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- PublicationAlternative dispute resolution in Islamic banking and finance: a paradigm shift in arbitrationNik Sarina Lugman Hashim; Zainal Azam Abdul Rahman; Ahcene Lahsasna (INCEIF, 2013)
This research will look at the reasons for the civil courts being the preferred mode of dispute resolution for Islamic finance disputes in Malaysia and how arbitration, based on the shari'ah can play an active role to resolve disputes in Islamic finance cases. Various features of arbitration in general and Islamic arbitration in particular will be looked into, followed by a study of the arbitration rules under two arbitration centres to find the common themes of these centres and the differences in their approach, if any ...
- PublicationAn empirical study of the oscillator option pricing model and an alternative modification to Black-ScholesImene Tabet; Belal Ehsan Baaquie; Mohamed Eskandar Shah Mohd Rasid (INCEIF, 2021)
The option pricing model introduced by Black-Scholes in 1974 gained wide acceptance for its simplicity but was inefficient in pricing options as it relied on implied volatility. Despite the evolution of various versions of option pricing models since their seminal work, little progress had been documented on the use of implied volatility, leaving Black-Scholes to be a mathematical identity to calculate the instantaneous implied volatility as it fails to be an efficient pricing equation. Although interpreted as market expectation of future volatility of stocks, implied volatility is literally a black box that captures market information that is not specifically known yet also internally inconsistent (e.g., having a different implied volatility surface for put and call options). The four main objectives of this thesis are: first, to empirically studying the performance of the Oscillator model developed by Baaquie (2019) and examining its efficiency in pricing options as compared to Black-Scholes model. The Oscillator model has only two sets of parameters in addition to the classical form of Black-Scholes; one to model for the underlying stochastic evolution of the stock price, and the second are of market time. Market time is a behavioural parameter introduced by Baaquie and Bouchaud (2004) which scales the time to maturity to capture the market sentiment of the underlying instrument. This thesis also introduced an alternative version of Black-Scholes by adjusting it for market time. Second, the thesis tested the put-call parity violation. Third, the thesis tested three main option hedging Greeks; Delta, Gamma, and Theta, which are partial differentiations of the option pricing equation. Fourth, the thesis discussed the calibrated output and parameters' behaviour to provide insights into the implied volatility information content and gain new understanding of the parametric gap of Black-Scholes particularly in the light of the Oscillator and Black-Scholes models adjusted for market time.
- PublicationAn analysis of issues surrounding stock index future contracts: Malaysian evidenceHashim Jusoh; Obiyathulla Ismath Bacha; Abul Mansur Mohammed Masih (INCEIF, 2017)
The derivatives markets in the Asian region have shown significant growth and development since their inception. Similarly, derivatives market in Malaysia and Bursa Malaysia Derivatives have experienced remarkable changes and developments. This study focuses mainly on the stock index futures contract (FKLI) and its relationship with the underlying spot index (FBM KLCI). The FKLI is chosen instead of other permissible futures due to availability of the data and its relevance in the context of fund managers' asset allocation strategy. The FKLI is chosen instead of other permissible futures due to availability of the data and its relevance in the context of fund managers’ asset allocation strategy. Mainly based on intraday data, this study makes an analysis of issues on pricing efficiency, the expiration-day effects on volume and volatility, the lead lag relationship between stock index and stock index futures, in Malaysian derivatives market as a newly advanced emerging market. Based on the underlying assumption that if a mispricing were to arise, unlimited arbitrage trading would trigger the market price back to its theoretical fair value and hedging effectiveness may go down as a result of pricing inefficiency, the first essay investigates the study of pricing efficiency specifically on the extent of mispricing by contract, evolution of mispricing, and mispricing episodes. Daily data based on the cost-of-carry model and 15-minute intraday data based on the basis model are used to address the issue of pricing efficiency. This essay fills the gap by introducing 15-minute intraday data, in addition to a larger time span of daily data. The results show variations in mispricing over time under study and provide valuable information for policymakers and fund managers as the Malaysia markets become more efficient and seem to provide a better avenue to hedge their positions and protect their investment values.
- PublicationAntifragility of Islamic financeUmar Rafi; Abbas Mirakhor; Obiyathulla Ismath Bacha (INCEIF, 2015)
This research attempts to show that risk sharing, as defined under Islamic finance, makes financial systems antifragile. The recent financial crisis has given rise to discussions around a new term known as antifragility, used for evaluating the long-term stability of a financial system. Antifragility specifies conditions under which systems become resilient to shocks caused by Black Swans. These are highly unpredictable outlier events that have a major negative (or positive) consequence when they occur, with their occurence only being explained retrospectively. According to this concept, the long-term survivability of any system centers exclusively on its antifragile nature, that is, its ability to absorb and actually benefit from Black Swan-type shocks. This research aims to investigate risk sharing Islamic finance, qualitatively (via literature-based research) and quantitatively (via mathematical modeling), as an antifragile system ...
- PublicationBeneficial ownership and its application in Islamic finance: an analysis from the Shari'ah perspectiveNik Abdul Rahim Nik Abdul Ghani; Muhammad Yusuf Saleem; Ahcene Lahsasna (INCEIF, 2017)
Beneficial ownership is applied in the modern Islamic financial contracts such as financing and sukuk structure, especially in countries where common law is dominant. It has been recognized by some scholars and rejected by others. In this regard, the concept of beneficial ownership in Shari'ah should be analysed to develop a clear interpretation of the concept of beneficial ownership from the Shari'ah perspective. The purpose of this study is to examine the meaning of beneficial ownership in Common Law system and its recognition from the Shari’ah point of view. It begins with identifying the meaning of milkiyyah (ownership) and its characteristics in the Islamic law and followed by the analysis of beneficial ownership in the current practice of Islamic finance as to whether it fulfils the Shari’ah requirements. The approach that is applied in this study is qualitative research in nature, with regards to documentation and secondary sources by reviewing and analysing the application of beneficial ownership in Islamic banking; in addition, some interview sessions were conducted with practitioners involved in the financial industry. The findings of the research are that the transfer of ownership in Shari’ah immediately occurs after the execution of ijāb and qabūl and interestingly, this idea is also shared by the Common law, which actually borrowed it from the Islamic law.
- PublicationCapital structure theory revisited: the impact of risk-sharing sukuk on firms in MalaysiaFareiny Morni; Obiyathulla Ismath Bacha; Belal Ehsan Baaquie (INCEIF, 2022)
In the Islamic finance capital market spectrum, the potential of mudharabah and musyarakah sukuk is hampered with criticism by Shariah scholars. Among the criticisms include the presence of uncertainties surrounding sukuk returns, the risk of losses that the rabbul-mal (investors) have to bear, and the need to mitigate agency costs (for mudharabah contracts). This have made it a deterrent for both issuers and investors in seeing the instrument as a viable alternative to debt-based sukuk structures. This study proposes an improvement to musyarakah sukuk. It begins with a qualitative examination of the structure of corporate mudharabah and musyarakah sukuk issued in Malaysia. The examination finds risk-sharing sukuk structures in Malaysia contain features that supresses the risk sharing element between the sukuk investors and issuer. Findings from qualitative analysis is supported by generalized method of moments (GMM) and threshold analysis. Based on the sample of 86 corporate mudharabah and musyarakah sukuk issuances, the introduction of partnership sukuk in the firm's capital structure is found to be insignificant in affecting both firm risk and firm performance. The present partnership sukuk structure is then modified to incorporate variable returns (coupon payments) proportionate to the firm's net profits and variable principal repayment proportionate to the firm's total assets value. This study finds that when sukuk returns are made variable, sukuk investors are able to earn better/ equitable returns compared what they are earning in the current sukuk structure.
- PublicationCombinations of contracts in Islamic commercial law and its application in Islamic financial services in MalaysiaShahrul Azman Abd. Razak; Ahcene Lahsasna; Joni Tamkin Borhan (INCEIF, 2014)
This study examines the concept of combination of contracts in Islamic commercial law and its application in the Malaysian Islamic financial services. Combination of contracts encounters some juridical issues by virtue of the three prohibiting ahadith mentioned by the Prophet (s.a.w.). The ahadith stated that the Prophet (s.a.w.) prohibited combining two sales in one sale, loan and sale, as well as two transactions in one transaction. Many debates have been raised among classical and contemporary Shari'ah scholars regarding the interpretation of these ahadith and the types of contracts that are combinable or non-combinable. Given the fact that these issues remain obfuscated, therefore this study is commenced. In so doing, this study employs two research methodologies; content analysis of Islamic jurisprudence's sources and case studies. The result of the study demonstrates that combination of contracts is generally permitted in Islamic commercial law, as long as there is no Quranic verse or Prophetic tradition that prohibits the combination. Concerning the understanding of three ahadith reported, they must be interpreted within specific context ...
- PublicationCompetition - stability relationship in dual banking systems Islamic vs. conventional banksMoutaz Abojeib; Mansor H. Ibrahim; Mohamed Ariff Abdul Kareem (INCEIF, 2017)
Numerous attempts have been made to study the impact of competition on banking-stability before and after the recent global financial crisis. In the rich theoretical and empirical literature on the topic, two contradictory views have surfaced, i.e. the competition-fragility view and the competition-stability view. This thesis provides empirical evidence of a nonlinear relationship between competition and stability that explains, at least partially, the conflicting results of previous theoretical and empirical studies. Furthermore, while the existing literature focuses on conventional banking, this thesis investigates both Islamic and conventional banks in dual banking systems and explores whether or not bank types affect ...
- PublicationConsumer financial protection in Islamic banking: a study of conduct risk in Shari'ah governanceMace Abdullah; Saiful Azhar Rosly; Syed Abdul Hamid Aljunid (INCEIF, 2021)
Islamic banks (“IB”) are predominant institutions of Islamic Finance (“IF”) worldwide. Consumers are key stakeholders in IBs. The central objective of this research is to study consumer financial protection (“CFP”) in IBs. The presence of conduct risk (“CR”) in the form of reputational damage, monetary awards, costs and fines, emanating from grievances, claims and disputes between IBs and their consumers is indicated as resulting from laxity in CFP. As with conventional banks (“CB”), lax CFP in IBs results in CR due to various forms of misconduct, whether intentional, negligent or inadvertent. However, in IBs, lax CFP may also result in CR due to “tensions” in Shari'ah governance (“SG”) that may have nexus to CFP. That conundrum may lead to Shari'ah risk (“SR”) and Shari'ah non-compliance risk (“SNCR”). Statistical analysis and modeling of CFP key indicators is therefore instrumental in examining the relationships. Exploratory factor analysis (“EFA”), confirmatory factor analysis (“CFA”) and covariance-based structural equation modeling (“CB-SEM”) on consumer-facing survey instrument responses (key measurement CFP variables) was conducted. The resulting empirical evidence indicates that latent and key measurement CFP variables hypothesised by multinational banking institutions have a statistically significant impact on CFP in IBs. taxonomy of civil court rulings involving IBs and Shari'ah-compliant contracts for the period 2011-2018 using a qualitative legal document review methodology, limited in scope to those civil case rulings and decisions resulting in money awards, damages, asset impairment, costs and significant exposure, was conducted. A literature review of pre-2011 and post-2018 civil cases involving IBs and regulatory actions was also conducted, in search of indicia of CR. Recent Bank Negara Malaysia (“BNM”) enforcement actions involving CFP issues were reviewed and annotated. Islamic banking disputes lodged with the Ombudsman of Financial Services (“OFS”) and the related awards for the calendar years 2014-2018 were qualitatively reviewed in search of further indicia of CR in IBs. Results indicate that taken together, these civil court rulings, enforcement actions and alternative dispute resolution (“ADR”) actions from OFS form compelling evidence of the persistent presence of CR in IBs. Moreover, EFA and CFA on consumer-facing survey instrument responses statistically buttress the conclusion that latent and key CR measurement variables trigger grievances, disputes and claims against IBs.
- PublicationConsumer protection in Malaysian Islamic home financing facilities from the Shariah perspective: with special reference to abandoned housing projectsAmnisuhailah Abarahan; Muhammad Yusuf Saleem; Azman Mohd Noor (INCEIF, 2019)
Consumer 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.
- PublicationCorporate sustainability and financial performance of banks in OIC and non-OIC countries: the role of competition and institutionsMuhammad Umar Islam; Baharom Abdul Hamid; Ginanjar Dewandaru (INCEIF, 2019)
Globally, the awareness about sustainability has increased due to the lingering environment, social and governance-related issues. In this perspective, the role of social media and consumer awareness are important since they influence the corporate sector to care for sustainable development. Banks, being very important to the economy, contribute to sustainability through their internal (through governance, data security, etc.) and external (through environment-friendly loans , financial inclusion, etc.) practices. These practices are collectively called as environment, society, and governance (ESG) sustainability. ESG practices by banks are important since they operate on public funds, have interconnections with the businesses and at times bailed out at the expense of taxpayers. An intriguing question, though, is whether these ESG activities impact bank profitability and risk. Further, as identified in the literature, there are certain moderators such as competition and institutions which may impact the ESG-profitability and ESG-risk relationship. We investigate these relationships for Organization for Islamic Countries (OIC) and Non-OIC countries. Specifically, we employ data of 341 banks from 65 countries, further divided into Non-OIC (54 countries, 295 banks) and OIC countries (11 countries, 46 banks). ESG data has been used for the years 2007-2016 while the dynamic panel model has been estimated using the Generalized Methods of Moments technique ...
- PublicationCost, profit and technical efficiency: a DEA based comparative analysis of Malaysian takaful and insurance providersNorashikin Ismail; Syed Othman Alhabshi; Obiyathulla Ismath Bacha (INCEIF, 2011)
This study attempts to measure the relative efficiency of the takaful industry and the conventional insurance industry in Malaysia. A sample of 18 firms consisting of 7 takaful operators and 11 insurance firms is examined over the period 2004 to 2009. The study employs Data Envelopment Analysis (DEA) to estimate the technical, cost and profit efficiencies for the takaful and insurance industry ...
- PublicationCredit to the private sector in dual banking countries: does the presence of state-owned and foreign banks have any role?Nazrul Hazizi Noordin; Mansor H. Ibrahim; Mohamed Eskandar Shah Mohd Rasid (INCEIF, 2021)
This study extends the bank ownership database of Claessens and van Horen (2015) to investigate the role of state-owned and foreign banks in the development of private credit markets in countries with a dual banking system. The enhanced database contains state and foreign ownership information of 1,038 banks operating in 29 countries, categorised as either Islamic or non-Islamic. To begin, this study uses the database to identify the bank ownership patterns in the dual banking countries. The data reveals that the ownership structure of the Islamic banking industry changes in a different manner from that of their conventional counterpart. More specifically, it shows that, in line with financial liberalisation policies, the presence of state-owned and foreign conventional banks decreases and increases, respectively. On contrary, Islamic banks with both types of ownership become more prevalent over time. Further, the data is used to examine how state-owned and foreign bank presence affects private credit in the countries. To do so, this study employs a cross-country approach that regresses private credit to GDP ratios against the shares of total bank assets held by state-owned and foreign banks. In the regressions, the asset shares are measured both in total and by bank types (i.e., Islamic versus conventional banks). The regressions are run separately using data average over the full sample period (1995-2017), and over the three subsample periods that are divided into the pre-crisis (1995-2006), during-crisis (2007-2009), and post-crisis (2010-2017) periods. When measuring bank ownership shares in total, this study finds that the presence of state-owned banks is associated with less credit to the private sector in support of the political view. This negative relationship is, however, found to be insignificant during the crisis period. In terms of magnitude, the effect, when significant, is somewhat larger in the post-crisis period than in the pre-crisis and the full sample period. On the other hand, this study does not find significant evidence that the presence of foreign banks could adversely affect private credit markets either in the full sample period or in the subsample periods.
- PublicationThe currency risk exposure of non-financial firms in ASEAN-4: an assesment using stock returns and cash flow methodologiesHishamuddin Abdul Wahab; Obiyathulla Ismath Bacha; Mansor H. Ibrahim (INCEIF, 2013)
The study of currency exposure in the context of small open economies such as the ASEAN-4 region is important in view of the higher degree of openness of the economies and the progressive growth of the Islamic finance industry. This study examined the presence of currency exposure in a sample of 405 listed non-financial corporations from Indonesia, Malaysia, Singapore and Thailand over a duration of 18 years from 1993 to 2010. This study is different from previous studies as it combines two assessment methods, i.e., the cash flow (CF) and stock returns (SR) approaches. Furthermore, this study covers two major events of the financial crises ...
- PublicationDefault risk of SME's in Malaysia: the role of religionAzarahiah Lokman @ Yusop; Mansor H. Ibrahim; Rodney Wilson (INCEIF, 2018)
Bank financing is an important external source of financing for SMEs. However, banks often considered SMEs as riskier than large enterprises and therefore use various tools to mitigate their risks in SME lending / financing such as imposing collateral requirement, higher pricing and credit rationing. This may limit access to finance for the SMEs. By understanding SME default risk better, banks may reduce or eliminate the collateral requirement, lower the pricing or avoid credit rationing thus improving access to finance for the SMEs. Studies have considered various risk factors and their impact on default. However, none, to the best of my knowledge has considered religion as a risk factor. Religion has been shown to influence individual decision-making that affects economic outcomes. Thus, this thesis postulates that religion may have an effect on SME default risk too. The thesis examines religion from four perspectives; as a loan characteristics i.e. Islamic financing and conventional loan, as a firm characteristic i.e. Muslim and non-Muslim owned SME, as a brand and religiosity ...
- PublicationDemonstrating the efficacy of risk sharing structures in infrastructure financingMomin Ebaad Vaqar; Obiyathulla Ismath Bacha; Baharom Abdul Hamid (INCEIF, 2018)
Infrastructure is the backbone of modem economies; an adequate and efficient public infrastructure is essential for nations to achieve their economic growth objectives. Although the need and role of infrastructure are well recognized, little attention has been paid to the risks and pitfalls of the current infrastructure financing structures. The enormous infrastructure deficit and the increasing instances of debt restructurings, infrastructure project failures and expensive government bailouts, present enough reason for a deeper thought and action towards making infrastructure financing more robust. Through the thesis, the researcher sheds light on the problems related to such forms of financings and presents the case for an alternative model to finance infrastructure developments ...
- PublicationDepositors response to the ESG risks: evidence of market discipline from banks in the Organisation of Islamic Cooperation Countries regionDana Abdullatif AlZayani; Baharom Abdul Hamid; Kinan Salim (INCEIF, 2022)
The Global Risk Report (2021) identifies ESG risks as the number one risk faced by the global economy. Banks have contributed to this risk and can also contribute to mitigating it. High exposure of Banks to ESG risks will contribute to climate disaster, which in turn will have financial risk implications for banks in the form of disaster events risks and energy transition risks. Depositors can discipline banks in reducing and preferably eliminating their ESG risks through enforcing market discipline by deposit withdrawal. This thesis investigates the extent to which deposit withdrawal works as market discipline against ESG risks in the banks of the OIC region. The thesis also examines the impact of financial risk represented by CAMELS variables on depositors' behavior. The generalized method of moments (System GMM estimator) is used for dynamic panel data models, as well as a sample from 65 countries over the period 2007 to 2016. Our findings indicate that depositors react significantly to environmental and governance risks while depositors' discipline does not exist with social risks. With regard to financial risks, our findings suggest weak evidence of market discipline. However, regressing CAMELS components separately provides better results and understanding than regressing CAMELS components collectively. In the OIC region, the study indicates that depositors tend to be sensitive to changes in capital adequacy, bank earnings and ESG risks, while in the non-OIC region, depositors are only sensitive to management quality.
- PublicationThe determinants and dynamics of portfolio investment inflows into ASEAN-4Rosnani Rasul; Mohamed Ariff Abdul Kareem; Baharom Abdul Hamid (INCEIF, 2017)
Understanding the determinants of portfolio investment inflows is imperative in a region highly susceptible to large amount of capital inflows like ASEAN. And to formulate the right policy, intervention and upgrade, ASEAN needs to have a good grasp on these determinants before it can manage volatile capital flows and the accompanying disruptive potential. Although a number of studies focusing on the drivers of gross capital inflows into EMEs has been established, one on ASEAN's has been largerly left out. The need for studying gross inflows is simple, as its movement has direct implication on financial stability and the vulnerability of the overall financial system ...
- PublicationThe determinants and impact of short-term capital flows on stock market (conventional and Islamic) and economic growth: evidence from the OIC countriesPrachaya Suwanhirunkul; Obiyathulla Ismath Bacha; Kinan Salim (INCEIF, 2022)
This thesis investigates the determinants and impact of short-term capital flow in the 33 OIC countries from 2000 to 2018 and bridges the understanding between both literature strands. The short-term capital flows are divided into gross inflows, outflows, and extreme episodes, analyzed under the push-pull framework. The empirical approaches for exploring the determinants of short-term capital flows consist of panel static and dynamic LSDV and probit models. Additional analysis controlling for Lucas's paradox conditions provides more insights and robustness. The study then analyzes their impact on economic growth (GDP), conventional, and Islamic stock markets. The study employs time-series models (ARDL and NADRL) to test the impact of short-term capital flows on economic growth and stock markets. The models establish the long-term dynamic relationship and synergize with prior findings on the heterogeneous responses of each country. The findings suggest that short-term capital flows into the OIC countries are tied to the global commodity and domestic consumption effects, indicating the dominance effect from push factors and the global economic cycle. Regional contagion act as a transmission mechanism of episodic flows across the OIC. There is also clear evidence of each country's heterogeneous determinants and impact of short-term capital flows, emphasizing the important roles of pull factors and the level of capital account openness. The impact of STC flows on stock markets confirms that they are susceptible to global economies and uncertainty, especially in conventional stock markets. The findings for Islamic stock markets support the "decoupling hypothesis" since they are less affected by global shocks from higher risks and uncertainty. The overall findings imply the importance of capital liberalization, institutional quality, and the optimal sequence of capital liberalization.
- PublicationDeterminants of demand-side intention to use Islamic home financing and supply-side challenges: empirical evidence from Kabul, AfghanistanZulfiqar Ali Khan; Saiful Azhar Rosly; Muhammad Yusuf Saleem (INCEIF, 2019)
The aim of this research is to examine the issues and challenges of the Islamic home financing market Afghanistan as the country is facing substantial housing shortage due to its growing population and unavailability of land in the major cities where unclear land titles, lack of legal and regulatory frameworks, absence of national housing policies and foreclosure laws constituted major barriers. These problems are compounded with the lack of supply of housing finance and people's low financial capacity to take bank loans and financing. This study first examines the current Islamic banking legal and regulatory framework ...
- PublicationDeterminants of financing among Malaysian technology startups and the role of Islamic financeGamal Nassar Ali Alhamdani; Zulkarnain Muhamad Sori; Mohd-Pisal Zainal (INCEIF, 2017)
Technology startups (TSs) are critical to develop economic capacity, support innovation and stimulate entrepreneurial spirit In a nation. As TSs embark on innovative and disruptive journeys, they face their biggest challenge: financing. This study aims to examine the determinants of financing among TSs in Malaysia while critically examining the role of Islamic Finance. The study adopts a triangulation methodological approach, which consists of questionnaire survey and semi-structured interviews. It focuses on Malaysian technology startups, entrepreneurs and their financing needs mainly at two stages: the early stage and the later stage. The study examines the following dependent variables as financing determinants: Entrepreneurs' Profiles (EP), Ethnic Culture (EC), innovation (IN) and Government Interventions (GI). It also examines the role of Islamic Finance among TSs. Binary regression analysis was used to analyse the data collected from the questionnaire survey, respectively grounded theory was employed to analyse interview survey data ...
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