INCEIF Knowledge Repository (INCEIF University)
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Estimating volatility clustering and variance risk premium effects on bank default indicators
No full textDefault risk increases substantially during financial stress times due to mainly the two reasons: volatility clustering and investors' desire to protect themselves from such increases in volatility. It manifested in the aftermath of the Global Financial Crisis of 2008-2009 with unpleasant outcomes of many bankruptcies and severe financial distress. To account for these features, we adapted the structural credit risk approach to include both time-varying (return) volatility and risk premium about the return volatility itself. By applying the model to US banks, we obtain better bank default indicators in comparison to the benchmark models
The impact of financial liberalization on prosperity in OIC countries and the role of institutional quality
No full textMany studies have affirmed that financial liberalization leads to higher output growth, yet the effect of financial liberalization on prosperity is ambiguous. The most common measurement to study prosperity is the GINI index, which is a single-dimensional index based on GDP. WEF2018 reported that global income inequality has steadily widened with 82 percent of all wealth created by only one percent of the world's richest countries. Therefore, this study uses the Legatum Prosperity Index, which is more comprehensive based on additional factors such as wealth, education, well-being, and health. This study focuses on OIC countries considering their impressive growth in Islamic finance. Our first objective is to identify the impact of financial liberalization on prosperity in OIC countries. The second objective is to further analyze the different impacts between two groups of OIC countries, namely the high-income and the low-income OIC countries. The third objective is to examine the importance of institutional quality as a mediator or facilitator to sustain prosperity in OIC countries. This study adopts the fixed and random effects panel technique to evaluate the determinants of financial liberalization and to identify the relationship between financial liberalization and prosperity. This study also employs the static panel technique regression to study the role of institutions in affecting the relationship, on a dataset from 40 OIC countries for the 2007-2016 period. The results confirm that financial liberalization has a significant impact on prosperity in OIC countries. Income, female labour, government spending and institutional quality are factors that contribute positively to prosperity. In addition, financial liberalization has a higher impact in OIC-LOW countries than OIC-HIGH countries. Significant contributing factors are domestic credits, foreign direct investment net and trade openness, whereas capital account openness shows a neutral effect. Further, this study finds that the impact of financial liberalization on prosperity varies with the level of institutional quality. Optimal governance would be more conducive as stringent rules and regulations could hamper financial liberalization. These findings could also assist policymakers in narrowing the gap between other rich and poor countries towards better income equality and global prosperity
The role of technology in enhancing Islamic social finance in assisting poor communities in the post COVID-19 era
No full textAlthough Islamic social finance is a relatively new term compared to Islamic commercial finance, there is ample evidence to prove that it has always been in practice in Muslim societies. For instance, zakat as the third pillar of Islam, is implemented and practiced as a form of 'ibadah (worship). The types of Islamic social financial instruments include zakat, sadaqat and infaq, waqf, takaful and microfinance in line with Islamic law of contracts. Using technology, the challenges facing the effective collection, management and distribution of these modes of Islamic social finance can be resolved. However, to adopt technology in this regard, some initial considerations and investments will be required, and proper technology governance mechanisms adopted to implement Shari'ah governance, in addition to corporate governance mechanisms addition to corporate governance mechanisms in respective organisations. This paper covers some tools and approaches that could be adopted in Islamic social finance to assist the poor particularly in the perspective of the COVID-19. As a preamble, it also discusses the principles and rationale of Islamic social finance, and the challenges faced in implementation of the suggested approaches
The impact of crisis on income inequality: the moderating role of financial inclusion and Islamic banking
No full textThe first objective of our study is to investigate how financial inclusion moderates the impact of crisis on income inequality. We treat financial inclusion as a potential moderating variable because it has the potential to impact income inequality both directly (through favourable labour market and employment effects) and indirectly (by inducing saving, impacting financial stability, and leading to growth, etc.). The empirical analysis is done using System GMM on a dynamic panel of 150 countries, spanning the period 1980-2018, for systemic banking and currency crises. Our results indicate that crises in general have an adverse distributional impact that is in some ways moderated by country-levels of financial inclusion: (a) the poor are provided increased savings and wealth accumulation opportunities; (b) easier availability of financial services improves the abilities of the poor to hedge against risks; (c) greater connectivity of the masses to the banking system means governments are able to disseminate aid packages during crisis times more efficiently; and (d) implementation of monetary policy becomes easier. As far as individual crisis types are concerned, financial inclusion favourably moderates the adverse impact of banking, currency, stock market, and domestic debt crisis. However, the adverse distributional impact of external debt crisis is amplified by increasing financial inclusion. This is potentially attributed to increased unemployment, an extended recession, and cuts in social expenditure by governments due to chronic (public and private) indebtedness caused by financial inclusion, among other reasons
Business cycles and energy real options valuation
No full textEnergy projects are mostly large, irreversible and highly risky investments. The real options valuation approach is widely used to value such investment projects. Indeed, papers covered in the survey article by Fernandes et al. (2011) underscore the relevance of the real options approach to value energy sector investments. However, the related literature overlooks the distributional nature of project cash flows. The
work on energy real options overwhelmingly considers log-normally-distributed cash flows, despite the well-documented evidence that cash flows are normally distributed (Burg, 2018; Kanniainen, 2009; Veronesi, 1999). The log-normality cash flows assumption solves the tractability of the problem at expense of ruling out negative cash flows. In other words, the popularity of this assumption stems from its tractability rather than its realism. Given the large and irreversible nature of energy projects, distributional assumptions characterising cash flows are crucially important in these investments. Furthermore, the interaction of normally distributed cash flows with macroeconomic risk associated with business cycles can be different than that of log-normal cash flows. This paper therefore uses a real options approach to value energy projects whose cash flows follow a normal distribution and subject to macroeconomic risk
Shariah-compliant equities and Shariah screening: need for convergence of ethical screening of stocks with Shariah screening
No full textThis study explores the practical application of the Shariah screening process and how it could be enhanced by converging the same with the ethical screening of stocks. This study adopts a qualitative research methodology by combining the qualitative descriptive approach and content analysis. The findings of this research suggest that there is scope to converge ethical screening of stocks with Shariah Screening as the lex loci applicable to Shariah screening is derived from Shariah, which considers ethics as part of determining its rules. The data from this study reveal several practical applications, the ultimate goal of which is to help the policymakers and stakeholders understand the relevance of the Shariah screening of stocks and get a streamlined screening process, paving the way to enhance the same using ethical screening criteria to develop its function to become much more relevant irrespective of the denomination of faiths. This is original research, which is expected to contribute to understanding the extent to which Shariah screening can be enhanced by integrating the ethical stock screening dimension to it
The importance of state managing zakat through digitalization
No full textThe recent statistical data of the World Bank shows that the majority of people who live in poverty are found in Muslim countries. Moreover, almost all Muslim countries have huge unsettled external debts which result from compound interest, besides the corruption which prevails in almost all Muslim countries. Some scholars relate this fact to the oppression, humiliation and bad policies that had been imposed in almost all Muslim countries during colonization and have continued up to the present time. Others related this to the incompetence and the corruption on the part of their governments which led to the last Arab spring and what followed. We cannot deny the abovementioned reasons as the catalyst for the spread of the above-mentioned problems in the Islamic world. However, we also believe that the main reason is imbued among Muslims themselves since they neglected almost all their Islamic social financial institutions, including the institution of Zakat which is meant to eliminate riba, eradicate poverty and purify Muslim society from all sorts of corruptions
A study on the policies and procedures on discretionary trading of Islamic securities
No full textDiscretionary trading is an investment that a stockbroker executes using clients' account which is done without getting specific approval from the client on decision whether to buy or sell the stock holding in the portfolio. The investment is conducted based on the experience and strategies made by the person in charge of the investment. The objective of this research is to study the existing policies and procedures of discretionary trading in the market, determine the shariah compliance of current practice of market discretionary trading, and formulate suitable shariah parameters for discretionary trading of Islamic securities. This research employs qualitative methodology. The finding related for this topic is limited as the researcher is the main findings. From the researcher findings, it is found that the respondents shared almost similar experience, but it is expressed in different ways. Besides, the priority of shariah compliant discretionary trading is highly important to the Muslim investors as it can be alternatives for them to grow their capital and the practice of discretionary trading in each stockbroker is different from the others due to the flexibility of the current guideline. It is anticipated that the findings of research will assist future researcher to develop and formulate better variables for Islamic discretionary trading
Islamic banks: history, stability and lessons from cooperative banking
No full textIslamic banking's profit-maximising fervour, building upon the use of interest-resembling products, has raised concerns about its Shariah authenticity and financial stability. While early Islamic economists envisioned an industry built on values of mutuality and participation, architects of Islamic banking have chosen to replicate interest-based conventional banking for the purpose of fast growth. This study has two objectives. First, to narrate the history of Islamic banking, from the theories postulated to the beginnings of the industry. This builds an understanding of why 'Islamic' banking operates as it does currently, which has implications for Shariah compliance and financial stability. It is suggested that the mimicking of conventional banks may cause instability since unlike commercial banks, 'Islamic' banks face Shariah constraints. This leads to the second objective, which is to analyse the cooperative banking model, which has been described as the closest theoretical model to Islamic banking. Specifically, this study focuses on the model in Europe which, despite its challenges, has managed to silence critics in the way it contributes to communal welfare and financial stability, especially during credit crunches when commercial banks are known to retreat from markets. This first study of a functioning cooperative banking model, in the context of Islamic banking, may thus offer lessons for Islamic banking reform
How about: activating modes of Islamic social finance in the midst of the pandemic
No full textThese are the slides that were part of Webinar on Activating Modes of Islamic Social Finance in the Midst of the Pandemic presented by Associate Professor Dr. Aishath Muneeza entitled "How about: activating modes of Islamic social finance in the midst of the pandemic"