RSS 1.0Faculty Research and Publications
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The effects of interest rate on Islamic bank financing instruments: cross-country evidence from dual-banking systemsIn theory, the cornerstones of Islamic finance are interest avoidance and risk-sharing. In practice, however, Islamic banks seem to be lacking both, particularly the latter. We investigate the interest rate impact on Islamic banks' three most-widely used types of financing instruments – i.e. sale-based, lease-based and risk-sharing – by employing the system GMM estimators on a unique panel data set of 77 Islamic banks from 13 countries over the period 2003–2017. We find that sale- and lease-based financing instruments are negatively correlated with the interest rate and that their exposure is amplified in more developed Islamic banking jurisdictions. Risk-sharing instruments, however, appear to be out of the interest rate domain of influence except in less developed Islamic banking jurisdictions, where the impact is positive. Additionally, the above effects on sale-based and risk-sharing instruments hold true only in the case of full-fledged Islamic banks and Islamic bank subsidiaries, respectively; the impact on lease-based instruments hold under all specifications. The findings imply that predominant use of sale- and lease-based financing instruments in their current form undermines the interest-free and risk-sharing essence of Islamic banking and runs the risk of converging with its conventional counterpart.
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The (mis)use of al-Hilah (legal trick) and al-Makhraj (legal exit) in Islamic financePurpose The purpose of this paper is to discuss the concepts of hilah (legal stratagem or legal trick) and makhraj (legal exit) and to examine their relevance and application in the contemporary Islamic financial services and products. Design/methodology/approach This paper uses the qualitative research approach to provide a theoretical overview of hilah and makhraj literally and technically and to examine their practical applications in Islamic financial products and services. In particular, this paper evaluates several Islamic financial contracts and examines its practices in light of the implications of hilah or makhraj. Findings The paper finds that there is a glaring difference in perception and application of hilah and makhraj, as argued by some scholars. It has been found that the principle of hilah has been extensively used in the Islamic finance industry as a way to circumvent the riba prohibition. For example, Islamic financial instruments such as bay’ bithaman al-ajil, bay’ al-‘inah, tawarruq, commodity murabahah, musharakah mutanaqisah and, in some cases, the sale and lease back sukuk are found to be tainted by hilah. Research limitations/implications Because this is a theoretical paper, it should be explored in more detail, and critical analysis of Islamic financial services and products should be reviewed in line with these two principles to ascertain if the products and services are in line with Shariah requirements and devoid of hilah practices or not and to align the industry with the maqasid al-Shariah. Practical implications This paper identifies a serious challenge that Islamic finance practitioners face in product development in their effort to provide more competitive services to their customers. As a result, it demonstrates the need to proactively use makhraj in innovating Islamic financial products and proffering more sustainable and competitive solutions. Originality/value This paper discusses a topic that attempts to dispel the suspicious perceptions of some analysts as to the genuineness of Islamic financial practices.
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Development of Islamic Finance in Bosnia and HerzegovinaThis paper represents the analysis of Islamic finance development in Balkan with a case study of Bosnia and Herzegovina (B&H). In this analysis we will use the data from the local Islamic financial institutions and global reports with regard to the Islamic finance industry. Since Islamic finance has been practiced in B&H for years, its development has seen a remarkable success. Islamic banking, led by Bosnia Bank International (BBI), is the major player in the field. However, the industry faces a number of issues and challenges that impede its further development. Among major issues are a lack of legal and regulatory framework(s), a low level of public awareness about Islamic finance that leads to a low demand for its products, and a lack of government support for its development. Thus, in order for Islamic finance to develop further within the Balkan countries there is a need for a better promotion, legal and regulatory framework that will facilitate this endeavor and new players that will increase competition and add additional value to this market.
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Bank Concentration and Economic Growth Nexus: Evidence from OIC CountriesThis paper examines the relationship between bank concentration and economic growth in Organization of Islamic Cooperation (OIC) countries. This is done using the system GMM estimators on a panel data sample consisting of 41 countries and 650 observations. Our analysis reveals that bank concentration has negative impact on economic growth and this relationship is non-linear. Furthermore, the impact of bank concentration on economic growth is found to be dependent on the country’s income and corruption levels. Therefore, it seems reasonable to conclude that bank concentration has negative impact on the economic growth in OIC countries.
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Impact of Bank Concentration and Financial Development on Growth Volatility: The Case of Selected OIC CountriesThis study investigates the impact of bank concentration and financial development on economic volatility for the Organization of Islamic Cooperation (OIC) member countries. Employing dynamic panel models, we find no evidence that bank concentration is significantly related to economic volatility when it is entered independently in the models. Meanwhile, financial development lowers economic volatility. Extending the models to include market structure–financial development interaction, we note that the impact of bank concentration on volatility depends on the level of financial development within OIC countries. More specifically, the volatility-increasing effect of bank concentration tends to be moderated by financial development. Accordingly, in the wake of banking sector consolidation in these countries, policymakers and regulators in OIC countries should focus on further developing their financial markets such that the negative consequences of resulting market concentration can be mitigated.
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The FDI and Economic Growth in the Western Balkans: The Role of InstitutionsThis study explores the impact of foreign direct investment (FDI) and institutional quality on the economic growth of the Western Balkan economies – Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia. The conventional wisdom says that FDI plays a significant role in economic development and that institutional development may also affect this relationship. Using a panel data analysis for 20 years (2000-2019) and in contrast to this conventional wisdom, the study shows that FDI significantly negatively impacts growth within the sample countries. At the same time, the results indicate that institutional development has a significantly negative or no role on growth directly. The results depend on the proxy used for institutional development. Furthermore, when FDI and institutional development measures interact, both indicators become insignificant, including their interaction terms. This may be because the institutions within the sample countries are at low levels of development to make any significant impact on either growth or FDI-growth relationship.
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Performances of Islamic and Conventional Equities during the Global Health Crisis: Time-Frequency Analysis of BRICS+T MarketsThis study investigates the dynamic linkages and spillover effect between emerging economies (BRICS and Turkey), focusing on global crises, notably the COVID-19 pandemic. The study uses daily frequency data covering the period from 2002M5 to 2021M03. For the methodology, the paper employs Wavelet Coherence for multiresolution time-frequency analysis in addition to the frameworks of Diebold-Yilmaz Connectedness Index (DY12) and Barunik-Krehlik Frequency Connectedness Index (BK18). The empirical results reveal that the stock market comovements among sample markets are non-monotonous and depend on the time and frequency of returns. Significant correlations among the sample countries and a spike in overall spillover are also evident at the outbreak of the COVID-19 pandemic or the Global Health Crisis (GHC). China, Brazil, Russia, and Turkey with all the other markets, experienced the weakest links during the GHC. Brazil, Russia, and South Africa act consistently (across different horizons) as net transmitters, whereas India, China, and Turkey perform as net receivers. Islamic equities are more likely to “give” and less prone to “receive” than conventional equities. Compared to the Global Financial Crisis (GFC), the GHC effect is more severe but short-lived. The findings of this study are helpful to policymakers and diverse investors when making portfolio diversification decisions.
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A new model for screening Shariah-compliant firmsIn this paper, a new quantitative measure is developed to assess how well a firm complies with Shariah compared to other firms in a particular region. Investors can customize this measure according to their goals, constraints, and beliefs. The following two reasons make the use of this measure preferable to the existing use of ratio thresholds. First, it provides the Shariah-compliant investor with a clear understanding of the relative compliance status of each company he wishes to invest in. Second, it can be incorporated into any portfolio optimization model to ensure Shariah-compliance without compromising investment returns. Finally, the paper makes use of a sample of US publicly traded companies to demonstrate its illustrative results.
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Bank Concentration and Economic Volatility in the OIC Countries: The Role of Financial DevelopmentThis study examines the effect of bank concentration and financial development on economic volatility in member countries of the Organization of Islamic Cooperation (OIC). Using the GMM estimator, we cover the 2000–2017 period. Based on both linear and non-linear estimations, we find no significant impact of bank concentration on economic volatility. By contrast, financial development reduces economic volatility. Moreover, the relationship between concentration and volatility is influenced by financial development. Considering this, policymakers should put more emphasis on developing the financial sector than controlling bank concentrations. We find that our findings remain robust in the face of different specifications and proxies used to measure bank concentration and financial development.
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The Role of Waqf (Endowment) in Economic Development of Bosnia & Herzegovina: A Historical Overview and Future ProspectsDespite a plethora of roundtable discussions and practical initiatives on sustainable socio-economic issues to solve the inequality gap between the rich and poor, policy makers and economists still remain in the dark and have not been able to unveil solutions to major social challenges to humanity concerning poverty, community empowerment, sustainability, and social injustice, globally. There are many verses in the Qurān that directs Muslims to engage in trade activities. Islam encourages social entrepreneurial ventures and gives the etiquette and spiritual guidance needed to engage in trade. Islamic Social Entrepreneurship (ISE), in particular, is vital for the Muslims to attain sustainable community empowerment, social and economic justice. Waqf (Islamic endowment) is indeed a vehicle for financing ISE and the waqf-ISE model, discussed in this paper, provides an environment that mobilizes resources to provide a platform that caters for socio-economic development. This paper showcases the waqf-ISE model which is engineered from ground zero from Islamic foundations, without emulating any Western model and provides a window of opportunity to solve many of the societal issues afflicting Bangladesh, particularly, in terms of poverty alleviation, socio-economic development and provides a platform to empower communities in a sustainable manner.
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Islamic Finance and Limited Purpose Banking (LPB): Two Sides of the Same CoinThe saying that “history repeats itself” is best manifested in capitalist financial system operating world- wide. It seems people are not learning lessons from the history of financial crises. Leading economists and capitalist gurus are warning about an inherently fragile capitalist financial system and about an urgent need to do something about it before it is too late. After the recent global financial crisis, Kotlikoff proposed the most radical and the most comprehensive reform of the existing financial system. His pro- posal became known as the Limited Purpose Banking (LPB). Kotlikoff’s proposal runs hand in hand with the aspirations of the pioneers of Islamic finance. He envisioned a financial system that is based on risk sharing, cooperation, and overall public interest (maslahah). In short, the idea of the LPB – after certain modifications and minor adjustments – can be applied in developing a true Islamic financial system. Thus, it can be said that the LPB and Islamic finance are two sides of the same coin.
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Does Bank Concentration and Financial Development Contribute to Economic Growth? Evidence from OIC CountriesNumerous attempts have been made to study the impact of bank concentration and/or competition on economic growth especially after the global financial crisis. There is scarcity in literature covering this relationship within the Organization of Islamic Cooperation (OIC) member countries. This study investigates whether bank concentration and financial development contribute to economic growth within the OIC countries. It investigates whether the same applies to high-income and low-income countries; corrupted and less-corrupted countries. The study employs the generalized method of moments (GMM) estimators that best fit the sample. Overall, bank concentration seems to have a negative impact and non-linear relationship with economic growth. Financial development has a negative impact on economic growth with minute coefficients’ values that can be ignored economically. Economic conditions within the OIC countries may not be improved by additional financial services, but rather by reducing bank concentration (increasing competition), corruption and improving overall income levels.
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Bosna-Hersek’teki Güncel Makroekonomik Gelişmeler [Current Macroeconomic Developments in Bosnia and Herzegovina]Bosnia and Herzegovina (B&H) is a small, open economy. The country belongs to the geopolitical region of the Western Balkans and has been going through the transition process for the past three decades. The transition process, which started in Europe with the fall of the Berlin Wall in 1989, implies that a country transforms from a centrally planned to a market economy. A market economy is characterized by liberalized prices and trade and an enforceable legal system, including the protection of property rights. During socialism, prices were artificially determined, trade and investment were restricted, unemployment was practically non-existent, and all decisions were made by the central government, which indicates that efficient institutions did not exist. The transition process ends once a country joins the European Union (EU). Bosnia and Herzegovina, together with Croatia, Kosovo, Montenegro, North Macedonia, Serbia, and Slovenia, formed the Socialist Federal Republic of Yugoslavia (SFR Yugoslavia), a country known for its unique system of market socialism, which was more flexible than socialism in the Union of Soviet Socialist Republics (USSR) or Central and Eastern European (CEE) countries. Private property practically did not exist, as it was not considered compatible with the socialist economic system and its expansion was restricted by law (Uvalić, 2018). Most of the economy was state-owned. The state decided what and how much each company would produce and the inputs were provided by the state. If the quota could not be fulfilled, then the quality of the products had to be sacrificed, which did not create any problems since there was no competition among the enterprises (Berend, 2016). The manufacturers did not sell their products in the market; that was done by specialized companies. After the Second World War, Yugoslavia pursued rapid industrialization, where the priority was given to heavy over light industry (Uvalić, 2018). Therefore, transition economies lie between developed and developing countries; they are industrialized, but the technology is obsolete. Bosnia and Herzegovina, together with other former Yugoslav republics, produces less sophisticated goods, which is one of the reasons why the countries are not as competitive as they should be. SFR Yugoslavia ceased to exist in its original form in 1991. Bosnia and Herzegovina declared its independence on 1 March 1992. The break-up of SFR Yugoslavia was followed by several wars – in Slovenia (1991), Croatia (1991-1995), B&H (1992-1995), and Kosovo (1998-1999). The wars delayed the transition to a market economy. CEE countries that had a more strict form of socialism went through the transition process in fifteen years. Among former Yugoslav republics, Slovenia joined the EU in 2004, followed by Croatia in 2013. In the 1990s, B&H and other Western Balkan countries faced structural problems; hyperinflation, slow economic growth, high public deficits, and depreciating exchange rates (Estrin and Uvalić, 2016).
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Financial markets and integration: The case of Bosnia and HerzegovinaIntegrating a country into a global financial system is a difficult task. This task is even more challenging when faced with a country that has a highly complex political system. Bosnia and Herzegovina (B&H) is a perfect example of a country having two separate government entities with four different levels that are further divided along political and ethnic lines. Bosnia is a small, open economy that has been going through the transition process since the Dayton Peace Agreement ended the aggression in 1995. It consists of two semi-autonomous political entities: The Federation of Bosnia and Herzegovina (hereafter FBIH) and Republika Srpska (hereafter RS), with District Brčko as a de facto third entity. FBIH is further divided into ten cantons. Even though B&H is a small open economy, it is rich in natural resources and has excellent potential for economic growth. However, to reach its full economic potential, the country must integrate more closely with regional and international markets. Leaving behind the socialist economic system, B&H committed itself to developing market-oriented economic policies and systems. With the technical and financial assistance of the international community and international financial institutions, B&H embarked on several structural reforms and investment programs right after the Dayton Peace Agreement was signed in 1995. However, due to the complex nature of the B&H government, these reforms have not been entirely successful, and critical reforms are yet to be addressed. More than two decades after the aggression, B&H faces a slow and stagnant economic growth with weak institutions making it vulnerable and unstable. Better integration of the country, both internally and externally, is needed for B&H to grow further. It is believed that the government can overcome other differences with better economic and financial integration. The absence of an integrated economic area within the country harms the economic development and performance of all sectors of the B&H economy. As pointed out by many, the main culprits for such situations are a fragmented administrative structure, partly different legal frameworks and implementation practices, a weak rule of law, lengthy bureaucratic procedures, and low-quality public administration.
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The Finance-Growth Nexus and the Role of Institutional Development: A Case Study of the Western Balkan Countrieshis paper empirically investigates the impact of finance and institutions on the economic growth of the Western Balkan economies – Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia – using a panel data analysis covering 2000–2020. While individually, neither finance nor institutions significantly impact economic growth, they increase the sample countries’ GDP when the two interact. Furthermore, the results suggest that the finance-growth relationship is non-linear, with a positive impact having a threshold. This relationship also depends on the sample’s institutional development (and vice versa). Similarly, this relationship depends on the proxy used, and hence, we need to be careful when making conclusions.
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Islamic approach to corporate social responsibility: an international model for Islamic banksPurpose This study aims to present a corporate social responsibility (CSR) model that would apply to Islamic banks, considering the international aspect of social responsibility because CSR is not applicable in the same way in all types of societies. Design/methodology/approach Based on the extensive review of the existing literature, the authors aim to present an Islamic CSR model applicable to Islamic banks. This study is based on the international approach to CSR developed by Masoud (2017). Each responsibility has an equal share but with specific changes regarding the order of priorities between them and the type of responsibility. Findings The findings show that the existing literature provides several Islamic CSR models. Most of these models are general and offer guidelines to Islamic financial institutions, but no model applies exclusively to Islamic banks. Using these models for Islamic banks is challenging because of their specific business activities, especially in non-Muslim countries. This study proposes a model that could act as the main guideline for Islamic banks with enough flexibility to meet different market and stakeholders’ requirements. Practical implications The model was not tested on a sample, and not all Islamic principles were considered. However, it is applicable for Islamic banks, especially considering internationalization in their businesses and the further development of Islamic banking. At the same time, this model puts ethical norms in the spotlight. This is particularly emphasized in the case of non-Muslim countries or in societies where a particular law does not regulate Islamic bank activities. Originality/value Although there is a growing literature on this topic, existing studies primarily discuss the Islamic approach to CSR from the overall perspective, not in a specific industry. While some authors developed their own Islamic CSR models relying on the primary Shariah sources, others base their proposals on other classical CSR ideas. To the best of the authors’ knowledge, this is the first study based on the CSR model developed by Masoud (2017), considering the relationship between economics and religion and the implications of the Islamic moral economy.
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The linkage between Bitcoin and foreign exchanges in developed and emerging marketsThis study investigates the connectedness between Bitcoin and fiat currencies in two groups of countries: the developed G7 and the emerging BRICS. The methodology adopts the regular (R)-vine copula and compares it with two benchmark models: the multivariate t copula and the dynamic conditional correlation (DCC) GARCH model. Moreover, this study examines whether the Bitcoin meltdown of 2013, selloff of 2018, COVID-19 pandemic, 2021 crash, and the Russia-Ukraine conflict impact the linkage with conventional currencies. The results indicate that for both currency baskets, R-vine beats the benchmark models. Hence, the dependence is better modeled by providing sufficient information on the shock transmission path. Furthermore, the cross-market linkage slightly increases during the Bitcoin crashes, and reaches significant levels during the 2021 and 2022 crises, which may indicate the end of market isolation of the virtual currency.
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Modeling SMEs Credit Default Risk: The Case of Saudi ArabiaThis study assesses the credit risk of small and medium-sized enterprises (SMEs) to minimize unexpected risk events. We construct a hybrid statistical model based on factor analysis and logistic regression to predict enterprise default on loans and determine the factors predicting SMEs default. We assess the credit risk of SMEs listed on the Saudi stock market. The results indicate that the SMEs acid-test ratios are the most influential factors in predicting SMEs credit risk. Therefore, the designed logistic model can be used by financial institutions during the decision-making process of granting loans to SMEs. This study sheds light on challenging access to bank credits due to the lack of financial transparency of most Saudi SMEs.
