured products vis-à-vis a reasoned Islamic risk-return paradigm are deliberated upon

Islamic structured investment: an example and critical analysis

This paper discusses in detail one example of an Islamic structured investment product. The said product is used as an illustration to highlight some issues deemed critical in the development of the wider Islamic finance space. The author humbly submits that convoluted structures, quite common in contemporary Islamic finance, are generally not healthy for the industry and its stakeholders. Opacity in financial dealings not only increases the cost of doing business, it makes risk assessment and management that much more challenging, to both transacting parties and regulators. Some additional perspectives related to the polemic on the practice of tawarruq are also offered. Finally, some thoughts on the widespread usage of wa’d as a somewhat indispensable tool in structuring contemporary Islamic financial instruments as well as the attitude towards risk inherent in structured products vis-à-vis a reasoned Islamic risk-return paradigm are deliberated upon