Understanding “Riba” (interest): the religious and the rational

2021 ◽  
Vol 11 (3) ◽  
pp. 1-11
Author(s):  
Saad Azmat ◽  
Ayesha Bhatti ◽  
M. Kabir Hassan
Keyword(s):  
Interest Rates ◽  
Religious Identity ◽  
Banking System ◽  
Point Of View ◽  
Content Type ◽  
Financial Decisions ◽  
Academic Level ◽  
The Poor ◽  
Personal Investment ◽  
Financial Expert

Learning outcomes The case explores Ayesha’s reasoning, who is also a financial expert, regarding how she approaches the question of Riba (interest) so that she can maximize her financial returns and remain true to her religious identity. The discussion in the case revolves around alternate rationalizations as to why Riba (interest) continues to remain important for many Islamic investors. Case overview/synopsis Historically, the prohibition of Riba (interest) prevented the exploitation of the poor borrower who was charged exorbitant interest rates by wealthy lenders. In the modern day, a banking system which operates in a regulated setup and charges market-based interest rates, the rationale regarding the exploitation of the poor seems less compelling. Furthermore, other economic realities such as inflation and currency fluctuations further lend support to protecting one’s investments through prudent financial decisions. In this case the authors approach this decision regarding the prohibition of Riba (interest) in Islam from the point of view of the protagonist, Ayesha Bhatti, who is religiously conscious and is faced with certain personal investment choices. Complexity academic level The case focuses on one of the core issues of Islamic finance (IF), that of the prohibition of charging Riba (interest) on debt and the reasons behind this ruling. The relevance of this prohibition to modern day financial markets is essential to understand IF. Supplementary materials Teaching notes are available for educators only. Subject code CSS 1: Accounting and Finance.

Stakeholders and opportunities of debt settlement as a values-based banking activity in Hungary

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zsuzsanna Győri ◽  
Borbála Benedek
Keyword(s):  
Research Question ◽  
Good Practice ◽  
Banking System ◽  
Financial Inclusion ◽  
Stressful Situation ◽  
Content Type ◽  
Main Research ◽  
The Poor ◽  
Lessons Learnt

Purpose The purpose of this paper is to discuss the stakeholders of debt settlement programmes in general and some lessons learnt from the most significant debt settlement programmes of recent years in Hungary. The study also presents a planned debt settlement programme in Hungary. The paper explores and details behaviours and motivations of different stakeholders in debt settlement in general and also with reference to a specific case study. As for its main research question, the paper seeks to identify the preconditions of a successful debt settlement programme with specially emphasis on the poor. Design/methodology/approach Data from semi-structured in-depth expert interviews, documents and former research papers were collected for identifying previous Hungarian debt settlement programmes and potential lessons learnt. After a general discussion, based on primary and secondary sources, a case study is presented to obtain a more comprehensive understanding of opportunities and challenges of debt settlement. Findings Six preconditions of successful debt settlement targeting the poor are identified. In the case study, the existence and relevance of these preconditions are tested: the main finding is that they all are important for solving the situations, so a partial solution is not sufficient. In the scope of the case study, more precisely within the planned innovative banking solution, the motivations of the bank and the coordinator NGO are identified. On the part of the bank, motivations for solving social problems (both as far as business and moral issues are concerned) are relevant, while – as for the other party – the situation of the debtor is important to understand so that opportunities of cooperation can be identified. In addition, as other stakeholders also influence the potentials of the programme, their cooperative attitude is also needed. Research limitations/implications Limitations consist in generalisation: the study presents some cases from one single country and finally it focuses only on one specific case in one specific social and economic context in Hungary. Having recognized this risk, the author opted for basing research questions on theory, documented the process in detail, and also used triangulation through applying a multiple data collection (interview, content analysis, literature review) method. Practical implications Besides presenting an academic understanding of the phenomena, the goal of the study is to contextualize and interpret the case, to help the realization of currently frozen initiatives and to promote similar future ones. Social implications Indebtedness is a stressful situation affecting families, smaller communities and broader society as well. The planned cooperation of BAGázs and MagNet tries to help people excluded from the banking system. So that a deeper debt trap can be avoided, the goal of this programme is to purchase, partially discharge and reschedule pre-accumulated debts of carefully selected people who have regular income and are willing to undertake bearable repayment. The idea is very innovative with literally no good practice to follow. The research seeks to clarify the pitfalls and opportunities to help the realization of the project and similar future ones. Originality/value A certain form of values-based banking concerns the financial inclusion of the poor, e.g. debt settlement. Nevertheless, over-indebtedness and the settlement of existing debts as well as the relevance of such issues to the financial inclusion are not emphasized enough in the literature or in practice. Besides presenting an academic understanding of the phenomena, the goal of the study is to contextualize and interpret the case, to help the realization of currently frozen initiatives and to promote similar future ones.

The relationships between time deposit rates, real rates, inflation and risk premium

2020 ◽  
Vol 11 (5) ◽  
pp. 1033-1053
Author(s):  
Siew-Peng Lee ◽  
Mansor Isa ◽  
Noor Azryani Auzairy
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
The Real ◽  
Explanatory Variables ◽  
Time Deposit ◽  
Causality Tests ◽  
Conventional And Islamic Banks

Purpose The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in Malaysia. Design/methodology/approach The data consists of 1-, 6- and 12-month average time deposit rates of conventional and Islamic banks over the period of January 2000 to June 2017. The cointegration methodologies are used to explore links between the time deposit rates, real rates, inflation and risk premium. The causality tests to test causality linkages between pairs of variables are also applied. The generalised forecast error variance decomposition based on the error correction model is conducted to analyse the impact of variables variation on the deposit rates. Findings The results show the presence of two cointegration vectors in the deposit rates, real rates, inflation and risk premium, for both conventional and Islamic bank rates. Causality tests reveal that deposit rates are caused by inflation and risk premium in a one-way causality. The results of variance decomposition highlight the importance of inflation and risk premium in explaining the variations in the bank deposit rates. For the conventional bank, inflation shocks play the most important role in explaining the movements of the deposit rates. In Islamic banks, the major determinant’s largest influence is the risk premium. Between the two bank rates, Islamic bank rates receive more influence from the explanatory variables in the long-run compared to conventional bank rates. The real rates have no noticeable effect on the variance of time deposit rates for both banks. Originality/value This study presents new evidence on the relationship between time deposit rates and the three explanatory variables, which are the real interest rates, inflation and risk premium, for both conventional and Islamic banks in Malaysia. The dual banking system allows exploring the similarities and differences between conventional and Islamic banks in Malaysia in terms of the linkages between the variables.

scholarly journals Macroeconomic Determinants of Shadow Banking – Evidence from EU Countries

2016 ◽  
Vol 9 (2) ◽  
pp. 111-129 ◽  
Author(s):  
Teodora Cristina Barbu ◽  
Iustina Alina Boitan ◽  
Sorin Iulian Cioaca
Keyword(s):  
Interest Rates ◽  
Banking Sector ◽  
Banking System ◽  
Point Of View ◽  
Stock Index ◽  
Shadow Banking ◽  
Investment Funds ◽  
Banking Regulations ◽  
Shadow Banking System ◽  
Macroeconomic Determinants

AbstractShadow banking is a topical, debated issue on the agenda of national and European macro-prudential regulatory and supervisory authorities. It is generally accepted that shadow banks and the traditional banking system have some core functions in common, such as credit and maturity transformation, and the exposure to similar risks. However, the tight banking regulations and the decreasing trend recorded by interest rates in the post-crisis period create prospects for shadow banking sector growth. Against this background, the present paper aims at investigating the particular impact that shadow banking activity exerts on macroeconomic fundamentals. The analysis covers 15 European Union countries, including Romania, during the period 2008 – 2015, using quarterly data. Shadow banking system is used as a proxy by monetary funds, due to breaks in the series or unbalanced number of observations across selected countries. By employing panel regression, it was found that the shadow banking total assets’ variation is negatively influenced by the GDP growth, short term interest rates, M2/GDP ratio and the ratio of investment funds’ assets in GDP, and positively determined by stock index dynamics and long term interest rates. The findings sustain the literature’s point of view

Transformation of the Ecuadorian financial system: regulation and response

2015 ◽  
Vol 23 (1) ◽  
pp. 84-102 ◽  
Author(s):  
Luisa Ana Unda ◽  
Julie Margret
Keyword(s):  
Interest Rates ◽  
Development Strategy ◽  
Initial Conditions ◽  
Political Process ◽  
Banking System ◽  
Financial System ◽  
Reform Process ◽  
Motivating Factors ◽  
Content Type ◽  
The Government

Purpose – The aim of this study is to analyse the transformation of the Ecuadorian financial system using the regulatory dialectic approach (Kane, 1977). This research examines the initial conditions and motivating factors of the reform process, as well as the interplay between government and bankers during the period 2007-2012. Design/methodology/approach – Kane’s regulatory dialectic suggests that regulation of financial institutions is a series of cyclical interactions between opposing political and economic forces. Three main stages are identified: thesis (measures and regulatory actions), antithesis (avoidance/lobby against those reforms) and synthesis (adaptive reregulation resulting from the interaction between interest groups). Findings – Since 2007, the government focused on regulating interest rates, developing a liquidity fund for banking emergencies, increasing taxation and restricting international capital flows. These government initiatives took place against a background of conflicting interests. Private bankers opposed the majority regarding them as burdensome new rules, rather than enlightened reforms. Publicly, these reforms as intended by the government were seemingly supported. Finally through the political process, they were approved. To date, these reforms have strengthened the financial system, produced encouraging social policy results and placed the financial sector to serve the government’s development strategy. Originality/value – Using Kane’s notion of regulatory dialectic, we explain the process of financial reform in Ecuador as part of a cyclical interaction between opposing forces. Drawing on this framework enabled insight into the nature of government intervention. Hence, we show how that intervention affected the growth, development and structure of the banking system.

Term spread, inflation and economic growth in emerging markets: evidence from Malaysia

2016 ◽  
Vol 15 (3) ◽  
pp. 372-392 ◽  
Author(s):  
Muhamed Zulkhibri ◽  
Mohamed Shukri Abdul Rani
Keyword(s):  
Banking System ◽  
Bond Market ◽  
Point Of View ◽  
Financial Indicators ◽  
Forecast Performance ◽  
Content Type ◽  
Term Spread ◽  
Market Participants ◽  
Monetary Analysis ◽  
Indicator Analysis

Purpose This paper aims to examine the role of term spreads to predict domestic output and inflation in Malaysia, a country with a relatively less-developed bond market. Design/methodology/approach The paper uses regression time-series regressions and probit models that control for past values of the dependent variable to determine the forecast performance of term spread on inflation and output in Malaysia. Findings The paper finds that term spread contains little information about future output and inflation at short horizons. Moreover, the usefulness of term spread to play a greater role in monetary analysis beyond conventional indicators in the case of Malaysia is limited. The degree of usefulness of term spread impediment could be attributed to the relatively fragmented, illiquid and captive bond market characteristics as compared to what is available in more matured and developed markets. Practical implications It is useful to incorporate technical and model-based approaches using yield curves beyond the usual indicator analysis from the policy point of view. Models could be used in tandem with other monetary and financial indicators to support discussions on the direction of monetary policy. Originality/value An efficient bond market could also play an important role in propagating monetary impulses via the relevant monetary transmission channels. Based on the findings, the paper suggests that there is a strong case to deepen domestic bond market. This would greatly enhance price discovery among market participants, improve risk management away from the traditional source for funds (i.e. banking system) and address supply-related issues.

Procedural and declarative cognitions

2019 ◽  
Vol 35 (4) ◽  
pp. 691-708
Author(s):  
George Okello Candiya Bongomin ◽  
John C. Munene
Keyword(s):  
Developing Countries ◽  
Research Design ◽  
Financial Literacy ◽  
Financial Information ◽  
Cross Sectional ◽  
Content Type ◽  
Financial Decisions ◽  
The Poor ◽  
Poor Households ◽  
Structured Questionnaire

Purpose Premised on the argument that procedural and declarative cognitions help individuals to memorize, store and recall information to make informed decisions and choices in daily life, the purpose of this paper is to analyze the auxiliary psychosomatic roles of procedural and declarative cognitions in promoting financial literacy among clients of microfinance banks in developing countries. Design/methodology/approach The study adopted a cross-sectional research design and a semi-structured questionnaire was used to collect responses from 400 poor households’ heads located in rural Uganda. Analysis of moment structures and structural equation modeling were used to test for the auxiliary psychosomatic roles of procedural and declarative cognitions in promoting financial literacy among the poor who are clients of promotion of rural initiatives development enterprises (PRIDE) microfinance bank in rural Uganda. Findings The results revealed that both procedural and declarative cognitions significantly and positively boost financial literacy among the poor who are clients of PRIDE microfinance bank in rural Uganda. Jointly, both types of cognitions explain 30 per cent of the variation in financial literacy among the poor who are clients of PRIDE microfinance bank. Accordingly, the results correspond to arguments by psychologists that the human mental models help individuals to process, encode, store and retrieve information at an appropriate time such as in articulating complex financial information. Research limitations/implications The study focused majorly on cross-sectional research design. Thus, future studies may use longitudinal research design to explore the ability of the poor to memorize and retrieve financial information over time. Additionally, the study used only quantitative data collected using a semi-structured questionnaire. Further studies may use qualitative data collected by means of interviews. Besides, this study solely used poor households living in rural Uganda as the main source of data. Hence, future studies involving data from other section of the population may be necessary. Practical implications The results from this study underpins the auxiliary psychosomatic roles of procedural and declarative cognitions in promoting financial literacy among clients of microfinance banks in developing countries. Indeed, the human mental models that revolve around cognition as individuals grow are critical in helping them make informed financial decisions when they are faced with difficult financial situations. Therefore, microfinance banks and financial literacy programs in developing countries should consider the roles of procedural and declarative cognitions while designing financial literacy modules. This is because they determine how individuals receive, encode, store and retrieve financial information in order to make informed and better financial decisions before consuming financial products offered by the microfinance banks. Originality/value At present, there is scanty extant literature and theory that explains the auxiliary psychosomatic roles of procedural and declarative cognitions in promoting financial literacy, especially in developing countries. The current study sheds more light on the deterministic roles of procedural and declarative cognitions in boosting financial literacy.

Dynamic lag structure of deposits and loans interest rates and business cycles formation

2017 ◽  
Vol 25 (2) ◽  
pp. 114-132
Author(s):  
Bijan Bidabad ◽  
Abul Hassan
Keyword(s):  
Interest Rate ◽  
Business Cycles ◽  
Interest Rates ◽  
Banking System ◽  
Real Economy ◽  
Short Term ◽  
Structural Dynamic ◽  
Content Type ◽  
The Real

Purpose This paper aims to study the structural dynamic behaviour of the depositors, banks and investors and the role of banks in the business cycles. The authors test the hypothesis: do banks’ behaviour make oscillations in the economy via interest rate? Design/methodology/approach The authors dichotomized banking activities into two markets: deposit and loan. The first market forms deposit interest rate, and the second market forms credit interest rate. The authors show that these two types of interest rates have non-synchronized structures, and that is why money sector fluctuation starts. As a result, the fluctuation is transferred to the real economy through saving and investment functions. Findings The empirical results show that in the USA, the banking system creates fluctuations in money and real economy, as well as through interest rates. Short-term interest rates had complex roots in their characteristic, while medium and long-term interest rates, though they were second-order difference equations, had real characteristic roots. However, short-term interest rates are the source of oscillation and form the business cycles. Research limitations/implications The authors tested the hypothesis for USA economy, while it needs to be tested for other economies as well. Practical implications The results show that though the source of fluctuations in the real economy comes from short-term interest rates, medium- and long-term interest rates dampen real economy fluctuations and also work as economic stabilisers. Originality/value Regarding the applied method, the topic is new.

Bank competition in India: revisiting the application of Panzar–Rosse model

2020 ◽  
Vol 46 (11) ◽  
pp. 1455-1477
Author(s):  
Bijoy Rakshit ◽  
Samaresh Bardhan
Keyword(s):  
Interest Rates ◽  
Banking Sector ◽  
Monopolistic Competition ◽  
Global Financial Crisis ◽  
Small And Medium Enterprises ◽  
Banking System ◽  
Optimal Level ◽  
Annual Data ◽  
Bank Competition ◽  
Content Type

PurposeThe paper measures the degree of bank competition in Indian banking over the period 1996–2016. Using bank-level annual data, we revisit the case of banking competitiveness during the prefinancial and postfinancial crisis and examine whether the global financial crisis alters the level of bank competition in India. Additionally, this paper addresses the misspecification issues associated with the widely used Panzar–Rosse model in Indian banking context.Design/methodology/approachWe apply Panzar and Rosse (1987) H-statistic and evaluate the degree of bank competition by estimating the extent to which changes in input prices are reflected in revenues earned by banks. Subsequently, we link this measure of competitiveness to a number of structural indicators (HHI and CRn) to examine the structure-conduct-performance hypothesis, which assumes that a concentrated banking system can impair competition. The simple panel regression model was used to handle the empirical estimations.Findingsfindings reveal that the Indian banking system operates under competitive conditions and earns revenues as if under the monopolistic competition. We also find evidence that Indian banks are competitive, even under a concentrated market structure. This observation runs, in contrary, to the prediction of the structure–conduct–performance hypothesis. The findings also indicate the differences in the estimated H-statistic value after considering the misspecifications of the P–R model.Practical implicationsFrom policy perspectives, policymakers should focus more on maintaining an optimal level of bank competition by mitigating entry restrictions, exercising less consolidation and withdrawing overregulation from banking activities. A competitive banking industry ensures both efficiency and stability.Social implicationsA competitive banking sector by lowering interest rates margin provides easier access to finance to both households and small and medium enterprises (SMEs).Originality/valueThis is the only study that addresses the misspecification of the P–R model while assessing competition in Indian banking and provides a thorough understanding of the role of concentration on bank competition.

Can poor farmers afford higher micro-credit interest rates than the un-poor?

2016 ◽  
Vol 8 (1) ◽  
pp. 100-111 ◽  
Author(s):  
Xiaoping Tan ◽  
Wanlong lin
Keyword(s):  
Interest Rates ◽  
Poverty Reduction ◽  
Return Rate ◽  
Point Of View ◽  
Endurance Capacity ◽  
High Interest Rate ◽  
Content Type ◽  
Household Level ◽  
Return Rates ◽  
Investment Return

Purpose – The purpose of this paper is to test whether there is higher return rate of investment for poor farmers than for un-poor farmers and to discuss its implication for poverty reduction microcredit rate policy. Design/methodology/approach – By using the household-level data of six provinces of China, farmer household production function is used in this paper to estimate the investment return rate of farmer. Findings – The paper indicates that regardless which kind of grouping standard is adopted, the investment return rates of poor farmer households in general are far lower than the non-poor. In general, the richer a farmer household, the higher is the return rate of his household productive operations. Practical implications – The study of this paper reminds policy makers that poverty reduction microcredit rate should really take endurance capacity of poor farmers for credit rate into accounting because of the low return rate of their family investment. Exorbitant credit rate should be avoided to protect the credit right of poor farmers. Originality/value – There is seldom study on the comparison of return rates of family operation investment between poor and un-poor farmers; there is also unenough empirical study on the rationality of high interest rate on poor households from the return rate of investment point of view. The authors expect this paper will have some contribution on these two points.

scholarly journals Monetary policy collision on the performance of banking sector in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Belavadi Nikhil ◽  
Shivakumar Deene
Keyword(s):  
Monetary Policy ◽  
Public Sector ◽  
Central Bank ◽  
Interest Rates ◽  
Banking Sector ◽  
Banking System ◽  
Economic Situation ◽  
Content Type ◽  
Public Sector Banks ◽  
The Impact

Purpose The study aims to identify the impact of monetary policy tools on the performance of banks in India, and this could be an excellent suggestion to the regulators in framing the favourable interest rates which would meet the macroeconomic objectives of the Indian economy. Design/methodology/approach The design adopted in this study is descriptive and analytical research. Correlation and regression analysis is used to determine the relationship between bank rate (BR) and the performance of public sector banks in India. The sample chosen for this study is the public sector banks actively performing in India. Findings The performance is measured by taking three factors, and they are deposits, loans and advances (L&A) and total asset value of the banks. All three factors have shown an impact of BR on them during the five years. L&A affected the least amongst the three factors, but the other two were significantly impacted by the change in BR by the Reserve Bank of India. So, there should be a favourable fluctuation in the BR which will bring flexibility in the banking system, and they can perform well in the economy and the central bank also can concentrate on the macro-economic situation in the country. Originality/value This paper helps in giving suggestions to the Central bank, researchers, financial institutions to look into the financial performance and monetary policy rates and the central bank also can concentrate on the macro-economic situation in the country.

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