Narrow Results

We look at market discipline in the Islamic deposit market of Turkey for the period after the 2000 crisis. We find support for quantity based disciplining of Islamic banks through the capital ratio. The evidence for price disciplining is, however, less convincing. In addition, we also look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. We observe that the reform increased quantity based disciplining in the Turkish Islamic deposit market.

We use a monthly dataset to analyze whether Islamic banks have greater market power compared with their conventional counterparts. Using a sample of Indonesian banks, we find that Islamic banks possess greater market power than conventional banks. This condition does not hold, however, when we compare state-owned Islamic and conventional banks. We also find some specific determinants of Islamic banks’ market power: the Ramadan holy month (positive impact), the proportion of profit-and-loss sharing in their financing (negative impact), and the presence of a Sharia board (positive impact). Interestingly, Ramadan benefits not only Islamic banks but also conventional banks. Our findings support prior literature emphasizing the role of religiosity in Islamic banks’ behavior.

Considering the reverberations of financial crisis of 2007–09 that the banking industry terribly witnessed, this paper aims to estimate both the non-bias-corrected and bias-corrected efficiency by employing the data envelopment analysis and Simar–Wilson double bootstrapping regression techniques over the period of 2011–2017 and see how the financial inclusion impacts on Islamic banks. This study finds that most of the countries, except some Asian and Middle-Eastern countries, have inconsistent efficiency trends in Islamic banking sector. It also shows that financial inclusion is significantly allied with Islamic banking efficiency. Eventually, the results propose that Islamic banks are still bearing the consequence of that economic recession and, therefore, bank should focus more on financial inclusion since those banks having sound and inclusive financial environment are seen enjoying higher level of financial efficiency.

This paper aims to measure the IAHs disclosure level in the annual reports of Islamic banks. To do this, we develop a specific IAHs disclosure index based on Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards. We use manual content analysis of 49 full-fledged Islamic banks’ annual reports over the period 2011–2015 across 10 countries. The findings of this study show that the overall level of IAHs disclosure is 28%. Indeed, the sampled Islamic banks provide fewer disclosures related to IAHs. This study contributes to enrich the knowledge of Islamic accounting literature by exploring directly the IAHs disclosure level in the annual reports of Islamic banks via self-constructed IAHs disclosure index based on AAOIFI accounting standards. It can help regulators in different countries to understand and strengthen the IAHs disclosure practices in Islamic banks by imposing AAOIFI disclosure requirements in terms of IAHs reporting.

Islamic banks do not pay interest on customers' deposit accounts. Instead, customers' funds are placed in profit-sharing investment accounts (PSIA). Under this arrangement, the returns to the bank's customers are their pro-rata shares of the returns on the assets in which their funds are invested, and if these returns are negative so are the returns to the customers. The bank is entitled to a contractually agreed share of positive returns (profits) as remuneration for its work as asset manager; however, if the returns are zero or negative, the bank receives no remuneration but does not share in any loss.

In the case of Unrestricted PSIA, the investment account holders' funds are invested (i.e., commingled) in the bank's asset pool together with the bank's shareholders' own funds and the funds of current account holders. In that case, the bank's own funds that are invested in the asset pool are treated the same as those of Unrestricted PSIA holders for profit and loss sharing purposes; however, the shareholders also receive as part of their profit the remuneration earned by the bank as asset manager (less certain expenses not chargeable to the PSIA holders). This remuneration (management fees) represents an important source of revenue and profits for Islamic banks.

From a capital market perspective, this arrangement presents an apparent anomaly, as follows: shareholders and Unrestricted PSIA holders share the same asset risk on the commingled funds, but shareholders enjoy higher returns because of the management fees. On the other hand, competitive pressure may induce the bank to forgo some of its management fees in order to pay a competitive return to its PSIA holders. In this way, some of the PSIA holders' asset risk is absorbed by the shareholders. This phenomenon has been termed "displaced commercial risk" [2].

This paper analyzes this phenomenon. We argue that, in principle, displaced commercial risk is potentially an efficient and value-creating means of sharing risks between two classes of investor with different risk diversification capabilities and preferences: wealthy shareholders who are potentially well diversified, and less wealthy PSIA holders who are not. In practice, however, Islamic banks set up reserves with the intention of minimizing any need to forgo management fees.

Islamic banks are established with the mandate of conducting all their transactions in conformity with Islamic precepts which prohibit, among other things, the receipt and payment of interest. Unlike conventional (non-Islamic) commercial banks, Islamic banks mobilise funds primarily via investment accounts using profit sharing contracts. In this paper, we argue that the concept of financial risk, on which modern capital structure theories are based, is not relevant to Islamic banks. Given the contractual obligation binding the Islamic bank's shareholders and investment account holders to share profits from investments, we propose a theoretical model in which, under certain assumptions, an increase in investment accounts financing enables the Islamic bank to increase both its market value and its shareholders' rates of return at no extra financial risk to the bank. We theoretically demonstrate that such a process leads to an increase in the Islamic bank's market value but does not alter its weighted average cost of capital, i.e. the weighted average cost of capital of the Islamic bank remains constant. The evidence obtained from estimating and testing the model on annual accounts drawn from a sample of 12 Islamic banks lends support to our theoretical predictions, as do the results from counterfactual simulations and sensitivity experiments. Hence, in the context of Islamic banks both our theoretical and empirical results provide a new dimension to the theory of capital structure, which is based on a mixture of only debt and equity financing. In general, viewed against the main competing tenets of the traditional school and the MM standpoint, our results provide an encompassing paradigm on the theory of capital structure.

This paper aims to model the impact of retail consumers’ behavior on a new banking dual market featuring both conventional and Islamic banking products. To build the model, we conduct an empirical qualitative and quantitative survey on Moroccan market consumers in order to appraise their preferences with regard to banking products’ attributes. Then, we use conjoint analysis method to determine the consumers’ decision function. We run market simulations on a Multi-Agents Simulation platform and analyze the results. Our findings indicate that in new dual markets, and under a range of assumptions, it is predicted that Islamic banks will face excess liquidity while conventional banks will be exposed to liquidity shortage.

This paper examines the performance of Islamic banks (IBs) and conventional banks (CBs) during the recent global crisis by examining the impact of the crisis on profitability, credit and asset growth, and external ratings in a group of countries where the two types of banks have significant market share. Our analysis suggests that IBs have been affected differently than CBs. Factors related to IBs' business model helped limit the adverse impact on profitability in 2008, while weaknesses in risk management practices in some IBs led to a larger decline in profitability in 2009 compared to CBs. IBs' credit and asset growth performed better than did that of CBs in 2008–2009, contributing to financial and economic stability. External rating agencies' re-assessment of IBs' risk was generally more favorable.

This paper attempts to estimate the determinants of crises on Islamic banking system during financial crises using early warning system (EWS) with particular focus on the element of profit–loss sharing. Profit–loss sharing has significant impact in reducing crisis probability experienced by the Islamic banking system. This suggests that profit–loss sharing may be considered as one of the risk mitigation techniques for bank to remain resilient during the crises. The results further show that full-fledged Islamic banks have higher chances of experiencing crises relative to the Islamic subsidiaries banks. In addition, economic freedom and overvaluation in the currency are more likely exposed to banks to the crises.

Religious beliefs are accepted to be one of the main motivations for financial actions. The economic theory fails to provide an adequate foundation to study the link between religiosity and economic behaviour. A number of empirical studies discusses the role of religion on the financial behaviour of economic agents yet more research needs to be conducted. This study provides a brief review on how religiosity might affect financial behaviour by the inclusion of recent studies. In addition to the empirical research that is based on European countries, we discuss the differences in different geographies and finance schemes. We also debate the potential factors that affect differing behavioural aspects with respect to religiosity.

Merger and acquisition is known as a market expansions strategy. This paper examines several factors associated with M&A namely bank size, intermediary role, modes of financing, bank-specific variables, and macro-economic variables on the operational performance and stability along with the mediation role of market structure for Islamic banks. This paper employs empirical research methods, namely POLS, panel data techniques and SEM to analyse a set of unbalanced panel samples of 10 Islamic banks during 2004Q1 to 2020Q4 from six countries, namely Qatar, Kuwait, Saudi Arabia, United Arab Emirates, Bahrain, and Pakistan. Stata package 14.2 is used to estimate M&A results (5 years pre and 5 years post). The results indicate that M&A improve Post-M&A performance of Islamic banks while stability does not improve. Interestingly, there is no mediation effects of market structure on the relationship between M&A, operational performance, and stability. Policymakers should take into consideration those factors taking M&A decisions considering the role of market structure.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) began to issue standards long ago and by 2021 will mark its 31st anniversary. The existing literature on AAOIFI, which has had its share of supporters and critics, may be categorized into the following three parts: (1) literature evaluating compliance levels, (2) literature examining the AAOIFI determinants, and (3) literature assessing the economic consequences of AAOIFI. Thus far, the third strand in the first research phase has no practical study evaluating the impact of AAOIFI adoption at a national level. Therefore, this report adds to the literature by measuring the macroeconomic effects of AAOIFI on economic size and growth rate based on foreign direct investment (FDI), economic development (ED), corruption, and stock market development (SMD). Data for 150 Islamic banks (IBs) in 22 countries for 10 years (2010–2019) are collected and analyzed using an ordinary least squares (OLS) approach. Our results create indicate that IBs across countries that adopt AAOIFI are further getting an advantage by growing in FDI and GDP than non-adopters. Our results further support the role of AAOIFI adoption by countries rather than adoption by banks on reducing the level of corruption. After applying several robustness checks, our results remain the same, with slight variations. Our results create value for central banks, regulators, setters of an accounting standard as AAOIFI and IASB, investors, and all categories of Islamic Financial Institution (IFI) whether adopters or not by identifying the contributions of AAOIFI adoption. The contemporary international literature is deficient in practical evidence on the consequence of AAOIFI adoption at the macro, such as FDI and corruption. To the author’s knowledge, that is one of the original research that provides confirmation of the significance and influences of AAOIFI adoption from a countrywide perspective.

Through a case study of three Egyptian Islamic banks, this study examines the concept of corporate social responsibility from an Islamic perspective, the role of Egyptian Islamic banks in social and environmental responsibility, and the extent to which they participate in sustainable development activities. The chapter provides a brief overview of the concept and dimensions of corporate social responsibility as well as the Islamic perspective of social responsibility and its fields and dimensions toward stakeholders, as well as the definition of Islamic banks, their nature, and how they support social activities and sustainability, and the differences between them and traditional banks. According to the report, Islamic banks in Egypt play an effective and pioneering role in sustainable development and social and environmental responsibility, as evidenced by the programs that these banks have established to participate in a variety of social projects and activities as health care, education, charity institution assistance, social housing, persons with special needs, Qard Hasan, the environment, and sustainability.

The first objective of this research is to explain and analyze the financial indicators of the Islamic banking sector in the Middle East and North Africa (MENA) countries before and over the COVID-19 pandemic period, and the second objective is to explore the key determinant that might affect Islamic banks performance before and during COVID-19 pandemic period. Orbis Bank Focus database and annual financial reports are used to collect financial information of Islamic banks in MENA countries over two years: 2019 and 2020. Descriptive statistics, t-test, and multiple regression are employed to analyze the financial structure and performance of Islamic banks before and during COVID-19 pandemic period. The results of this study reveal that there is a sharp drop in financial indicators in Islamic banks during the pandemic period, liquidity risk, bank size, managerial efficiency ratio, and oil price shocks are the determinants of Islamic banks profitability before the appearance of COVID-19. The credit risk, bank size, liquidity risk, managerial efficiency, inflation, and oil price shocks are the determinants of Islamic banks profitability during the pandemic period. Finally, there is no significant impact of GDP and capital structure on Islamic banks profitability before and during the COVID-19 pandemic period.

We analyze the systematic (macroeconomic) and unsystematic (bank specific) determinants of liquidity risk in Islamic banks. We extract the data from DataStream of Islamic banks in Pakistan, Qatar, Malaysia, UAE, Bangladesh, Bahrain, and Saudi Arabia from 2011 to 2020. We collect macroeconomic variables data from World Development Indicator (WDI). We apply generalized method of moment (GMM) to analyze data. We find that non-performing loans, capital adequacy ratio, leverage ratio, bank size, return on equity, gross domestic product, and inflation have significant impact on liquidity risk. We recommend that Islamic banks should be strong enough to face the liquidity risk come from systematic and unsystematic ways.

The purpose of this chapter is to evaluate relationship between the capital adequacy ratio (CAR) and explanatory variables as well as the possibility that any of the three Basel Capital Accords adopted in Islamic banks is appropriate to combat the effect of COVID-19 pandemic. This study employed reverse regression estimation techniques, using random effect estimator and interaction modeling. Data were obtained from IFSB database. The findings of this study indicate that bank asset quality and ROE exhibit conditional negative relationship with CAR, while ROA and bank liquidity exhibit conditional positive relationship. Therefore, the relationship between CAR and bank asset quality, bank profitability, and bank liquidity fulfilled conditional hypothesis, that is, the relationship varies according to the Basel Capital Accords approach adopted by the Islamic banks. Among the three Basel Capital Accords, the capital requirement by Basel III could not be met, thereby made it inappropriate for adoption during the period of COVID-19 pandemic, while the capital requirement of Basel I exposes Islamic banks to serious challenges which support non-risk sensitivity framework in developing Basel I. This finding is novel, as previous studies on Basel Capital Accords neither simultaneously examined all the three Basel to make inferences nor explore the possibility of conditional relationship in their CAR studies. This is the first empirical study that establishes the existence of conditional hypothesis relationship between CAR and the explanatory variables using reverse regression.

This study aims to look into the effect of intellectual capital efficiency on Islamic banks’ financial stability after controlling the bank-specific and macroeconomic variables. This study employed a hierarchical two-step system generalized method of moment (2SYS-GMM) estimation technique to analyze the data collected from 94 Islamic banks in 18 Asian Islamic countries during the period 2010–2020. The empirical findings show that ICE components, specifically SCE and RCE, have a positive and statistically significant effect on Islamic banks’ financial stability. Our findings suggest that policymakers and top management at Islamic banks should pay closer attention to ICE resources, which have the potential to improve bank efficiency and stability while also keeping them competitive in times of distress.

Islamic banks play a significant role in the financial sector in a number of emerging markets especially countries with a large Muslim population. The objectives of Islamic banks are fundamentally different from those of conventional banks. While conventional banks seek to maximize their shareholders wealth, Islamic banks primarily strive to achieve a balance between providing sufficient Shari'ah compliant returns and their social responsibilities to various stakeholders. Moreover, Islamic banks are characterized by multiple agency relationships. I analyze the corporate governance characteristics of a sample of Islamic banks in six emerging countries and their corporate social responsibility (CSR) as these two aspects are increasingly related. I identify areas of interest through mini case studies and examples. Finally, I conclude by considering the likely future development of corporate governance and CSR in Islamic banks in emerging markets.