INCEIF Knowledge Repository (INCEIF University)
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Financial intermediation costs in a dual banking system: the role of Islamic banking
No full textThis paper empirically analyses the role of Islamic banking in financial intermediation costs as measured by net interest margins for a leading dual banking country, Malaysia. Controlling for theoretically motivated determinants of the margins, the paper compares the interest/financing margins of conventional and Islamic banks and examines the impacts of Islamic banking presence on bank margins. The analysis provides evidence of the higher margins of Islamic banks compared to those of conventional banks. Further, the difference in bank margins between the two types of banks can be attributed to differences in market power, operating costs, and diversification. Finally, Islamic banking presence or penetration, as represented by the ratio of Islamic financing to aggregate bank credit/financing and, alternatively, the share of Islamic banking assets, is robustly associated with lower bank margins, on average. These results bear important implications for the development of the Islamic banking industry and in fostering the efficient allocation of financial resources by the banking system
A comparison of MASB and AAOFI accounting conceptual frameworks
No full textThis chapter provides new findings to accounting and finance literature, where, it compares the conceptual framework of both of the MASB- and the AAOIFI- in the context of financial reporting of Islamic financial institutions (IFls). The conceptual framework or some authors referred as "accounting constitution" set the tone for a consistent accounting standards and become a reference point for developing future standards for financial accounting and reporting (Barker et al., 2014; Abela et al., 2014; Holzmann & Munter, 2014 (Sutton et al., 2015; Gebhardt et aI., 2014; Norby, 1977; Gore & Zimmerman, 2007). In this context, more than 120 countries (including major players in Islamic finance like Saudi Arabia, Malaysia and many others) are adopting IASB' financial reporting regime in financial reporting of IFIs, and only six countries like Bahrain, Jordan, Lebanon, Oman, Qatar and Sudan are employing the AAOIFI accounting standards ..
Revenue recognition of Islamic banks
No full textAccounting for revenue recognition has been a subject of interest for regulators and other market participants. The interest stems from the fact that revenue forms the greatest single item in the financial statements (FASB, 2002 , p. 1). Indeed, aggressive revenue recognition has always been associated with corporate financial scandals like Enron, Worldcom and Parmalat. It has been used to mask firms' real performance with the aim of preventing shareholders and stakeholders from scrutinizing their financial performance and other wrongdoings. The Securities and Exchange Commission in the US documented that mistake in revenue recognition as the lead issue in "financial reporting errors" (SEC , 2003, p. 6). Also, revenue is one of key financial indicators and the most scrutinized item in financial statements in assessing firms' health and ability to continue as a going concern entity. This chapter examines the practice of using the 'Effective Profit Rate Method' in estimating revenue (or profit share) from financing activities under various Islamic finance contracts by Islamic banks (IBs) that operate in Malaysia ..
Risk management, asset liability management and their impacts on net interest margin (NIM)/net profit margin (NPM): a comparative analysis between conventional and Islamic banks
No full textThe comparative analysis between conventional banks (CBs) and Islamic banks (IBs) were conducted to gain insights of factors that might explain risk management practices and their impacts on respective net interest margins (NIMs) and net profit margin (NPMs). The present research was aimed at investigating the simultaneous equation model that jointly determines the hedging techniques of maturity gap and interest rate derivatives (profit rate derivatives in the context of IBs) and their influence on the hedging decisions of CBs and IBs. This framework is highly relevant to IBs to distinguish whether these two hedging techniques were substitutes or complementary in light of the limited Shariah compliant tools available in the market. The results would have an impact on the RM and the ALM strategies to be adopted by IBs in managing profit rate risk exposure. The research found that maturity gap and interest rate derivatives of both bank types were substitutes. There was a tendency for CBs to increase the maturity gap (lower hedging) when faced with financial distress while IBs tend to reduce the maturity gap (higher hedging). However, there was no evidence that CBs and IBs increased the usage of interest rate derivatives when faced with higher likelihood of financial distress, which is inconsistent with hedging theory. The impact of hedging techniques and bank-specific variables on the performances of CBs and IBs as represented by NIMs and NPMs were further explored. To achieve this, panel corrected standard error (PCSE) and generalized method of moments (GMM) methodologies were employed. The differences in margins of both bank types were analyzed as to whether the factors that affect the margins of CBs affect IBs differently. The results showed factors that displayed differential impact on the margins of IBs were maturity gap, derivatives skills (usage of other derivatives), capital adequacy, operating cost, liquidity and bank growth. The findings also exhibited that the crisis has no positive impact on the margins of both banks. The results demonstrated important policy implications for IBs to further innovate financial derivatives for hedging purposes in view of the rapid growth of IBs in the financial system as well as the positive impact of derivatives skills on the margins
Islamic financial wealth management: empowering women in Islamic societies
No full textThe gender gap in Islamic wealth management is an area often not discussed as some perceive Islam as a religion that bans women from acquiring and managing wealth separately from the men in their life. Therefore, this paper aims to explore the economic status of women from an Islamic perspective by examining the relevant literature. Drawing from the Malaysian context, this paper illustrates the gender gap in financial inclusion and also looks at market opportunities to empower women financially. This is a conceptual paper grounded in religious texts, academic publications and statistics published by authoritative bodies. The paper clarifies the general concept of Islamic wealth management and the economic status of women according to the Shariah perspective. Moreover, the paper also discusses certain products offered by Islamic Financial Institutions (IFIs) which women can channel their savings into
Infantile equity markets are a drag on development
No full textIf well-developed equity markets can contribute hugely to national growth, underdeveloped ones impose a huge cost on national competitiveness through higher required risk premiums and higher equity costs to firms. The high cost of equity has the added disadvantage of incentivising firms to leverage their capital structure with debt. Thus, the common phenomenon of developing countries with infantile stock markets and highly leveraged economies. Retarded stock markets offer perverse incentives, both to managers of firms and shareholders. So, how do the equity markets of the Islamic world stack up? To address this, we examined the performance of the Muslim world's top eight stock markets against two global benchmark indices, the MSCI World and the S&P 500. The annual performances of the main stock indexes of the eight stock markets were compared to that of the two benchmarks. The percentage annual returns and volatility over the 16-year period 20012016 was studied. With the exception of Malaysia, which had returns and volatility (standard deviation) very much in line with the benchmarks, the other markets showed interesting results
Environment, social and governance (ESG) disclosure, governance mechanisms and Shariah committee (SC) characteristics at Islamic financial institutions (IFIs)
No full textOne of important non-financial information to be disclosed by IFIs is the information related to environment, social and governance (ESG) matters. Solid ESG practices result in lower risk and better operational performance of firm. The increasing cases of corporate collapse over non-financial issues during the last decades have highlighted the importance of ESG disclosure. IFIs have been seen left behind in term of providing their stakeholders with enough information to the stakeholders' attached surrounding from environmental aspect. In addition of that , the study examines SC characteristics from SC size, SC meeting and international member on the linkages between governance mechanisms and ESG disclosure. The SC characteristics are utilized as the moderating variables as SC is the additional layer Shariah governance of IFIs. They are suggested to moderate the linkages between BOD characteristic and ESG disclosure, and not other governance mechanism such as AC characteristics and disclosure quality as the SC can indirectly influence the BOD on the ESG disclosure decision. The results of the descriptive statistics reveal the low extent of ESG disclosure by 16 IFls in Malaysia ..
Big data analytics and Islamic banking
No full textAs the Fintech evolution transforms the banking sectors worldwide, the players in the market are hard-pressed to experiment the tremendous opportunities that the application of the likes of Blockchain, Big Data and Artificial Intelligence et cetera would have on the financial world. As the volume of the data continue to expand, the possibilities that this raw data materializes in the form of opportunities lean towards limitless. Organizations such as financial institutions must be vigilant of the prospects that such data can reveal and the extend of leverage that they can exercise to build insights for their consumers, products, and services. Big data analytics have alone become the driving force for digital innovations and transformation of banks
Efficiency, asset quality and stability of the banking sector in Malaysia
No full textMalaysia practices a dual banking system, where conventional banks coexist with Islamic banks. While conventional banks are well established, Islamic banks are growing rapidly. Since Islamic banks consist of two types, namely stand-alone or wholesome Islamic banks and Islamic subsidiaries of conventional banks, it would be revealing to examine if Islamic subsidiaries of conventional banks differ from standalone Islamic banks in terms of efficiency, stability and assets quality. A few studies in the literature that examine the issue have focused on comparisons between Islamic banks and conventional banks, with no consideration given to the differentiation between the two categories of Islamic banks. In this paper, we attempt to examine the differences among the players in the banking sector in Malaysia. This paper extends the traditional analysis of conventional versus Islamic banks to comparisons between stand-alone Islamic banks and Islamic subsidiaries of conventional banks. Using dynamic panel data "generalized methods of moments" (GMM), the study reports that there are differences among different types of banks, viz. conventional banks, Islamic subsidiaries of conventional parents, and stand-alone Islamic banks. It shows that Islamic subsidiaries of conventional banks perform better than stand-alone Islamic banks as well as their own conventional parents. Furthermore, the results show that Islamic subsidiaries are more stable in term of their financing income compared to the rest of the banks, while the stand-alone banks have lower asset quality in comparison with both Islamic subsidiaries and their parents
Consumer protection in Malaysian Islamic home financing facilities from the Shariah perspective: with special reference to abandoned housing projects
No full textConsumer protection has never been more needed now as financial products and services are widely available. Due to information asymmetries, consumers often have lower bargaining power when using financial products and services. The concept of consumer protection is not directly found in classical Islamic writings. However, it is part and parcel of the Maqasid al-Shariah and evidenced in the Qur’an and Prophetic traditions. This study focuses on the issue of consumer protection in Islamic home financing from the Shariah perspective and related specifically to abandoned housing projects in Malaysia. It is an endeavour to find out the extent of protection consumers get when their homes financed from Islamic financial institutions end up abandoned. It is a qualitative study based on primary Shariah sources, analyses of legal documentation/structural operations of BBA, ijarah muntahiyyyah bi al-tamlik, musharakah mutanaqisah and tawarruq) and information gathered from interviews. Content analysis was applied to analyze all relevant information leading to the findings. The review of legal documentation found that there are no clauses, terms and conditions that protect consumers as most of the clauses appear to be in favour of the bank in the event the project is abandoned. Operationally, regardless of the contract, the study found that they do not reflect the inherent rights of protection especially for homebuyers in case of abandonment. The products are structured that all risks and liabilities are transferred to customers and the use of standard legal documentation has seen to this