36 research outputs found
Lessons from East Asia's Crisis and Recovery
This paper provides an empirical analysis of the currency crisis and recovery in three East Asian countries, Malaysia, Thailand and South Korea. Using macro economic data for the three countries over a 13 year period, 1990 â 2002, the paper examines the factors leading to the crisis, the policy response to the crisis, an evaluation of their recovery and the lessons that can be learnt. During the seven year period prior to the crisis, all three countries experienced very rapid GDP growth. Collectively, average annual GDP growth was 11.5%. This growth however was fueled by rapid monetary growth, current account deficits, negative S-I gaps and short term capital inflows. As a result, serious structural weaknesses were built. Overvalued exchange rates enhanced the vulnerabilities. The two year period of crisis, saw sharply negative GDP growth in all three countries. These were accentuated by the contractionary policies. While Thailand and South Korea had to turn to the IMF and adopt the IMF package, Malaysia took the âunorthodoxâ route of capital controls and currency peg. The paper argues that despite different policy stance the underlying responses were the same. All three countries experienced a V-shaped recovery. Malaysiaâs controversial policies appears to have provided no additional advantage. The paper concludes with an outline of key lessons for policy makers from the experience of the three countries.Lessons from East Asia's currency crisis; and recovery
Dual Banking Systems and Interest Rate Risk for Islamic Banks
In introducing Islamic banking in Malaysia, the basic strategy was to replicate the products/ services offered by conventional banks. The successful implementation of such a strategy has meant that Malaysia today has a truly dual banking system. Islamic banks in Malaysia not only have product similarity with conventional banks but share the same overall economic environment and a common customer base. The ability of non Muslim customers/depositors to switch between the two banking systems, means that deposit / financing rates have to be similar â else give rise to arbitrage flows. The implication is that, though Islamic banks operate on interest free principles, the economic environment in a dual banking system inevitably exposes them to the problems of conventional banks; in particular interest rate risk. Using monthly data over the 10 year period 1994 â 2003, the paper argues that, paradoxical as it may seem, Islamic banks operating within a dual banking system may also be subject to interest rate risk.Dual Banking Systems; Interest Rate Risk; Islamic Banks
Value Preservation through Risk Management - A Shariah Compliant Proposal for Equity Risk Management
This paper makes a case for the preservation of Muslim Wealth through risk management. It provides an exposition of risk management techniques used in conventional finance and outlines the limitations faced by Muslim fund managers and businesses. This limitation arises from the proscription of key risk-management tools, in particular financial derivatives. Though the reasons for the prohibition are diverse, the overriding concern appears to be that they encourage speculative behaviour. As such the emphasis of Islamic risk management has been on, On Balance Sheet methods. The problem with On Balance Sheet methods is that they require the restructuring of business transactions which can render businesses less competitive and subject to residual risk. The paper proposes a portfolio insurance scheme that uses the logic and mechanics of conventional Index Put Options but in a Shariah compliant manner. The proposal is intended to strike a balance between the need to avoid speculation and the genuine need for hedging equity risks.Shariah compliant, equity risk management
Derivative Instruments and Islamic Finance: Some Thoughts for a Reconsideration
This paper examines contemporary derivative instruments and the Islamic viewpoint of these new instruments. The validity and permissibility of these instruments appears to vary by scholar. Even where Islamic scholars have found them to be objectionable, their reasons for objection differs. Much of the work by Islamic scholars has been of a highly juridical nature. They examine derivatives within narrow confines of contractual arrangements and thereby miss the broader picture of why instruments like futures and options are needed in modern business environments. This paper analyzes forwards, futures and options, examines the evolution of these instruments, their unique benefits and makes a case for why they are needed. Islamic Finance instruments with derivative like features such as the Baâi Salam and Istijrar contracts are also examined. Some of the key concerns that Islamic scholars have regarding derivatives is addressed. The paper is divided into four parts. Part 1, outlines the objective and introduces derivative instruments. Part 2, examines the Islamic viewpoint and shariah conditions for financial instruments. Part 3, examines Baâi Salam and Istijrar contracts. Part 4, clarifies why some of the objections of Islamic scholars regarding features and trading mechanism may be misplaced and concludes.Islamic Finance and Derivative Instruments; The need for a reconsideration of their acceptability
Adapting Mudarabah Financing to Contemporary Realities: A Proposed Financing Structure
Islamic banking in Malaysia, despite its recent start, has seen very rapid growth. This growth however has been uneven. While short-term trade financing has always been dominant and grown rapidly, Mudarabah financing by Islamic banks in Malaysia has reduced to insignificantly amounts. Yet, Mudarabah which is based on profit and loss sharing has always been considered to be at the core of Islamic financing and in tune with the shariahâs injunctions against interest based financing. The paper addresses why this has been the case. Using conventional finance theories it is shown that Mudarabah financing has serious agency problems, lacks the bonding effect of debt financing and can induce perverse incentives. Following an analysis of these problems in Part I. Part II compare: Mudarabah with conventional debt and equity financing within a risk-return framework. Using scenario analysis, it is shown that for a âborrowerâ faced with the alternative of using Mudarabah, debt or equity financing, Mudarabah would be best in a risk-return framework. For a financier faced with the same three alternatives however, Mudarabah financing would be the worst. Expected returns would be the lowest while risk highest among the three alternatives. This has to do with the structure of Mudarabah financing where strict interpretation of the Shariah requires the financier to absorb all losses, but profits to be shared. It is argued that this inequality in the distribution of risk and returns has caused Islamic banks to reduce Mudarabah financing. Part III proposes an alternative financial arrangement under Mudarabah. Using the principles of mezzanine and vertical-strip financing, currently in use in venture-capital and other high risk financing like Leveraged Buyouts (LBOs), it is shown that a more equitable distribution of risk and returns can be achieved. The proposal requires the mudarib (borrower) to âreimburse' the financier in the event of certain outcomes. This reimbursement will be in form of the Mudarib giving up part of his equity to the financier. While this reduces the agency problems and the downside risk faced by the financier it does not eliminate all such risk. Thus, both parties will be required to be responsible and cautious in undertaking new projects. Part IV concludes with an evaluation of the proposed arrangement in the context of the ShariahAn adapted model for Mudarabah; Islamic profit-loss sharing financing
The Market for Financial Derivatives: Removing Impediments to Growth
This paper begins with an evaluation of the performance of the Malaysian market for financial derivatives. Despite a headstart, Malaysia appears to be lagging substantially when compared to the performance of other Asian derivative markets. While the other Asian markets though newer, have seen explosive growth in volume, trading volume in Malaysia appears to have shrunk. We examine why this has been the case and identify several macro and micro level impediments. Among macro level impediments have been the imposition of Capital controls, reduced equity market volatility, falling interest rates and a fragmented regulatory/operational structure. The lack of market makers, regulation and settlement rules were identified as impediments at the market micro structure level. We propose several measures to develop the local derivatives market. This includes, privatizing and deregulating risk management, facilitating market making, liberalization of unit trust guidelines with regard to their use of derivatives and the initiation of derivative funds. We also recommend the reactivation of securities borrowing and lending, introduction of new derivative products and streamlining of licensing / regulationsMarket for Financial Derivatives in Malaysia and removing impediments to their growth
Pricing Hybrid Securities: The Case of Malaysian ICULS
This paper provides an indepth analysis of Irredeemable Convertible Unsecured Loan Stocks or ICULS. A Malaysian variant of the convertible bond, ICULS are a hybrid security. Despite their introduction and trading since the late 1980âs, not much work have been done on them. This paper presents the first empirical evidence on the pricing of ICULS. We propose a pricing model for ICULS, built on the replication technique of options. Using 30 months (2Âœ years) of daily price data, we test our model on a sample of 34 ICULS. Though on average ICULS are underpriced by 2.3%, we find an equal number of under and overpriced ICULS. Our findings show that not only does the market misprice ICULS, the mispricing is sustained over quite a while. Infact, even over a one year window period, marginal mispricing remains. We argue that issuers of ICULS benefit much more than investors do.Pricing of Hybrid Securities; Irredeemable Convertible Unsecured Loan Stocks or ICULS; Option Pricing, Pricing Efficiency
The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience
This paper examines the operation of an Islamic Interbank Money market (IIMM), within a dual banking system. The paper argues that even though an Islamic Money market operates in an interest free environment and trades shariah compliant instruments, many of the risks associated with conventional money markets, including interest rate risk is relevant to an Islamic Money Market operating within a dual banking system. The empirical evidence based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in sync with conventional money market rates. Given the dynamics of fund flows and cross linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest rate risk. In fact, the paper argues that such an IIMM may actually enhance interest rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector.Islamic Interbank Money Market, Dual Banking, Malaysia
A Common Currency Area for MENA Countries? A VAR Analysis of viability
This paper examines the feasibility of a Common Currency Area (CCA) among 10 (Middle East and North Africa) MENA Countries. The 10 sample countries constitute the six GCC Countries and the four Agadir nations. Methodology Approach Macroeconomic data for the 34 year period 1970 to 2003 is used. Feasibility is examined by analyzing the symmetry of response of countries within each group to a common external shock. The impulse response functions (IRF) from a Vector Autoregression Model is used. The strength of lingkages within each economic bloc was examined using Pearson pairwise correlation and variance decomposition. Findings Among GCC countries, the results show the existence of strong lingkages among the monetary variables, signifying strong monetary sector integration. Such integration however is lacking where the real sector is concerned. Despite the symmetry seen in the impulse response functions, variance decomposition showed the absence of any meaningful influence of countries on each other within the bloc. Amongst the Agadir nations, the results show no correlation in real output growth, some correlation among monetary variables but no symmetry whatsoever in response to external shocks. The variance decomposition too did not show mutual influence intra group. Implications The lack of real sector integration will present a challenge to GCCâs desired goal of a CCA by 2010. The Agadir nations appear to be simply a loosely knit economic grouping with little integration of any kind. Thus, hopes of a CCA among Agadir nations is far too premature.Feasibility of Common Currency Area; for MENA (Middle East and North African) countries
The Asian Currency Crisis - A Fait Accompli?
This paper analyzes the East Asian Currency Crisis to examine what factors led to the crisis and the differential impact across countries. Empirical data of 7 Asian countries over the period 1990 â 1996 is examined. The sample of seven countries is divided into two categories; crisis countries and affected countries. Comparison of several economic indicators is made between these two categories to determine what factors led to the severe consequences in the crisis countries as opposed to affected countries, all of which were subject to contagion. The crisis countries were found to have had aggressive growth policies that were fuelled by reflationary strategies; particularly rapid monetary growth and capital inflows. With higher relative inflation and repressed interest rates, exchange rate equilibrium as dictated by purchasing power and interest rate parities were out of line given pegged exchange rates. The currencies had become overvalued. The result being current account deficits that were financed by capital inflows, increasingly in the form of short term foreign currency denominated loans. The combined impact of all of this had been to increase the crisis countriesâ vulnerability to a speculative attack and a resulting self-fulfilling crisis.Asian Currency Crisis; differential impact on countries