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- PublicationVenture waqf in a circular economyTariqullah Khan (Emerald Publishing Limited, 2019)
This paper aims to enhance the impact of incorporated waqf institutions by blending their resources to promote responsible small businesses that are inclusive of human development, service to society and preservation of ecological environment and other species. This is expected to shift the paradigm of businesses from the current waste-oriented linear economy to ideally a zero-waste circular economy. This is an analytical study building on the experience of European Venture Philanthropy Organizations (VPOs) that work with the primary objective of making impactful businesses successful, with capital protection and return on investment being of secondary concern. This paper suggests an incorporated institutional design that blends resources for promoting responsible businesses using a new hybrid financial mechanism, namely, equity-at-default (EaD) to replace collateral and foreclosure requirements with responsibility and compassion. The research calls for changing the business paradigm from linear to circular, an incorporated institutional framework for venture waqf, purpose of the waqf to make impactful small businesses successful and designing a financial contract to loan in favor of responsible businesses that convert to equity stake for the waqf in case of default (EaD) replacing collateral and foreclosure requirements. This is a theoretical study motivated by the success of VPOs but assigns a new role to waqf institutions. Furthermore, the incorporated nature of waqf is a new idea and EaD is a new mechanism. Being new, these ideas have the risk of not being implemented. However, the broader message that waqf shall promote businesses that are inclusive of ecological concerns is generally applicable. The paper has a significant practical implication to transform the responsibility and consciousness of businesses. Waqf is fundamentally a compassionate institution, and it must enhance the responsibility of businesses to become more inclusive of the environment and other species. It should also become more compassionate toward businesses that are in distress and default. In this sense, the paper tries to internalize compassion in financial contracting that can potentially change the architecture of lending. Altering businesses' mindset from a waste-driven extractive linear economy to inclusive circular economy has a tremendous transformative role. This will have implications for enhancing business consciousness and responsibility. As poverty is a phenomenon of state of mind, changing the society's state of thought in Muslim communities is expected to have basic positive implications. Entrepreneurs with a new mindset can have far-reaching positive impacts on the society.
- PublicationManaging displaced commercial risk in selected GCC Islamic banks: an empirical test for robustnessSafrina Latheef; Tariqullah Khan (Islamic Bank Training and Research Academy, 2019)
Profit sharing investment accounts (PSIAs) are unique and foundational to Islamic banking. PSIAs are a hybrid between current accounts (unstable sources of funding due to withdrawal risk) on one extreme, and partnership (stable sources of funding due to risk taking nature) on the other extreme. In the literature, considerable interest has been attached to this nature of the PSIAs in the capital structure of Islamic banks, specially, with respect to its implications for banking stability and regulatory capital assessment. Recognising the hybrid nature of the PSIAs, the Islamic Financial Services Board (IFSB) introduced two formulas addressing the inherent risk in the full range of the hybrid nature of PSIAs. The standard formula treats the PSIAs as partnership and risk taking. The supervisory discretionary formula treats the PSIAs as deposits tempting to migrate between banks seeking higher rate of returns. If depositors have to migrate, shareholders have to face the migratory depositors' risk displaced on their responsibility. In quantitative terms how much this displaced commercial risk will be in a particular Islamic bank? The measure is known as the Alpha factor in the second IFSB formula. In this paper we empirically address the robustness of the Alpha factor in the selected GCC Islamic banks. We show that the regulatory practice in this regard needs improvement on credibility. If Islamic banking has to make a difference in the global scene, the management of PSIAs requires a deep rooted reform. We set the pillars of such a reform that policy makers may find useful in supporting the promotion of genuine Islamic banking.
- PublicationEthical banking and Islamic banking: a comparison of Triodos Bank and Islami Bank Bangladesh LimitedAmirah Raffick Nabee Mohomed; Tariqullah Khan (The Islamic Research and Training Institute, 2017)
Ethical finance and Islamic finance are the two important topics in the post global financial crisis market environment and in the context of sustainable development goals and circular economy. If Islamic finance is inherently ethical finance, then what remains the difference between the two is an interesting theme for investigation. Islamic finance is governed by universal and divine legal and moral principles and standards related to economic transactions. Contemporary Islamic financial practices are however, strongly criticized for giving precedence to legal forms over ethical substance and for the rising gap between moral ideals and practical realities. Ethical finance is a conscious human effort to reform finance and it embraces environmentally, socially and morally conscious practices. In this paper we select two banks, namely Islami Bank Bangladesh Limited (IBBL) and Triodos Bank. We perceive that the first is an ideal Islamic Bank and the second is an ideal Ethical Bank. We undertake an analysis of the content of balance sheet disclosures of the two banks and try to gauge the similarities and divergences in their business principles and practices. The analysis uncovers that the current practices of IBBL may far exceed other Islamic banks in terms of financial inclusion, microfinance, gender balance, SME financing and green banking while still being financially stable and profitable. However, Triodos Bank has some significant lead over IBBL regarding ethical practices since it only promotes sustainable businesses. If Triodos Bank exceeds IBBL in ethical expectations as we conclude, then it is far ahead of other Islamic banks in such comparison. The implication of our conclusion is that Islamic banking needs ethical reform and this can be benchmarked with Triodos Bank's business model. For Islamic banks the correct approach would be to strike the right balance between ethics, moral standards, Shar'ah compliance and profitability. The Islamic banking model has in-built features to ensure Shari'ah compliance, and this can be enhanced through adopting sound ethical practices as well as dedicating efforts towards being environment friendly. The paper attempted to present some considerations which if present in Islamic banks would take them away from the criticism of being only for profit in motivation. Triodos has balanced its for-profit and not-for-profit motivations letting the later to lead the first.
- PublicationIslamic blended finance for circular economy impactful SMEs to achieve SDGsFatou Badjie; Tariqullah Khan (World Scientific Publishing Company, 2022)
In this research, we present a framework for blended Islamic finance for impactful small and medium enterprises (SMEs) to achieve sustainable development goals (SDGs). The blend results from discussing the pertinent perspectives that underlie the motives of philanthropy, private sector activities and public sector facilitation. The consensus of these three stakeholders on the impact criteria is an essential precondition for the blend to happen. Therefore, we first developed the consensus-based impact criteria for SMEs, namely, 4Zeros & SS (zero-waste, zero-emissions, zero-interest, zero-foreclosures and service to society). After that, we adopted a financial engineering approach to design products by blending the three motives. Financial contracts could be incentive compatible and effective if these three motivations are recognized and brought together. The purpose of our research is to offer such incentive-compatible structures that can mobilize funding for impactful SMEs, save cost as well as generate revenue for self-sustainability. In the contract design, the private sector provides finance, the philanthropist pays the costs of funds, the public sector facilitates, and the impactful SME gets subsidized financing. Since the blended nature of the contract provides a social subsidy to fund the cost element of the financing, the proposed structure creates a win-win result for the blending parties. While financial institutions expand into the SMEs sector for profitability, blended Islamic finance will attract additional resources toward enhancing development impact. Through the philanthropic component, SMEs, on the other hand, will access the source of social subsidy that will relieve the burden of the exorbitant commercial rates. The funding structure will reduce risk perception and spur growth. Consequently, this collaborative and innovative contract design will contribute to achieving multidimensional human development, as enshrined in the Maqasid al-Shariah, and the SDGs. Impactful businesses must integrate environmental, social and governance best practices as well as national development goals. Hence, the proposal offers several benefits and prospects of extended use for other consensus-based purposes such as low-cost housing, solar panelling, health, education, etc.
- PublicationReforming Islamic finance for achieving sustainable development goalsTariqullah Khan (King Abdulaziz University, 2019)
The paradigm of Islamic economics and finance is guided by the motivation of comprehensive human development (CHD) and its preservation as manifested in the objectives of Shari'ah (maqasid al-Shari'ah). However, the real world free-market economies are driven by the linear economy paradigm under the influence of Hotelling's 1931 famous work concerning the economics of exploiting natural resources, in which, the ecological environment is not recognized as a resource. The global financial architecture is designed to protect and preserve the linear economic paradigm. In practice, Islamic finance has also remained a halal sub-set of this system. The resultant social, environmental, and governance imbalances have recently led to different initiatives sponsored by the UN including the Sustainable Development Goals (SDGs). Like the maqasid, the SDGs also aim at achieving and preserving human development. In practice, for the first time, a real paradigm shift from the linear to the ecological/circular economy is noticeably taking place, also inducing the transformation of the financial architecture. In this paper, in a broader perspective, we use the CHD and SDGs interchangeably, and discuss a number of paradigmatic and regulatory reforms that will be required to enhance the actual effectiveness of Islamic finance in achieving the ideals of CHD, and the SDGs at large. The paper in fact outlines a wider scope of the potential reform initiatives
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