Determinants of profit and loss sharing financing in Indonesia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zaini Ibrahim ◽  
Nury Effendi ◽  
Budiono B. ◽  
Rudi Kurniawan
Keyword(s):  
Interest Rates ◽  
Risk Sharing ◽  
Banking System ◽  
Structural Vector Autoregression ◽  
Content Type ◽  
Management Evaluation ◽  
Dynamic Relationship ◽  
Financing Performance ◽  
Internal And External Factors ◽  
Robustness Check

Purpose This paper aims to investigate the dynamic relationship between profit and loss sharing (PLS) financing and banking-specific variables, macroeconomic variables and religiosity in Indonesia. Design/methodology/approach This study used seven variables, such as PLS financing, Islamic financing rate, risk-sharing deposits, bank size, interest rate, economic growth and level of religiosity. The data used were monthly time series during the 2009–2019 period, and they used the structural vector autoregression method plus ARDL and ECM as a robustness check mechanism. Findings The results show that in the short term, PLS financing is more influenced by changes in the risk-sharing deposits and bank size variables. Meanwhile, analysis of variance decomposition illustrates that variations in PLS financing are more influenced by the dynamics of PLS financing itself than other variables. This finding also strengthens the characteristics of PLS financing that is immune to the influence of interest rates, and this result can strengthen the implementation of the PLS scheme as an alternative to the monetary channel in the dual banking system in Indonesia. Practical implications The immunity of PLS financing to changes in interest rates has implications for the management of Islamic banking risk management. Evaluation must be carried out by increasing the skills of the bankers in response to losses arising from moral hazard and asymmetric information. Originality/value This paper used empirical evidence to show the influence of internal and external factors toward PLS financing performance. To the best of the authors’ knowledge, the study on determinants of PLS financing is limited, particularly in the context of Indonesia.

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.

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.

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.

Ecuador economy plans may run into difficulties

2021 ◽  
Keyword(s):  
Private Sector ◽  
New Deal ◽  
Risk Sharing ◽  
Banking System ◽  
Content Type ◽  
Fiscal Adjustment ◽  
The Pacific ◽  
Trade Bloc

Significance The second had been delayed pending the inauguration of President Guillermo Lasso and confirmation of his commitment to the agreement’s objectives. Lasso reached a new deal last month which unlocks two new tranches under Ecuador’s existing USD6.5bn loan programme, while facilitating a more gradual fiscal adjustment than that agreed by his predecessor. Impacts Crisis measures in the banking system will be unwound later in the year to preserve the sector’s health and avoid creating distortions. Lasso will strive to accelerate Ecuador’s incorporation into the Pacific Alliance trade bloc. Lasso’s plan to double oil output through risk-sharing agreements with the private sector will probably prove over-optimistic.

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.

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.

Pressure on Iran’s banks raises chances of collapse

2022 ◽  
Keyword(s):  
Central Bank ◽  
Interest Rates ◽  
Financial Institutions ◽  
Banking Sector ◽  
Task Force ◽  
Banking System ◽  
Reliable Data ◽  
Content Type ◽  
Bank Managers ◽  
Financial Action Task

Significance However, the signs of strain are becoming more marked. On December 15, the Central Bank of Iran (CBI) issued an official warning to all financial institutions, threatening legal penalties for bank managers who try to compensate for rising inflation by offering savers higher interest rates than is legally permitted. Impacts If US sanctions are not lifted, further economic deterioration will increase pressure on the banking system. Iran’s blacklisting by the Financial Action Task Force will be an ongoing burden for the banking sector. Tight credit will make it hard for consumers to get even small loans, such as those for which newlyweds used to be automatically eligible. There are no reliable data, but comprehensive restructuring of the banking system would likely cost hundreds of billions of dollars.

Greek debt deal will bring fresh elections soon

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Banking System ◽  
Energy Market ◽  
Labour Law ◽  
Tax System ◽  
Content Type ◽  
Comparable Effect ◽  
The Government

Significance The new programme will support recapitalisation of the banking system, allow orderly -- rather than fire-sale -- divestment of state-owned assets and promote liberalisation of the energy market. In exchange, Greece must implement 'prior actions', which include extensive changes to the tax system (already itemised) and to pensions and labour law (yet to be finalised). The rigour of the reforms makes it almost certain that the government will call fresh elections to reinforce its mandate. Impacts Germany wants no write-down in Greek debt's face value but longer maturities and lower interest rates, which could have comparable effect. It also wants IMF involvement in the deal, but the Fund will not make up its mind until after the first programme review in October. If a 20-billion-euro first tranche is released by August 19, it will meet outstanding obligations, including an ECB repayment on August 20.

Is the third Greek Memoranda of Understanding and Loan Agreement of August 2015 odious?

2017 ◽  
Vol 20 (3) ◽  
pp. 220-230
Author(s):  
Spyridon Repousis
Keyword(s):  
Interest Rates ◽  
Public Debt ◽  
Banking System ◽  
Infrastructure Development ◽  
Private Debt ◽  
Economic Rights ◽  
Content Type ◽  
Public Deficit ◽  
The Third ◽  
Odious Debt

Purpose The purpose of this study is to examine the odious debt concept in Greece. In Greece, the odious debt concept received high attention during recent financial crisis and Greek or Hellenic Parliament decided to establish a Special Committee. Design/methodology/approach The Greek Parliament Truth Committee on Public Debt investigated the public debt in Greece, and the main findings are: increase of debt was related to the growth in interest payments, high public spending in defence expenditures associated with corruption scandals, falsification of public deficit and debt statistical data and illicit capital outflows and adopting the euro led to a drastic increase in private debt. Findings Based on above the third Memoranda of Understanding (MoU) and the August 2015 loan agreement, according to Greek Parliament Truth Committee on Public Debt are illegal, illegitimate and odious because they fail to recognize the odious character of Greece’s existing debt, and the nature of the instruments by which this debt was financed from 2010 until early 2015. The Third MoU and the August 2015 loan agreement violate the fundamental human rights of the Greek people (both civil and political as well as socio-economic rights) as set out in the Greek Constitution and under international law (treaty-based and customary). Research limitations/implications On the other side of results, Greece was a democratic regime during the time it contracted the vast majority of its loans and membership into the Eurozone, which benefitted country by gaining the highly low interest rates that euro currency involved. Also, substantial borrowing for Greece spent directly on the people via social welfare and public sector wages and infrastructure development. Practical implications Therefore, Greece, instead of the odious debt doctrine, should resort to other debt solutions such as simple debt repayment, restructuring or “haircut” of the debt (principal and interest) or declare bankruptcy without invoking the odious debt doctrine. Although this recourse avoids the dangerous precedent-setting risks of the odious debt doctrine, it also involves numerous other complexities and policy problems because with default, the banking system would collapse. Originality/value It is the first study examining the topic of odious public debt in Greece.

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