Critical issues on Islamic banking and financial markets : Islamic economics, banking and finance, investments, Takaful and financial planning

This book examines the principles and practices ofIslamic banking and financial markets, particularly from the Malaysian experience. The main objective of Islamic financial system is to govern the flow of funds from the surplus sector to the deficit sector and it does so to promote justice ('adalah). That is, by adhering to Shariah principles and achieving efficiency - doing the right thing and doing it right, public and private interest interests are can both be protected. By doing so, the legal and moral dimensions of product design and development are now equally important. In this way halal status should not discount how Islamic products affects general economic activities. It means that Shariah advisors should not only approve Shariah complaint products along the juristic plane but dutifully consider how the products can affect income disparities and poverty, economic stability and growth. For this reason, the principle of risktaking (ghorm) and the principle of work (kasb) and the principle of liability, accountability, responsibility (daman) are paramount in determining Shariah legitimacy of profits and earnings derived from Islamic financial transactions. Risk (ghorm), work (kasbh) and liability (daman) constitute the essence of trading and commerce (ai-bay') the Holy Quran has enjoined over usury (riba). By risk, it means allowing capital to depreciate and appreciate as dictated by the market forces. By work, it refers to value-additions namely, knowledge and skills imparted into the business process. Liability means the responsibility each party must assume in the contract such as providing warranties on the goods and services sold. Based on these principles ofrisk, work and responsibility, also known as the principle of equivalent countervalue ('iwad), the ethical and moral dimension of Islamic fmancial transactions can be realized and thus promote the sense of justice the Quran attempts to convey. It helps people take a second-look at financial products that have received Shariah compliant status and help control potential duplication of interestbearing products bearing the Islamic label

What Drives Profitability of Banks: Do Interest rate, and Fee and Commissions impact the profitability of Banks? Evidence from the European Countries

Traditionally, the main role of the bank is to offer loans to its customers, to facilitate the intermediary role in the financial market between the investors and feed the need of the big corporations in terms of investment. This study is an attempt to analyze, at the same time, the impact of three factors that are involved in the income of the European banks. The first two are endogenous to the bank and the third one is deemed, a priori, to be exogenous to the bank. Our objective is to look at the influence of “Fee & commissions”, the “Net Non-interest income” and the interest rate on banks’ profitability in a panel data of 34 banks chosen from different European countries. The interest rate of reference is supposed to be under the control of the central bank but subject to movement due to the interactions between the cross-border countries and the competitive framework within the same country. The “Fee & commissions” and the “Net Non-interest income” are more related to the efficiency of the management team and the effectiveness of the processing inside the same bank. Our main finding is that the “Fee & commissions” are not really influencing the profitability of the European banks. However, the “Net Non-interest income” and the interest rate are significantly impacting the profitability of the European banks

Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators

The financial and banking crises around the world have prompted the regulators to revise, among others, the capital level of the banks to deal with the excessive risks taken by the banks, both conventional and Islamic. This study is the first attempt to investigate the relationship between risky assets and capital level in a mixed banking system applying the panel VECM and dynamic GMM estimators. The Malaysian mixed banking system is used as a case study taking panel data covering the period from December 2006 to October 2013. Our statistical results based on dynamic OLS (DOLS) tend to indicate that there is a positive relationship between the capital ratio (CAR) and risk weighted asset ratio (RWA) in the long run and also, the causality analysis based on panel VECM and two-step dynamic System GMM tends to indicate unidirectional causality in that the RWA is positively driven by CAR. Our results appear to suggest that higher capital buffer (excess capital above regulatory capital requirement) might have opened up more space for bank managers to taking risky positions while assisted by increasing domestic demand for credit facilities under favorable economic condition of Malaysia. In other words, high capital growth and capital buffer provides an extra cushion for Malaysian banks to pursue relatively riskier financing activities. For the full-fledge Islamic banks (IB) and Islamic bank subsidiaries (IBS), the existence of a cointegrating relationship between RWA and CAR suggests that the way the managers of Islamic banks behave towards risky assets follows the conventional practice

Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators

The financial and banking crises around the world have prompted the regulators to revise, among others, the capital level of the banks to deal with the excessive risks taken by the banks, both conventional and Islamic. This study is the first attempt to investigate the relationship between risky assets and capital level in a mixed banking system applying the panel VECM and dynamic GMM estimators. The Malaysian mixed banking system is used as a case study taking panel data covering the period from December 2006 to October 2013. Our statistical results based on dynamic OLS (DOLS) tend to indicate that there is a positive relationship between the capital ratio (CAR) and risk weighted asset ratio (RWA) in the long run and also, the causality analysis based on panel VECM and two-step dynamic System GMM tends to indicate unidirectional causality in that the RWA is positively driven by CAR. Our results appear to suggest that higher capital buffer (excess capital above regulatory capital requirement) might have opened up more space for bank managers to taking risky positions while assisted by increasing domestic demand for credit facilities under favorable economic condition of Malaysia. In other words, high capital growth and capital buffer provides an extra cushion for Malaysian banks to pursue relatively riskier financing activities. For the full-fledge Islamic banks (IB) and Islamic bank subsidiaries (IBS), the existence of a cointegrating relationship between RWA and CAR suggests that the way the managers of Islamic banks behave towards risky assets follows the conventional practice

ECONOMIC PRINCIPLES IN ISLAM: SOME METHODOLOGICAL ISSUES

This paper examines the nature of economic principles in Islam. Two types of economic principles are identified. The first type refers to the economic laws derived from revelation-based sources namely the Quran, Sunnah, Ijtihad and Ijma. The second type refers to economic lwas derived from reasoning and experience. The former is the economic system and the latter is economic theory. Both forms of economic laws are in harmony and have no basis for compartmentalization as there is no conflict between revelation and science in Islam. in theory building, it is shown that Quran based assumptions act as the linking mechanism in harmonizing revelation and science. As revelation is superior to reason and experience. Modification of economic models for empirical verification must not involve changes in Quranic based assumptions. Only the observed or tabi' based assumptions are subjec to modifications.

Shariah parameters reconsidered

Purpose – The purpose of this paper is to explain three additional parameters, namely maqasid al-Shariah, financial reporting, and legal documentation of contract for determining Shariah legitimacy of financial instruments in Islamic financial institutions. Currently, contract ('aqd) is the only parameter recognized by Shariah scholars at the supervisory level. Design/methodology/approach – This analysis begins with examining the pitfalls of the contract approach and proceeds to present the maqasid, financial reporting and legal documentation approaches in ascertaining absolute Shariah compliant of financial products. Findings – The paper argues that the four approaches must be applied in package in determining Shariah compliant status to avoid costly errors that might lead to litigations and loss of competitiveness in the Islamic financing business. Originality/value – The paper provides new insights and integrated analysis of Shariah auditing where knowledge clusters concerning the Shariah, economics, finance and accountancy, and law are algamated to ascertain wholesome Shariah viewpoint.Contracts, Financial reporting, Islam, Legal action

'IWAD AS A REQUIREMENT OF LAWFUL SALE: A CRITICAL ANALYSIS

This paper will argue that replacing ribOE with al-bayc does not mean that the latter can imply any form of sale (al-bayc) to justify Islamic legitimacy. Apart from the prohibition of uncertainties (gharOEr) in sale, the requirement of an equivalent countervalue (ciwaè) must also be met. Risk (ghurm) and liability (èaman) after sale and value-addition or effort (ikhtiyOEr) are the principal components of ciwaè. As such, any increase from sale must contain ciwaè, otherwise ribOE is implicated. In classical Islamic commercial contracts such as ijOErah, salam and muèOErabah, ciwaè is evident. However, the contracts of credit of al-murOEbaúah or al-bayc bithaman OEjil are widely used by Islamic banking practitioners. To prove Islamic legitimacy, this contract must show that the financiers assume the risk of ownership in making the sale. It must also show evidence that the seller is liable to the option of defect (khiyOEr alcayb). The same holds for bayc al-c¥nah and bayc al-dayn which are also widely used in Islamic money and capital markets in some Muslim countries.Iwad, Riba