Maturity transformation risk factors in Islamic banking

2018 ◽  
Vol 44 (6) ◽  
pp. 787-808
Author(s):  
Haroon Mahmood ◽  
Christopher Gan ◽  
Cuong Nguyen
Keyword(s):  
Financial Services ◽  
Global Financial Crisis ◽  
Generalized Method Of Moments ◽  
Balance Sheet ◽  
Islamic Banking ◽  
Annual Data ◽  
Basel Iii ◽  
Islamic Banks ◽  
Data Set ◽  
Content Type

Purpose Maturity transformation risk is one of the leading causes of the global financial crisis. While endorsing the new Basel III liquidity reforms, the Islamic Financial Services Board has suggested a modified NSFR ratio as a structural measure for the maturity transformation function of Islamic banks, allowing for their unique balance sheet structure. The purpose of this paper is to analyze various firm-specific and macroeconomic factors that may significantly affect the maturity transformation risk of these banks. Design/methodology/approach Using an annual data set of 55 full-fledged Islamic banks from 11 different countries over a period from 2006-2015, this study utilizes a two-step system generalized method of moments estimation technique on an unbalanced panel data. Findings The empirical results reveal bank size, capital, less-risky liquid assets, risky liquid assets, external funding dependence and market power as significant bank-specific factors in determining maturity transformation risk. However, the authors find no evidence for the effect of bank credit risk on maturity transformation risk in Islamic banking system. Originality/value This is the first study that focuses on the measurement of maturity transformation risk and its determinants in Islamic banks in a cross-country context, with regards to new liquidity regulatory requirements as proposed by Islamic Financial Services Board (IFSB) in conjunction with Basel III.

The impact of COVID-19 on Islamic banks in Bangladesh: a perspective of Marxian “circuit of merchant’s capital”

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohammad Dulal Miah ◽  
Yasushi Suzuki ◽  
S. M. Sohrab Uddin
Keyword(s):  
Financial Services ◽  
Balance Sheet ◽  
Banking System ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Working Capital ◽  
Content Type ◽  
Increased Risk ◽  
Merchant Capital ◽  
The Impact

Purpose This paper aims to assess the probable impact of COVID-19 on the Islamic banking system in Bangladesh. More specifically, it attempts to test the hypothesis that Islamic banks are exposed to increased risk because of their role as a provider of “merchant capital” including financing for trade, commerce and working capital, which are believed to be severely disrupted by the COVID-19. Design/methodology/approach The paper draws upon the Marxian tradition on the identification of the circuit of “merchant capital” separated from the circuit of “interest-bearing capital.” Moreover, the research adopts the balance sheet approach to trace the sectoral distribution of investment as well as sources of income of Islamic banks. Findings The research supports the hypothesis that the investment pattern of Islamic banks is skewed toward the trade and merchant’s financing. More than two-third of Islamic banks’ investment, and income thereof, is concentrated on working capital and trade finance. As these sectors are largely vulnerable to the economic shock resulting from COVID-19, Islamic banks in Bangladesh are likely to be affected through this channel. Research limitations/implications The research focuses only on Islamic banks in Bangladesh. Further study can assess the impact of COVID-19 on conventional and Islamic banks in other countries to find similarities and differences with the findings of the current research. Practical implications The finding of this research will be useful for bank managers, policymakers and users of financial services. In particular, this study provides important information useful for regulators in devising appropriate policies which aim to mitigate the adverse impact of COVID-19. Originality/value To the best of the authors’ knowledge, this is the first study that attempts to examine the impact of COVID-19 on Islamic banking system in Bangladesh, a country where Islamic banks occupy one-third of the total banking system’s assets.

Empirical evaluation of structure-conduct-performance paradigm as applied to the Iranian Islamic banking system

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mahdi Ghaemi Asl ◽  
Muhammad Mahdi Rashidi ◽  
Alireza Ghorbani
Keyword(s):  
Market Structure ◽  
Market Share ◽  
Balance Sheet ◽  
Empirical Evaluation ◽  
Banking System ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Content Type ◽  
Simple Regression Model ◽  
The Impact

Purpose This paper aims to investigate the impact of market structure and market share on the performance of the Islamic banks operating in the Iranian banking system based on the structure-conduct-performance (SCP) paradigm. Design/methodology/approach The Iranian Islamic banking system’s market structure is evaluated by using the econometrics method to test the validity of the traditional SCP paradigm. For this purpose, the authors estimate a simple regression model that is consisted of several independent variables, such as the market share, bank size, real gross domestic product, liquidity and Herfindahl-Hirschman index as a proxy variable for concentration and one dependent variable, namely, the profit as a proxy for performance. The panel data includes a data sample of 22 Islamic banks operating from 2006 to 2019. Data are extracted from the balance sheet of Islamic banks and the time-series database of the Central Bank of Iran and World Bank. Findings The study’s findings indicate that both concentration and market share have a positive impact on the performance of banks in the Iranian Islamic banking system. This result is contradicted with both traditional SCP and efficient structure hypotheses; however, it confirms the existence of oligopoly or cartel in the Iranian Islamic banking system that few banks try to gain the highest share of profit and maintain their market share by colluding with each other. This result is in contradiction with other research studies about the market structure in the Iranian banking system that claimed that banks in Iran operate under monopolistic competition. In addition, it shows that the privatization of some banks in Iran does not improve and help competition in the Iranian banking system. Originality/value This paper is a pioneer empirical study analyzing the market structure, concentration and collusion based on the SCP paradigm in Iranian Islamic banking. The results of the study support the existence of collusive behavior among the Islamic bank in Iran that is not aligned with Sharia. This study clearly shows the difference between ideal Islamic banking and Islamic banking in practice in Islamic countries. This clearly indicates that only prohibiting some operations like receiving interest, gambling and bearing excessive risk is not enough. In fact, the Islamic banking system should be based on the Sharia rule in all aspects and much more modification and study have to be done to achieve an appropriate Islamic banking system. These possible modifications to overcome the issues of cartel-like market structure and collusive behavior in the Iranian Islamic banking system include making the Iranian banking system more transparent, letting foreign banks enter the Iranian banking system and minimizing the government intervention in the Iranian banking system.

Need for calibration: applying a maximum threshold to liquidity ratio for Islamic banks

2020 ◽  
Vol 13 (1) ◽  
pp. 56-74
Author(s):  
Muhammed Habib Dolgun ◽  
Adam Ng ◽  
Abbas Mirakhor
Keyword(s):  
Financial Services ◽  
Risk Sharing ◽  
Financial Intermediation ◽  
Capital Adequacy ◽  
Islamic Banking ◽  
Alternative Mechanism ◽  
Islamic Banks ◽  
Content Type ◽  
Coverage Ratio ◽  
The Right

Purpose The purpose of this paper is to highlight the effects of liquidity regulations on Islamic banking using Turkey as a case study. It recommends an alternative mechanism using capital market standards for liquidity requirement of Islamic banks to mitigate certain risks. Design/methodology/approach The paper evaluates the correlation between cash and profit and between liquidity coverage ratio and capital adequacy ratio of participating banks in Turkey. Findings Islamic banks hold higher cash than they should. The paper suggests a maximum liquidity ratio for Islamic banks. Applying a cap to the liquidity coverage ratio will impose discipline on Islamic banks to manage their assets appropriately as well as to encourage their financial intermediation to the real sector. In addition, the authors argue that even if the cash outflows from investment account on the right side of Islamic banks’ balance sheets are included in the short-term projection, they should not be included in the denominator of the liquidity coverage ratio. Practical implications The current Basel requirements and Islamic Financial Services Board standards are disincentives to Islamic banks to provide risk-sharing or partnership-based investments and services to their customers and depositors. Effective legal and regulatory framework and supervisory oversight need to take into account the difference between the risk profile of a typical Islamic bank and a conventional bank. Originality/value Although it is well accepted that without adequate regulatory involvement it would not be possible to control and mitigate the risks related to Islamic banking financial intermediation, there should be a balance between the growth and stability of the industry. The regulatory involvement that satisfies this balance would be welcome.

Banking stability in the MENA region during the global financial crisis and the European sovereign debt debacle

2017 ◽  
Vol 18 (4) ◽  
pp. 381-397 ◽  
Author(s):  
Naama Trad ◽  
Houssem Rachdi ◽  
Abdelaziz Hakimi ◽  
Khaled Guesmi
Keyword(s):  
Global Financial Crisis ◽  
Islamic Banks ◽  
Mena Region ◽  
Data Set ◽  
Content Type ◽  
Negative Effect ◽  
Macroeconomic Effect ◽  
Conventional Banks ◽  
The Global Financial Crisis ◽  
Conventional And Islamic Banks

Purpose This paper aims to focus on the main determinants of the performance and stability-banking sector in the Middle East and North Africa (MENA) region during the global financial crisis. Using a data set of 13 countries with both of 77 Islamic and 101 conventional banks during the period 2006-2013, empirical results show that specific variables allow explaining the change in the level of performance and stability for conventional and Islamic banks. However, the effect of some banks’ characteristics is not the same for the two bank groups. For the macroeconomic effect, it is observed that inflation exerts a negative effect on the bank performance except for conventional banks when it increases the profitability. Design/methodology/approach Using a data set of 13 countries with both of 77 Islamic and 101 conventional banks (CvB) during the period 2006-2013 and performing the generalized method of moments (GMM) method, the findings provide comprehensive evidence for the bank systems studied which are of interest also to policy makers and practitioners. Findings The main finding is that after the international financial crises of 2008, many worldwide banks have been experiencing crises in contrast to Islamic banks (IsB) which remain Gen more stable and more profitable. Foreign banks had a higher degree of exposure to risk, given their higher number of subsidiaries in the developed economies. As for the determinants of profitability, the bank-specific variables allow to explain the change in the level of performance and stability for conventional and Islamic banks. However, the effect of some banks characteristics is not the same for the two bank groups. For the macroeconomic effect, it is observed that inflation exerts a negative effect on the bank performance except for CvB when it increases the profitability measured by the return on assets (ROA). It is also found that the growth rate acts positively when the dependent variable is the ROA and negatively when the performance is measured by return on equity. Originality/value The inflation rate exerts a negative effect only on the ROA. This study differs from previous contributions in that it is tested the hypothesis of determinants of bank profitability and stability for both conventional and Islamic banks in the MENA region. It is of great interest to both policymakers and investors, with respect to regional development policies and dedicated portfolio investment strategies in each emerging region respectively. The authors adopted several ratios from the empirical literature on bank profitability and stability. Using a data set of 13 countries with both of 77 Islamic and 101 CvB during the period 2006-2013 and performing the GMM method, the findings have significant contributions to the literature by comprehensively clarifying and critically analyzing the current state of profitability and stability for both banks.

scholarly journals The impact of Islamic banking model and Islamic financial development on bank performance: evidence from dual banking economies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tanveer Ahsan ◽  
Muhammad Azeem Qureshi
Keyword(s):  
Financial Development ◽  
Fixed Effects ◽  
Generalized Method Of Moments ◽  
Bank Performance ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Content Type ◽  
Country Level ◽  
Conventional Banks ◽  
The Impact

Purpose The purpose of this study is to develop an Islamic Banking Index representing the Islamic banking model and to investigate its impact on the performance of Islamic and conventional banks. This study also analyzes the impact of Islamic financial development on bank performance. Design/methodology/approach The authors collected the data from 23 countries for the period from 2010 to 2018 and developed a composite Islamic Banking Index. The authors applied the generalized method of moments on 3,542 bank-year observations for both Islamic and conventional banks to analyze the impact of the Islamic Banking Index on bank performance. The results of the study are robust to time-fixed effects, country-level time-varying factors and endogeneity issues. Findings The authors found that Islamic Banking Index positively contributes to the return on assets (ROAit) of Islamic banks only. This impact becomes highly significant in countries with comparatively higher Islamic financial development. This finding suggests that the Islamic financial development in a country provides a supportive operating environment to Islamic banks and increases their performance. The authors also found that Islamic Banking Index positively contributes to the return on equity (ROEit) of both types of banks. Practical implications The authors argue that moving away from interest-based products and focusing more on diversified portfolios can boost the performance of both types of banks without increasing their risk levels. Originality/value To the best of the authors’ knowledge, this is the first study that develops a composite Islamic Banking Index based on differentiating factors of the Islamic banking model and investigates the impact of Islamic Banking Index and Islamic financial development on bank performance.

Selection of Islamic banking in a multicultural context: the role of gender and religion

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Suzanna ElMassah ◽  
Heba Abou-El-Sood
Keyword(s):  
Emerging Market ◽  
Marketing Strategies ◽  
Business Strategies ◽  
Equation Modeling ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Data Set ◽  
Content Type ◽  
Multicultural Context ◽  
Selection Of

Purpose As the popularity of Islamic banking and financial instruments continues to rise globally, a recurring empirical question is what specifically makes consumers choose Islamic banking. This paper aims to investigate the determinants of bank type selection, especially in culturally diverse settings where the Islamic banking sector is well-established. It further examines whether consumers’ gender/religion influences their choices. One intuitive prediction is that Muslim consumers opt for Islamic banking products as “ethical” because of conviction-related reasons. However, the reality is not necessarily straightforward. Design/methodology/approach This paper uses structural equation modeling to examine data collected from a survey questionnaire of 790 respondents in an emerging market setting. Further analysis is made based on gender and religion to remove related bias. Findings Results suggest that overall consumer awareness significantly affects the selection of Islamic banking products. The positive effect of awareness is more significant for Muslim consumers relative to non-Muslims. Interestingly, social stimuli and bank attributes have an insignificant effect on the banking choices of both Muslims and non-Muslims. Practical implications Results suggest that Islamic banks’ marketing managers should adopt differentiated strategies for men and women, focusing on the core benefits of the service or personal interactions with consumers, respectively, along with a focus on different aspects of personal service for each gender. Awareness should be enhanced by adopting informative and effective marketing strategies to attract and retain consumers in the competitive bank environment. Islamic banks (IB) should pay attention to the religious effect without considering it as the sole variable motivating potential customers. They should design segmented and customized marketing strategies based on gender-religion market segmentation to suit different groups’ needs. Originality/value The findings fill a gap in the literature and provide Islamic bankers with insights to help design and articulate their business strategies to appeal to consumers in a multicultural context. Examining an integral part of gender and religion mitigates biased estimates due to the omission of variables. The study contributes to the existing literature on customer preferences for IB with a relatively large, new data set.

Identification of systemically important banks in India using SRISK

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Juhi Gupta ◽  
Smita Kashiramka
Keyword(s):  
Systemic Risk ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Balance Sheet ◽  
Data Set ◽  
Content Type ◽  
Long Run ◽  
Marginal Expected Shortfall ◽  
The Global Financial Crisis ◽  
Systemically Important Banks

Purpose Systemic risk has been a cause of concern for the bank regulatory authorities worldwide since the global financial crisis. This study aims to identify systemically important banks (SIBs) in India by using SRISK to measure the expected capital shortfall of banks in a systemic event. The sample size comprises a balanced data set of 31 listed Indian commercial banks from 2006 to 2019. Design/methodology/approach In this study, the authors have used SRISK to identify banks that have a maximum contribution to the systemic risk of the Indian banking sector. Leverage, size and long-run marginal expected shortfall (LRMES) are used to compute SRISK. Forward-looking LRMES is computed using the GJR-GARCH-dynamic conditional correlation methodology for early prediction of a bank’s contribution to systemic risk. Findings This study finds that public sector banks are more vulnerable to macroeconomic shocks owing to their capital inadequacy vis-à-vis the private sector banks. This study also emphasizes that size should not be used as a standalone factor to assess the systemic importance of a bank. Originality/value Systemic risk has attracted a lot of research interest; however, it is largely limited to the developed nations. This paper fills an important research gap in banking literature about the identification of SIBs in an emerging economy, India. As SRISK uses both balance sheet and market-based information, it can be used to complement the existing methodology used by the Reserve Bank of India to identify SIBs.

Impact of oil and gas prices shocks on banks’ deposits in an oil and gas-rich economy

2018 ◽  
Vol 13 (5) ◽  
pp. 875-901 ◽  
Author(s):  
Abdulazeez Y.H. Saif-Alyousfi ◽  
Asish Saha ◽  
Rohani Md-Rus
Keyword(s):  
Financial Crisis ◽  
Oil And Gas ◽  
Global Financial Crisis ◽  
Balance Sheet ◽  
Islamic Banks ◽  
Aggregate Level ◽  
Price Changes ◽  
Content Type ◽  
Bank Deposits ◽  
The Impact

Purpose The purpose of this paper is to investigate and compare the impact of oil and gas prices changes on bank deposits at the aggregate as well as at the level of commercial and Islamic banks in Qatar over the period 2000–2016. Design/methodology/approach Using the BankScope Database as well as bank-level balance sheet and financial statements data, the authors use one-step system GMM dynamic model to examine and compare the association between oil and gas prices changes with bank deposits in Qatar. The authors also test hypotheses of direct and indirect impacts of oil and gas prices changes on bank deposits. Findings The results indicate that oil and gas prices changes have a direct impact on deposits of banks at the aggregate level in Qatar. However, the authors find that oil and gas price changes significantly affect deposits of Qatari commercial banks directly prompting enhanced lending by banks and the consequent business activities in the economy, while their impact on the deposits of Qatari Islamic banks is indirect, i.e. the impact is permeated through the macroeconomic and institutional characteristics of the country that are reinforced by the growing expectations and commercial sentiment of the country. The authors find that significant association between oil price changes and deposit growth during the global financial crisis 2008 has been distorted. However, the authors find that there was a sharp rise in the deposits of Islamic banks during the period of global financial crisis. Practical implications The results of this study necessitate policy measures that can counter the effects of changes in oil and gas prices on the effectiveness of bank deposits. Originality/value It is widely recognized that oil and gas prices and the level of production are of great importance to the economic development of oil and gas exporting countries. So far, however, no econometric study has been reported in the literature which analyses and compares the impact of oil and gas prices changes on bank deposits of commercial and Islamic banks and also at the aggregate level in any of the oil-exporting economies. Thus, this study provides the first empirical evidence on distinct direct and indirect channels through which oil and gas prices changes may affect bank deposits.

scholarly journals Financial distress prediction of Islamic banks using tree-based stochastic techniques

2018 ◽  
Vol 44 (6) ◽  
pp. 759-773 ◽  
Author(s):  
Khaled Halteh ◽  
Kuldeep Kumar ◽  
Adrian Gepp
Keyword(s):  
Financial Distress ◽  
Gradient Boosting ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Z Score ◽  
Data Set ◽  
Content Type ◽  
Financial Distress Prediction ◽  
Stochastic Gradient Boosting ◽  
Distress Prediction

PurposeFinancial distress is a socially and economically important problem that affects companies the world over. Having the power to better understand – and hence aid businesses from failing, has the potential to save not only the company, but also potentially prevent economies from sustained downturn. Although Islamic banks constitute a fraction of total banking assets, their importance have been substantially increasing, as their asset growth rate has surpassed that of conventional banks in recent years. The paper aims to discuss these issues.Design/methodology/approachThis paper uses a data set comprising 101 international publicly listed Islamic banks to work on advancing financial distress prediction (FDP) by utilising cutting-edge stochastic models, namely decision trees, stochastic gradient boosting and random forests. The most important variables pertaining to forecasting corporate failure are determined from an initial set of 18 variables.FindingsThe results indicate that the “Working Capital/Total Assets” ratio is the most crucial variable relating to forecasting financial distress using both the traditional “Altman Z-Score” and the “Altman Z-Score for Service Firms” methods. However, using the “Standardised Profits” method, the “Return on Revenue” ratio was found to be the most important variable. This provides empirical evidence to support the recommendations made by Basel Accords for assessing a bank’s capital risks, specifically in relation to the application to Islamic banking.Originality/valueThese findings provide a valuable addition to the limited literature surrounding Islamic banking in general, and FDP pertaining to Islamic banking in particular, by showcasing the most pertinent variables in forecasting financial distress so that appropriate proactive actions can be taken.

Additional Tier 1 Capital Instruments under Basel iii: A Sharīʿah Viewpoint

2016 ◽  
Vol 30 (2) ◽  
pp. 138-162
Author(s):  
Beebee Salma Sairally ◽  
Marjan Muhammad ◽  
Madaa Munjid Mustafa
Keyword(s):  
Financial Services ◽  
Reference Point ◽  
Abu Dhabi ◽  
Islamic Banking ◽  
Basel Iii ◽  
Islamic Banks ◽  
Regulatory Capital ◽  
Islamic Bank ◽  
Tier 1 ◽  
Banking Institutions

This research aims to compare the regulatory capital instruments for Islamic banking institutions (ibis)—in particular the qualifying Additional Tier 1 (AT1) capital instruments—as defined by Basel iii, Bank Negara Malaysia (bnm) and ifsb-15 (issued by the Islamic Financial Services Board). Principally, the research examines the Sharīʿah issues, especially related to subordination, arising in equity-based contracts when used for structuring AT1 capital instruments. In particular, it examines the muḍārabah ṣukūk issued by the Abu Dhabi Islamic Bank (adib) in 2012. The study finds that the most appropriate Sharīʿah contract that would be suitable for structuring AT1 capital instruments would be mushārakah. The present study is considered an original attempt in examining an under-researched topic relating to Basel iii and its Sharīʿah perspective. The study will be an important reference point to Islamic banks when structuring AT1 capital instruments.

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