Narrow Results

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.

We study the problem of determination of asset prices in an incomplete market proposing three different but related scenarios, based on utility pricing. One scenario uses a market game approach whereas the other two are based on risk sharing or regret minimizing considerations. Dynamical schemes modeling the convergence of the buyer and seller prices to a unique price are proposed. The case of exponential utilities is treated in detail, in the simplest possible example of an incomplete market, the trinomial model.

This paper examines whether risk sharing exists in mortgage loan agreements. Specifically, we analyze the effect of the number of co-borrowers on foreclosure risk, using data from Singapore. Through the estimation of probit model, the results consistently show that co-borrowers significantly reduce the foreclosure risk, suggesting the existence of risk sharing among the co-borrowers. In addition, foreclosure risk is reduced proportionately with the number of co-borrowers. Further analysis shows that low-rise properties required a larger number of co-borrowers than high-rise properties in order to share risk effectively. Interestingly, low-rise properties experience a greater decline in the foreclosure likelihood than high-rise properties for every increase in the number of co-borrowers.

The first motivation of the creation of derivatives is hedging risk but unfortunately this motivation has changed over the decades since more conventional contracts are used for speculation. The purpose of this study is to use derivatives solely for hedging while respecting principles of profit and risk sharing. According to previous work about the pricing of Waad Bil Mourabaha and using the conventional expression of the contingent premium option, we will propose a model of Participating CPO.

The increase of a network connectivity may improve network performance, but at the same time, it may also increase the chance of extremely large risk contagion. If external shocks or excess loads at some agents are propagated to the other connected agents due to failure, the domino effects often come with disastrous consequences. How to prevent cascading failures due to external shocks is an important emerging issue. In this paper, we propose mechanisms of mitigating flow-based cascading failure. Our aim is to improve the network's resilience actively and topologically. In the scenario of how to increase cascade resilience actively, we provide a simple micro-foundation based on coordinated incentives to absorb external shocks in order to survive collectively. We propose two types of risk sharing protocols: The topology-based and non-topology-based risk sharing in which network topology plays an important role. These rules employ local sharing algorithms to achieve global shock balancing. The models of shock transfer are designed to investigate some stylized facts on how external or innate shocks tend to be allocated in a network, and how this allocation changes agents' failure probability. In the scenario of how to increase cascade resilience topologically, we provide a rewiring method in which a network is self-organizable to reduce the damage of cascading failure. Simulation results indicate that risk management and adaptive network may dramatically reduce the average size of large cascading failures.

Climate change impacts are stochastic and highly uncertain and moreover heterogeneous across regions. That is, there is a potential to sharing this risk ex-ante across regions and hence to reduce the welfare-economic costs of these risks. We analyze how climate risks could be reduced via an insurance scheme at the global scale across regions and quantify the potential welfare gains. We introduce risk sharing of global climate risk represented by the equilibrium climate sensitivity, and introduce an asset-based insurance scheme to allow for risk sharing across regions. We estimate that such risk sharing scheme could lead to welfare gains reducing the global costs of climate change by up to 15%. Such a scheme implies transfers of about USD 200 billion per year and faces important implementation challenges. The results provide a motivation for the loss and damage mechanism related negotiations about sharing risks of climate change at the global level.

In this paper, we study how a competitive banking firm can use a variable deposit rate to insure against profit risk from risky assets and how the utility of the bank manager is affected by this kind of risk management policy. Furthermore, we study the advantage of a risk management policy which is based on financial hedging. Finally, we answer the question which of these risk management policies the bank manager prefers.

In this paper, we propose two financial-longevity risk-sharing methods based on an existing risk-linked annuity. Within a specific framework, we first propose the risk-sharing group self-annuitization (GSA), where different proportions of financial and longevity risks are shared between a group of annuitants and the insurer. Secondly, we propose the complete risk-sharing GSA. We implicitly define a set of annuity products which depend on the risk proportion borne by a group of annuitants. The defined set of annuities goes from the classical annuity to the GSA.

Islamic finance industry since its inception has faced a dilemma that has persisted in spite of its significant increase in market share and tremendous growth. The similarity that it has with the conventional finance industry makes many of the participants very unconformable. Behind this criticism are many embedded assumptions. One of it is that Islamic finance in its current form may not be ‘Islamic’: As if this line of the thinking opens the door for an existential crisis. In this paper we discuss the existential crisis of Islamic finance and explain the different ways it continues to deal with it and provide meaning to the industry and academia. Firstly, we offer a historical perspective on Islamic finance and how the first generation of Islamic finance scholars conceived the problem. Then we discuss the different ways the Islamic finance scholars continue to explain the meaning that Islamic finance contains. Here the focus particularly would be on the deontological nature of Islamic ethics and the importance of risk sharing instruments. The success of the Islamic finance industry in terms of its profitability and the opportunity it holds as a possible provider of meaning are presented. Finally, we focus on the role of the actor as not simply a receiver of meaning but as the creator of meaning.

In the first decade of this millennium, rising food prices returned as a concern for policy makers, especially in developing economies. This paper examines how supply shocks, both domestic and foreign, impacted imports and consumption in the world rice market between 1960 and 2010. Such an investigation is important in assessing the role of trade in compensating for domestic shocks. If shortages lead economies to impose trade restrictions, then trade may not be allowed to play an important role in stabilizing consumption. The existing literature has highlighted the importance of these policy shocks in the world rice market and how they have worked to increase the volatility of prices and trade flows. Although trade cannot be expected to play a strong role when the major producing and consuming economies are simultaneously hit by negative yield shocks, such a scenario has occurred in only about 3% of all observed cases. We also find that consumption fails to stabilize even when domestic shocks are negative and foreign shocks are positive; however, imports do peak. Thus, while trade does help in coping with domestic risks, it is unable to achieve full risk sharing. Therefore, no matter the nature of foreign shocks, the principal concern is to stabilize consumption when an economy is hit by negative domestic yield shocks. The frequency of such shocks is about 12% in all observed cases, highlighting the importance of domestic responses. We find that domestic rice stocks have been important in stabilizing consumption. The reliance on domestic policies has, in turn, kept the rice market thin.

Empirical literature suggests that while there is low but improving risk sharing in developed countries, risk sharing in the developing countries is low and has remained low. We confirm this observation using panel data for the period 1986–2011. Overall we find weak evidence that an increase in capital account liberalization reduces the dependence of idiosyncratic consumption on idiosyncratic gross domestic product (GDP) in sub-Saharan Africa (SSA). An interaction of capital account liberalization proxy with capital flows produces a mixed effect on consumption risk sharing, calling for caution in capital account liberalization policy design. On the other hand, while we find no evidence that financial integration, as measured by cross-border capital flows in terms of the ratio of foreign assets to GDP, is helpful in consumption risk sharing in SSA, equity appears to hold the potential of precipitating a reduction in consumption risk while foreign direct investment (FDI) and debt are particularly noticeable to have a facilitative role in unhinging idiosyncratic consumption from idiosyncratic output in East African Community (EAC) and Southern African Development Cooperation (SADC) regional groupings, respectively. FDI liabilities in particular elicit a significantly positive enhancement of risk sharing in EAC and are economically meaningful in SADC. The impact of individual assets and liabilities is overall mixed, both in SSA and regional groupings, pointing to an underdeveloped capital markets scenario in need of urgent attention in terms of well-planned policies and strategies directed towards developing competitive capital markets in Africa for purposes of risk sharing.

The study investigates the extent to which trade openness could determine consumption risk sharing. The findings from panel regressions on Sub-Saharan African countries suggest a significant contribution of trade integration in the allocation of consumption risk. Further results point to the importance of reducing corruption if countries are to unhinge domestic consumption from domestic production. Additionally, as countries achieve higher financial deepening, they could become independent from international financial reliance thereby enjoying less Consumption risk sharing. The study argues for policies to promote trade and fight corruption if the observed levels of risk sharing in Sub-Saharan Africa are to improve.

The literature on the financial crisis is very large and diverse. The intent of this article is to summarize these and other mainstream articles through the lens of two key questions: (1) what caused the crisis? and (2) why have the spillover effects been so devastating in so many industrial countries?

In Section II of this review, we address the demand side for liquidity. Section III presents the supply side of liquidity. Section IV tackles the second question: namely, the contagion effect. Section V introduces the other articles in this special section of the journal.

This area of research tries, through the introduction of politics in economic models, to explain the existence and the extent of anti-trade bias in trade policy. The two main approaches, namely, the median-voter approach and the special-interest approach are surveyed. Certain applications of these approaches to policy issues, such as trade agreements, the issue of reciprocity versus unilateralism in trade policy, regionalism versus multilateralism, hysteresis in trade policy and the choice of policy instruments, are discussed. Finally, the empirical literature on the political economy of trade policy is surveyed. The new literature that employs a more ‘structural’ approach is emphasized.