Journal of Islamic Finance (JIF)
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Speculative Rational Bubbles: Asset Prices in GCC Equity Markets
Get PDFConventional theory of speculative bubbles describes stock bubbles as stock prices that exceed their fundamental value because current owners believe that the stocks can be resold at an even higher price in the future. A speculative bubble driven by rumors and not supported by fundamentals will result in mis-allocation of resources into non-optimal uses. Therefore, identifying and dating speculative explosive bubbles has been a major concern in the economic literature. This study examines the presence of the phenomenon of stock market bubbles in the GCC countries including Saudi Arabia, Qatar, United Arab Emirates, Oman and Bahrain over 2000 to 2013. Considering rational bubble change stock price from random walk to an explosive regime and traditional unit roots has less power in detecting periodically collapsing bubbles, this study employ newly developed testing approach of right tailed unit root test to not only investigates the presence of rational periodically collapsing bubbles, but also stamps the times of bubbles emergence and collapse. Our empirical results indicate the existence of rational bubbles in GCC stock market. The estimation of the starting date of the bubbles indicates that explosive regime emerges in the early 2000s
Islamic Banking and Shari'ah Compliance: A Product Development Perspective
Get PDFThe key difference between Islamic banks and their conventional counterparts is that the former abides by the principles of Islamic law (Shari’ah). However, some Islamic banking products are criticized for not fulfilling the Shari’ah requirements as these closely mimic conventional products. The article discusses how traditional Islamic contracts are used to structure Islamic modes of financing during contemporary times. To understand the choice of financing modes used by Islamic banks, the product development process is examined and the role of Shari’ah related bodies in these institutions (Shari’ah unit/department and Shari’ah supervisory board/committee) in this process is outlined. The article contends that the choice of modes of financing used by Islamic financial institutions depend on external and internal factors. In some cases Islamic banks choose controversial modes of financing as these are the only ones that are feasible under the legal and regulatory regimes they operate under. In other cases the choice of inferior modes may result from competing internal organizational considerations whereby economic factors overshadow Shari’ah requirements. The article highlights the role of Shari’ah related bodies within a bank in ensuring Shari’ah compliance of products
The Susceptibility of Islamic Banks' Credit Risk Towards Macroeconomic Variables
Get PDFCredit risk is the most anticipated risk in the banking system. It is one of the key elements to assess systemic risk and stress testing financial fragility which is very helpful to come up with macro-prudential surveillance in financial systems. Unlike the conventional banking system, there is dearth of empirical study on macro-credit risk in relation with Islamic banking. As such, further research regarding the stability of the Islamic banking industry has become imperative. Accordingly, this paper is aimed at determining and assessing the long run vulnerabilities of Islamic financing sustainability in term of its response to changes in key macroeconomic variables by using time series econometric approaches of cointegration and vector autoregression (VAR). Based on the result of simulating variance decomposition (VD) and impulse response function (IRF), it is found that, sufficient evidence of long-run relationship between credit risk ratio in Islamic banking industry and the selected macroeconomic variables exist. The exchange rate, supply side-inflation, and growth have been indicated to negatively influence credit risk rate in Islamic banking, while money supply and Islamic interbank money market rate positively affect the risk rate
Factors Influencing the Choice of Takaful Over Conventional Insurance: The Case of Malaysia
Get PDFThe present research attempts to study the factors that influence Malaysians to choose Takaful over conventional insurance. The study employs a qualitative research approach, conducting four intensive interviews with customers and Takaful Operators, who were selected from Klang Valley area in Malaysia. The respondents represent prominent Takaful Operators and their customers. The findings from the in-depth interviews led to the following major propositions; that Takaful customers have a clear concept of Takaful and the requirement of Shariah compliance; takaful is necessary for Muslims as a replacement of conventional insurance; takaful customers have awareness on the relationship between insurance and religion in contemporary business; the roles of Takaful agents in explaining the concept of Takaful and its benefits as acts of worship (Ibadah); the obligation by Takaful agents in promoting Takaful products to Muslims as acts of (dak’wah); and the growth of Takaful business remains slow compared to conventional insurance in the Klang valley area in Malaysia. Several implications of the research were further discussed
Derivatives, Pricing Efficiency and Gharar: Evidence on Embedded Options in Malaysia
Get PDFDerivatives, despites their extensive usage as risk management tools, receive differing arguments among the Muslim scholars. Focusing on embedded option contracts, the resolution of Islamic Fiqh Academy, Jeddah No (63/1/7) under the financial markets considers the currently applied option contracts as different from the Shariah nominated contracts and being neither a sum of money nor a utility or a financial right which may be waived, makes it forbidden in Shariah. Most Islamic scholars accuse option contracts of containing gharar and are transacted for speculative gains thus, prohibited in fiqh muamalat. Therefore, this study intends to investigate the accusation of the gharar elements in the option contracts. The Black Scholes Option Pricing Model (BSOPM) is used to examine the pricing of 183 outstanding embedded options (equity warrants) from January 2006 to December 2012. Cases of mispricing were detected in reference with their theoretical values indicating inefficiency in the Malaysian market and speculative activities taken place which are prohibited in Islam. Speculation contains gharar (uncertainty) and leads to maysir (gambling) and may result in wealth accumulation at the expense of other parties’ jahl (ignorance). Violating the concept of adl (justice), not serving the concept of maslahah (public interest) and not complying with the Maqasid al Shariah make speculation forbidden. The existence of gharar is empirically and statistically evidenced in the speculation activities indicated by the excessive mispricing detected in this study. This study contributes significantly in the literature by providing empirical evidence which is very much lacking in the study of options in Islamic Finance
A Critical Analysis of Poverty Alleviation Strategies of Al-Hayat Relief Foundation in Nigeria
Get PDFPoverty is a global phenomenon that is dynamic, complex and multi-dimensional. It remains a major factor in human history. In recent years, however, international consensus has tended to focus development goals on poverty alleviation. Three actors, therefore, have been identified in the existing literature as agents for poverty reduction, the bilateral or multilateral corporations, the governments and the non-governmental organisations (NGOs). However, studies have shown that the roles of the third group are remarkable in the poverty alleviation agenda the world over. The non-governmental organisations are capable of introducing participatory development opportunities for grassroots people or poor communities. Using observational technique, interview and content analysis,this paper is aimed at presenting a critical analysis of poverty alleviation strategies of Al-Hayat Relief Foundation, with a view to establishing a framework for the Muslim communities in Nigeria in their quest for poverty reduction. The Foundation is one of the non-governmental organisations providing non-interest microfinance credit facilities for Muslims in Southwestern Nigeria
A Measurement Model of the Determinants of Financial Exclusion among Muslim Micro-entrepreneurs in Ilorin, Nigeria
Get PDFThis study investigated the various factors that impede both the access to and use of the requisite financial resources for entrepreneurial development in Ilorin, Nigeria. Data was collected via a survey questionnaire administered on Muslim micro-entrepreneurs in the study area. A measurement model using the structural equation modelling approach was adopted. The paper concluded that both the voluntary and involuntary financial exclusion factors significantly account for financial exclusion among the respondents. However, voluntary exclusion signals a relatively serious problem. This is because it is a reflection of lack of use, rather than lack of access to financial services by the Muslim poor. In this regard, religious consideration as well as debt phobia as a reflection of the presence of Islam in the area had statistically significant factor loadings. Recommendations were also offered
Priority of Waqf Development among Malaysian Cash Waqf Donors: An AHP Approach
Get PDFThe practise of cash Waqf is increasingly gaining popularity among the Malaysian Muslim. Waqf institutions (SIRCs) are responsible to utilise the collection of cash Waqf to develop relevant projects in order to benefit the society in general. The purpose of this study is to explore the cash Waqf donors’ priority toward what types of development that fulfilled the current need of the society. Hence, to accomplish this purpose; thirty (30) Muslim employees who have contributed cash Waqf were interviewed. This study employs analytical hierarchy process (AHP) analysis to identify the rank of the developments that priorities by donors. The result shows that the cash Waqf contributors prefer to channel their money for Waqf development in the following rank order: (1) education, (2) health, (3) masjid and madrasah, (4) social-care and welfare (5) trade and commerce (6) environment (7) infrastructure and (8) art, culture and heritage
The Perception of Micro-entrepreneurs and Petty Traders on Conventional and Islamic microfinance: A Case Study of Pakistan
Get PDFMicrofinance is a general term that entails the provision of financial services to micro- entrepreneurs or to those who do not have access to banking facilities. The current issues faced by micro-entrepreneurs are difficulties in seeking financing from financial institutions due to lack of sufficient collateral, no credit history, irregular or uneasily verified sources of income. Consequently, they often rely on relatives or local moneylenders who charge high interest rates. Thus, on grounds of equity and justice, Islamic microfinance seems to provide an alternative needed by them. This research deals with the perceptions of micro-entrepreneurs and petty traders towards conventional and Islamic microfinance in Pakistan. It further investigates the intention to use Islamic microfinance and challenges for the micro-entrepreneurs. A total of 270 people were surveyed by means of self- administered questionnaire. The sample comprises 81 percent males and 19 percent females in three major cities; Rawalpindi, Lahore and Peshawar. Results of this study indicate that Islamic microfinance is a preferred choice as compared to conventional microfinance and best answer to poverty eradication. Although, Islamic microfinance is a new concept but majority of respondents had some understanding of this concept. However, the respondents also expressed their dissatisfaction to the management of Islamic banks
Islamic Banking-Growth Nexus: Evidence from Toda-Yamamoto and Bootstrap Granger Causality Test
Get PDFThis paper examines the causal relationship between Islamic banking development and economic growth and between Islamic banking development and capital formation in the case of Malaysia. Different with other studies, this paper uses Toda-Yamamoto and bootstrap granger non-causality test to reduce the size distortion in the data and provide more precise test inference than the commonly used asymptotic method especially in the case of small sample size. The results demonstrate a significant Granger causality from Islamic financial development to economic growth but the converse is not true, which supports the Schumpeter’s supply-leading view. The empirical evidence indicates further development of Islamic finance will contribute to the economic growth in the case of Malaysia