The Singapore Economic Review

This paper reviews empirical studies with a particular interest in Islamic finance literature and highlights future research directions. The earlier literature on Islamic finance was built on the Islamic economic foundation of social justice and fairness, which was formed theoretically from the primary sources of Sharia coupled with some analytical frameworks. Subsequent studies emphasized the empirical investigations without including far-reaching analytical and theoretical postulations in the area. Although empirical studies on Islamic banking are plenty, there is a new body of emerging empirical literature on Islamic finance focusing on corporate finance and Takaful, whereas Islamic accounting studies are mostly qualitative. The literature provides a mixed picture of Islamic financial markets and instruments, showing that the Islamic ones perform better most of the time but also perform worse at times than their conventional counterparts. This paper discusses issues that are relevant to Islamic finance and identifies avenues for future research and policy implications.

Based on the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued six new Financial Accounting Standards (FAS) in 2017, we derive the cost of financing formulas for various Islamic financing contracts. Later, we present a simple theoretical framework for interest-free Islamic banking based on the Basic Limited-Participation Model seminal approach developed by Lucas ( (). Liquidity and interest rates. Journal of Economic Theory, 50(2), 237–264.) and Fuerst’s ( (). Liquidity, loanable funds, and real activity. Journal of Monetary Economics, 29(1), 3–24.), and later followed by Walsh ( (). Money in the short run: Informational and portfolio rigidities. In Monetary Theory and Policy, pp. 211–223. Cambridge, Mass.: MIT Press.). We compare the competing theoretical models for conventional banks and for interest-free Islamic banks and formulate testable hypothesis. To complement our models, we provide empirical evidence by using a unique sample of 15 banks from Bangladesh that provide both conventional banking and Islamic banking services. Results suggest that Islamic bank profit rates and conventional bank interest rates are correlated in an economic environment where conventional and Islamic banks dwell under same regulatory framework.

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.

Governments and global institutions are working to enhance economic development as a key for sustainability by including disadvantaged people (including the poor, women, youth, and illiterate) in the financial system. This paper uses the World Bank Global Findex Database (2014) for 1000 Palestinians to examine the influence of individual behavior on financial inclusion in Palestine. This study used empirical methods to determine whether individual socioeconomic characteristics influence financial inclusion in Palestine. The results indicated that females were less likely to be included in financial transactions, especially transactions involving borrowing and formal accounts. Further, we learned that borrowing behavior in Palestine leans toward informal sources. Formal institutions have made remarkable efforts to develop an inclusive financial infrastructure in Palestine. However, the country’s unstable political climate continues to impede economic stability and individuals’ motivation to use formal financial resources such as credit. More efforts to specifically encourage youth, the poor, and women to use formal banking could enhance their access to financial services. Adopting Islamic financial services, and online banking would also improve financial inclusion for all of Palestine’s citizens and drive sustainable development. Further, theoretical and empirical studies of Palestine’s economic development are recommended.

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 unique study examines the moderation effect of institutional quality (IQ) on the relationship between financial inclusion (FI) and financial development (FD) of 45 Organization of Islamic Cooperation (OIC) countries. For empirical analysis, panel data are used for the period 2000–2016. We use the Arellano–Bond generalized method of moments (GMM) and two-stage least-squares (2SLS) method in our estimations to draw multidimensional results. The empirical results confirm the significant positive relationship between FI, IQ and FD. Interestingly, we find that IQ moderates FI and has a significant positive impact on FD. Our findings are robust to alternative econometric specifications of FI, IQ and FD. Therefore, policymakers must sensibly understand the pivotal role of FI and IQ in establishing sustainable future development of OIC countries.

This study examines the impact of foreign aid on the institutional quality (IQ) of the OIC countries. Using the data of OIC countries for the three-year average period from 1991 to 2016, the system GMM finds that aid in general deteriorates the IQ for the aid recipient countries. However, quantile regression suggests that the negative impact of foreign aid on institutional quality (IQ) is relatively greater in the countries where the existing quality of institution is poor. The findings of the study suggest that improving the existing capacity is essential for reaping the optimum benefit of foreign aid on institutional development.

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.

Islamic finance is one of the most rapidly growing sectors of the global financial system. This paper empirically outlines the pure effect of Islamic finance including Islamic banking and Islamic bonds on economic growth in major Muslim countries. Current study has taken up Islamic banks’ assets and Islamic banks’ financing, total value of sukuk issued and real GDP as measuring proxies. For the analysis, PMG of ARDL framework has been utilized. The outcomes of the study revealed that in the long run, Islamic banks’ assets, Islamic banks’ financing and Islamic bonds are significantly correlated with real GDP in Muslim countries.

In 1978, a revolution in Iran succeeded in toppling Shah Mohammad Reza Pahlavi. After the Shah was forced to leave the country, Ayatollah Ruhollah Khomeini, one of the leaders of the revolution, returned from his exile in France to become the Supreme Leader of Iran. In this paper, we investigate the economic cost of the revolution using the synthetic control method. According to our estimates, we conclude that after the emergence of the revolution, the annual real gross domestic product (GDP) per capita in Iran declined by about 20.15% on average relative to its synthetic counterpart without the revolution in the period 1978–1980. If Iran had not faced such a revolution, the accumulated per capita GDP would have been $6,479 higher, which amounts to an average annual loss of about $2,159 over that period.

This paper measures and compares the performance of GCC conventional and Islamic banks in terms of total factor productivity growth (TFPG) before and after the 2008 financial crisis. The sources of TFPG are technical change, size economies, and observed asset growth. Technical change and size economies are measured by estimating a translog cost function and factor share equations. Results show that Islamic banks outperformed conventional banks overall and across different sizes. To the extent that product and process innovation improves TFPG, Islamic banks have weathered the 2008 financial crisis by being more innovative than conventional banks.

This research attempts to explore the impact of banking competition on financial stability employing a more precise measure of market power. It was found that Islamic banks are less stable and are enjoying lower market power. The analysis shows that higher market competition makes the banking sector vulnerable to defaults, supporting the “competition-fragility view”. This research finds no difference in the relationship for Islamic banks indicates that Islamic banks might be involved in traditional banking activities as conventional banks. The results are consistent and robust to different estimation approaches and subsamples. This research carries regulatory and policy implications.

This paper investigates the impact of non-intermediation activities of banks on economic growth and volatility of OIC. For the purpose, we utilize LSDVC estimation approach using the sample of Organization of Islamic Countries (OIC) member countries for the period of 2001–2013. We find non-intermediation income to be insignificant for both economic growth and volatility of OIC member countries in general though it reduces volatility of Gulf Cooperation Council (GCC) economies. Intermediation activities are found to be insignificantly related with the growth of OIC member countries, but on the other hand, they are found to reduce volatility in OIC member countries. Our results are robust across different specifications and estimators.

The paper investigates the determinants of credit risk of Islamic and conventional banks in Bangladesh. In so doing, it collects data from 30 private commercial banks comprising of seven Islamic banks and 23 conventional banks for the period 2001–2018. Collected data are analyzed using GMM estimation technique. This method is perceived to be robust because it reduces the endogeneity problem that exists in the panel data set. Analysis of data shows that among the macro-economic variables, GDP growth decreases credit risk, whereas real interest rate and inflation increase credit risk. Bank-specific variables prove that both clusters of banks suffer from adverse selection and moral hazard problems. Results also indicate that competition has a risk-enhancing effect on banks, which supports the competition-fragility nexus. Further analysis shows that board size and board independence affect the credit risk of both clusters of banks. Findings of this study suggest some policy implications from macro, bank and governance perspectives. Specifically, banks should adopt ‘speed limit’ policy to reduce the poor quality loan. Also, competition in the banking industry should be regulated. Finally, central bank should maintain uniform capital adequacy ratio for both clusters of banks. Although this study is limited to private commercial banks in Bangladesh, the results can be generalized for other emerging economies.

Participatory financing schemes, including Musharakah and Mudarabah, are theoretically claimed to be the ideal modes of Islamic financing, but their practice is restrained by several factors. That is why Islamic banks have a consistent tendency to avoid participatory financing on the assets side throughout the world. However, recently this trend has started changing in Pakistan and Indonesia where the share of participatory finance has raised significantly in the financing portfolio of Islamic banks. The present paper explores this recent spur of participatory finance in Pakistan in terms of its domains of applications and the responsible factors. The findings lead to a novel posteriori framework which shows that the shift toward participatory financing is primarily characterized by increase in working capital financing and commodity operations financing through Musharakah mode Islamic banks. Moreover, five factors contribute to the spur of participatory financing including: (i) introducing varieties in Musharakah, (ii) enhanced applicability, (iii) high volume projects, (iv) government interventions, and (v) regulator’s role. The framework can significantly advance understanding with respect to the implementation theory of participation financing within Islamic banking and related Shariah compliance and regulation.

This study investigates the relationship between macroeconomic risk and low-frequency volatility of conventional and Islamic stock markets from around the world. Using a panel of 36 countries, representing developed, emerging and Islamic countries for the period from 2000 to 2016, the study finds that low-frequency market volatility is lower for Islamic countries and, markets with more number of listed companies, higher market capitalization relative to GDP and larger variability in industrial production. The study also finds that low-frequency component of volatility is greater when the macroeconomic factors of GDP, unemployment, short-term interest rates, inflation, money supply and foreign exchange rates are more volatile. The empirical results are robust to various alternative specifications and split sample analyses. The findings imply that religiosity has an influence on the correction of market volatility and investors may consider the Islamic stocks to diversify their risks.

The suitability of assets-backed money has been the subject of considerable debate, although hampered in part by lack of theoretical and empirical evidence. Therefore, the motivation of this research is to investigate the perceptions of Shari’ah scholars and financial experts on the concepts and salient features of Shari’ah-compliant precious metal backed crypto-currency (PMC). To achieve this, this study adopted a qualitative method using semi-structured interview based on saturation technique. The results from Shari’ah advisors and financial experts indicated that the informants have differences of views on the assets-backed money, but they agreed that it ensures stability of money and adding the cryptocurrency technology is found to be desirable and recommendable. It is also found that PMC would be subjected to financial regulation challenges and using blockchain technology will increase the transparency. The informants agreed that PMC is closer to Maqāsid al-Shari’ah and there is some form of justice and equality compared to the current interest-based financial system. Therefore, the informants recommended the implementation of PMC.

This study seeks to highlight the implications of governance and reporting practices in ensuring accountability and building donors trust in Waqf Institutions (WIs). Data gathered through the survey are analyzed using PLS-SEM technique. The conceptual model was developed based on the critical review of the past literature. Among the three proxies of board attributes, only board ability has a significant positive impact on accountability. Voluntary information disclosure has a significant positive impact on accountability. Accountability has a significant impact on building trust in waqf management. Results provided by the study advocate for the adoption of formal reporting and improved governance mechanisms to enhance donors’ trust in WIs.

During the last decade, studies on Islamic pricing (IP) have received considerable attention from researchers and academicians. Given the growing popularity of IP, this study critically examines IP literature using a hybrid review — bibliometric analysis with content analysis. In addition to that the Islamic view of pricing based on the principles of Quran and Sunnah is also examined. The bibliometric results show that IP literature demonstrates a low productivity, low citations ratio, and high research collaboration. The content analysis identifies that the pricing methods, mechanisms, considerations and other industries except Islamic finance industry, are still under-researched. This study is of critical importance because it simultaneously shows the evolution of IP and explores new dimensions of it.

Focusing on the sukuk market in Malaysia from 2000–2017, this study estimates the degree of each sample issuer information asymmetry and investigates how it influences sukuk issuance and how it differs by sukuk type. First, we find that a cost-plus-sales-based Murabahah sukuk is available for all sukuk issuers, even though the degree of information asymmetry is high. Second, a lease-based Ijarah sukuk can be chosen by high information asymmetric firms only when the firm has qualified collateral assets. Third, only a low information asymmetric firm can choose a profit-and-loss sharing-based Musyarakah sukuk. Therefore, we conclude that sukuk issuance also follows a financial hierarchy in accordance with the agency costs of each financial methodology required when a specific sukuk is chosen.