Third
International Conference on Islamic Banking & Finance Risk
Management,
Regulation & Supervision
State Bank of Pakistan, Karachi - October 27 -28, 2008
Paper
Abstracts
Disclaimer:
The purpose of the conference series is to encourage and promote
policy oriented research work in the area of Islamic financial
sector development. However, the views expressed in the papers
and presentations are those of the authors and presenters and
do not necessarily reflect the policies of the conference organizers.
Conference
Academic Committee
PAPER
ABSTRACTS
Sensitivity
of the Islamic Banks to Interest Rate Changes in a Dual Financial
System: The Case of Malaysia
There seems to be a general belief that since the Islamic banks
only deal with interest-free instruments, they are therefore shielded
from the risks associated with interest rate fluctuations. Focusing
on the Malaysian data covering the period from January 1999 to
December 2006, the study tests of this proposition. It attempts
to determine the sensitivity of the Islamic banks by analyzing
the impact of interest rate changes on the banks’ loans
and deposits. The study uses autoregressive distributed lag (ARDL),
the vector error correction (VECM), impulse response functions
and variance decomposition analysis based on the vector auto-regression
(VAR) methodology. The study finds that the Islamic banks’
balance sheet items are relatively more sensitive to monetary
policy changes, while the conventional banks’ balance sheet
items, particularly the conventional loans are insensitive to
interest rate changes. This implies that the impact of monetary
policy is more de-stabilizing on the Islamic banks than the conventional
banks. The results of this study have important implications for
the risk management practices of the Islamic banks, particularly
in a dual banking system such as in Malaysia.
Salina Hj Kassim,
MA Economics, University of Missouri-St. Louis, PhD, International
Islamic University Malaysia (IIUM), Assistant Professor of Economics
IIUM.
Sharia
Issues in Liquidity Risk Management
Islamic banks need to establish sound liquidity risk management
as a standard practice in modern banking to guarantee
safe banking operation and maintain their business. Considering
the bank’s characteristics and risk profile, Shariah provides
Islamic banks with Shariah approaches and techniques to conduct
liquidity risk management taking into account its challenges.
Practically, to mitigate liquidity risk, Islamic banks prepare
internal investment approach and liquid instruments from Islamic
financial market or regulators to work out regular and irregular
liquidity needs.
Rifki Ismal, MA
Applied Economics, University of Michigan, Ann Arbor, PhD candidate
at Durham University, United Kingdom.
Measuring
the Efficiency of Islamic Banks in Indonesia and Malaysia using
Parametric and Nonparametric Approaches
This study measures and compares the efficiency of Islamic banks
in Malaysia and Indonesia using parametric stochastic frontier
approach (SFA) and distribution free approach (DFA), as well as
nonparametric approach data envelopment analysis (DEA). The results
using parametric SFA and DFA show that Islamic banking in Malaysia
has been improving and has become as efficient as Islamic banking
in Indonesia in 2006. Meanwhile, the results using non-parametric
DEA show that Islamic banking in Indonesia is slightly more efficient
than Islamic banking in Malaysia, especially due to better technical
efficiency. Funding (deposits) and human resource (labor) are
the sources of inefficiency in Malaysia as well as in Indonesia.
Therefore, Islamic banks should redirect their marketing and communication
strategies to focus more on targeting floating customers, while
the shortage in human resource should be given serious attention
with short term and long term strategies. Ascarya, MBA Finance
and MSc Information System University of Pittsburgh USA , PhD
candidate University of Pittsburgh USA, Senior Researcher, Center
for Central Banking Education and Studies, Bank Indonesia.
Noer A. Achsani,
Senior Lecturer, Department of Economics, Faculty of Economics
and Management, Bogor Agricultural University. He has got his
PhD from the University of Postdam, Germany.
Risk
Identification of the Islamic Banks in Indonesia: A VAR Modeling
Approach
Islamic banking is a nascent industry in Indonesia, with impressive
total asset growth of approximately 50 per cent per annum but
small proportion of the total banking industry’s market
share. Amid the aggressive efforts to accelerate growth of the
industry within the realm of stable financial environment, there
is an urgent need to identify and critically evaluate the risks
faced by the Islamic banking institutions. In view of this, the
main objective of this study is to identify the types of risks
facing the Islamic banking in Indonesia by focusing on the latest
available data from March 2000 to August 2007. The study employs
rigorous investigation techniques by adopting the Impulse Response
Functions and Variance Decomposition Analysis based on Vector
Autoregressive (VAR) methodology. The study found that, in addition
to the conventional banks’ risks, the Islamic banks are
exposed to unique risks namely the benchmark risk, rate of return
risk, displaced commercial risk, withdrawal risk, and Shariah
compliant risk. These risks, if not properly managed, could be
significant obstacles in developing the Islamic banking industry
and achieving the Islamic financial system stability. Ultimately,
effective risk management frameworks are paramount for better
risk management practices and growth of Islamic banking institutions
in Indonesia and also worldwide.
Rahmatina A. Kasri,
MA Economics, Australian National University, MBA, IIUM, Lecturer/Researcher
and Academic Manager, Islamic Economics and Business Centre, Faculty
of Economics and Business, University of Indonesia.
Salina Hj Kassim,
MA Economics, University of Missouri-St. Louis, PhD, International
Islamic University Malaysia (IIUM), Assistant Professor of Economics
IIUM.
Gharar
and Jahl revisited - New impulses on how to distinguish permissible
risk taking from forbidden speculation: A comparative study of
Qualified-Investor-Concept-provisions in Luxemburg, Switzerland
and Germany and their impact to Shariah issues
With a vibrant fund market, Continental European banking centers
like Luxemburg, Frankfurt and Zurich claim a significant share
of the market worldwide. These centers have always adhered to
investor protection for the sake of market functionality. During
1428-1429AH/2007-2008AD ´Qualified Investor Concepts´
are channeled into Continental European reform projects thus reconciliating
investor protection and flexible risk models by implementation
of a differential treatment for different groups of investors.
The balance between permissible risk taking and forbidden speculation
has for a long time been an important issue under the precepts
of Gharar and Jahl - though from a much broader perspective. The
paper provides insights into the guiding principles of these ´Qualified
Investor´- approaches and the practice of their implementation.
Similarly, the prescriptions of Gharar and Jahl are examined.
This will open the stage for a comparative view of both systems.
The unusual approach delivers evidence how the systems can learn
from each other.
Robert M. RILK is
Senior Advisor to BNP Paribas Najmah, BNPP's Islamic Banking Unit
Bahrain and currently finalising his Ph.D. research.
Duration
Gaps and Net Worth Risk for Islamic and Conventional Banks: A
Comparative Cross Country Analysis
This paper undertakes a comparative analysis of the Duration gap
and Net worth (NW) risk of Islamic Commercial Banks (ICBs) and
Conventional Commercial Banks (CCBs). Though Islamic banks work
on interest free principles, the vast majority of the world’s
ICBs operate within dual banking systems. The inevitable flow
of funds between the two banking systems and the common customer
base implies that ICBs would have the same exposures as CCBs.
Our sample consists of a total 60 commercial banks from nine Islamic
countries. These were made up of 30 ICBs and 30 CCBs. Each ICB
had a CCB pair of approximately equal asset size in US $ terms.
The analysis is based on year end 2006 financial data. We test
for significant difference in rate risk between ICBs and CCBs
using both a parametric and nonparametric test. Our results show
ICBs to have higher duration gaps and Net worth risk than CCBs.
We do however find substantial country specific difference in
risk profile. Malaysian ICBs had significantly higher Duration
gaps and Net worth risk compared to both the other ICBs and CCBs
in our sample.
Jamshaid Anwar Chattha
is currently working as a Senior Executive Technical at the Standards
Implementation Unit of the Islamic Financial Services Board (IFSB),
Kuala Lumpur, Malaysia. He holds his MBA Finance from NUML, MS
Finance (Islamic Banking and Finance) from IIUM and is currently
a recipient of Chartered Islamic Finance Professional (CIFP) scholarship
at INCEIF, Malaysia.
Obiyathulla Ismath Bacha
PhD, Professor of Finance, Dept. of Business Administration, Faculty
of Economics and Management Sciences, International Islamic University
Malaysia (IIUM). He got his MA (Economics), MBA and PhD at the
Boston University, USA.
Cross-Border
Interbank Exposures and Financial Contagion
Integrated financial (interbank) markets provide opportunities
for expansion and improved risk sharing on one hand, but pose
threats of contagion risk through cross-border interbank exposures
on the other. This paper examines cross-border interbank contagion
risk for available seventeen countries over the period 1999-2005.
To that purpose we use aggregate cross-border interbank exposures
of reporting countries in the Consolidated Banking Statistics.
We find that contagion risk increases over time. Particularly,
the US banks, through their cross-border exposures with non-US
banks, mainly trigger international financial contagion. The failure
of British or German banking system is also a serious concern
for global financial stability. We also observe that the “speed
of propagation of contagion” has increased in recent years
resulting into an increasing number of directly exposed banking
systems. Contagion risk is also found in bank level analysis under
certain assumptions and robust to alternative representations
of country risk transfer in BIS consolidated banking statistics.
Muhammad Ather Elahi
works at the Economic Policy Department of the State Bank of Pakistan.
He is currently on leave and is doing his PhD at Tilburg University,
The Netherlands.
Hans Degryse is
a full Professor of Financial Intermediation and Markets at Tilburg
University, The Netherlands.
Maria Fabiana Penas
is Assistant Professor of Finance at Tilburg University, The Netherlands.
She got her Bachelors at the University of Buenos Aires, and her
PhD in Economics at the University of Maryland.
Volatility
Spillover Effects for Jakarta Islamic Index, LQ45 and Jakarta
Composite Index
The paper attempts to analyze two investment benchmarks namely,
ethical investment and non-ethical investment for Indonesian stock
markets. The study employs volatility approach to measure to what
extent shocks persistency from the previous period affect the
volatility in the current period for each type of investment.
Jakarta Islamic Index (JII) is used to represent the ethical investment
type, while non-ethical investment type is represented by Jakarta
Composite Index (JCI) and LQ45. Univariate and Multivariate Conditional
volatility models are employed to achieve the objective. Univariate
models of GARCH(1,1) and AGARCH (1,1) will be used to analyze
shock persistency for each market. Moreover, multivariate conditional
models of VAR(1)-GARCH(1,1) and VAR(1)- AGARCH(1,1) will be used
to investigate how volatility spillover runs among these three
markets. The result shows that in general JII and JCI are better
modeled by GARCH(1,1) while LQ45 is better by GJR(1,1). Furthermore,
there is spillover effects among the markets in which JII tends
to be superior with higher persistency of shock. This result implies
to a better understanding for investors in making prediction of
the stocks in order to select the optimal portfolios.
Esta Lestari is
a Researcher for the Economic Research Center, Indonesian Institute
of Sciences, and has a Masters
Degree in Economics from the School of Economic and Business,
the University of Western Australia, Perth, Australia. She did
her Bachelors of Economics at Gadjah Mada University, Yogyakarta,
Indonesia.
Regulating
Islamic Finance in Secular Countries: A Case Study of India
Indian Muslims have always been trying to manage their economic
affairs within the framework of Shariah. Their struggle against
usury practices has been both religious and financial struggle.
This paper aims to highlight the attempts made by Indian Muslims
in this regard and how some of the recent developments since opening
of Banking and financial sectors and FDI cap from 74% to 100%
in various categories of banking and provides opportunity and
poses regulatory challenge in establishing Islamic Finance and
Sharia compliant-products affecting their functioning. The paper
focuses on opportunities, events and regulatory changes facilitate
and pose new and additional challenges to new entrants. It examines
the potential segments including NBFCs, FII, Micro Finance and
Mutual Funds as new source of proliferation in India and the regulatory
mechanism existing and requisite for functioning at large scale.
The paper also relates the causes of failures in past by the depressed
economic scenario in early 1990s and the highly changing regulatory
environment in the late 1990s. Some prominent Islamic NBFCs and
new initiatives by UTI and others in India are taken for detailed
case studies to identify the future aspects in the topic of the
paper.
Syed Kamran Razvi
is a practicing advocate based in New Delhi, India and registered
with Bar Council of Delhi.
Shariq Nisar PhD
Economics, Aligarh Muslim University, CEO, Bearys Amanah India.
Cost,
Revenue, and Profit Efficiency of Islamic versus Conventional
Banks: International Evidence Using Data Envelopment Analysis
This paper measures and compares the cost, revenue, and profit
efficiency of 43 Islamic and 37 conventional banks over the period
1990-2005 in 21 countries using Data Envelopment Analysis. In
addition, it assesses the efficiency of those banks based on their
size, age, and region. The findings suggest that there are no
significant differences between the overall efficiency results
of conventional versus Islamic banks. However, there is substantial
room for improvement in cost minimisation and revenue and profit
maximisation in both banking systems. Furthermore, the findings
show no significance difference in average efficiency scores between
big versus small and new versus old banks in both banking streams.
This implies that size and age did not affect the performance
of those groups significantly in this sample.
However, geographical location explains the significant differences
in revenue and profit efficiency between both streams of banks.
Overall, the results in this paper are favourable with the ‘new’
banking system.
Mohammed Khaled I.
Bader is Assistant Professor at Al-Quds University in Palestine.
He did his PhD at University Putra Malaysia (UPM) and his MA at
Al-Quds University, Palestine.
Shamsher Mohamad is
currently Deputy Dean of the Thesis Based Programme and Research,
Graduate School of Management, Universiti Putra Malaysia, and
has PhD in Finance from the University of Glasgow, UK.
Taufiq Hassan is
a Lecturer in Finance at Universiti Putra Malaysia and has got
his PhD in Finance from the University Putra Malaysia (UPM) and
his M.com in Commerce from Dhaka University, Bangladesh.
Unique
Risks of Islamic Modes of Finance: Systemic, Credit and Market
Risks
This paper examines the unique attributes of systemic risks (the
possibility of financial system or institution to collapse or
fall down), credit risks (bad loans), and market risks (currency
fluctuation) of Islamic modes of finance, as these issues are
considered as contemporary concerns for the global financial industry.
In addition, as types and sources of risk in finance are interrelated
and encompass diversity of risks, other types of financial risks
which are associated with systemic, credit and market risks, such
as the operational and liquidity risk, will be explored and discussed
accordingly. Furthermore, the paper argues that implementing Al
Shariah compliant guidelines and procedures devised from the principle
of Islamic finance would be an effective instrument in controlling
these risks.
Rasem N. Kayed
PhD, is a lecturer at the College of Business, Massey University,
New Zealand. He has his PhD in Development Studies from Massey
University, New Zealand, and MBA from Jacksonville State University.
Kassim M. Mohammed,
Department of Management, School of Business, Massey University,
New Zealand.
Issues
and Challenges in Implementing Strengthened Supervisory Standards
for Islamic Banks: the Role of Investment Account Management as
a Risk Mitigant in Islamic Finance
The paper highlights some of the key issues and gaps in the supervision
of Islamic Banks, and in particular, addresses the supervisory
implications of the role of investment account management. One
of the key issues in Islamic banking is how to measure and manage
the sharing of returns and risks between shareholders and investment
account holders (IAH), so that such risk sharing can become an
effective tool of risk management in Islamic finance. A methodology
for estimating such risk sharing is developed so that the extent
of risks shifted (“displaced”) from IAH to shareholders,
also referred to as “Displaced Commercial Risk” (DCR),
can be measured. Drawing on the recent work on linking the DCR
with the “Alpha”, which is the share of risk weighted
assets funded by IAH that should be included in the denominator
of Capital Adequacy formula for Islamic banks( as recommended
in the new IFSB Capital Adequacy standard), the paper presents
and illustrates an empirical approach for the supervisory assessment
of “Alpha”.
Dr. V. Sundararajan
is currently the Director and Head of Financial Sector Practice
in Centennial Group, Washington DC. Prior to joining Centennial,
he was the Deputy Director of International Monetary Fund’s
Monetary and Capital Markets Department.
Regulation
and Supervision of Islamic Banks and Financial Institutions: Bangladesh
Perspective
This paper presents an explanation of the role of Bangladesh Bank
(Central Bank of Bangladesh) in accomplishing the above task.
There are six full-fledged Islamic banks, one non-bank Islamic
financial institution and 22 Islamic banking branches of ten conventional
banks operating in Bangladesh in tandem in line with the glorious
Islamic Shariah.
Alongside, one Islamic mutual fund, Government Islamic Investment
Bond and Islami Bank Mudaraba Perpetual Bond is also playing important
role in mobilizing the financial resources on Islamic line in
the stock exchanges of the country. The rules, provisions etc,
of the above instruments have been discussed. Above all, role
of Bangladesh Bank has been critically examined relating to the
regulation and supervision of the Islamic banking system of the
country and some suggestions have been proposed for enhancement
of the capacity of the central bank in achieving its objectives.
Abdul Awwal Sarker is
Division Chief, Bangladesh Bank, and has M.Sc in International
Banking from Loughborough University, Leicestershire, UK, and
M.A in Economic from Rajshahi University.
Challenges
in Implementing Basel II Pillar 1 to Islamic Banks
Throughout the past thirty years or so, the practice of Islamic
banking has proved to be a viable alternative and is growing at
an estimated annual rate of 15%. However, many challenges still
lie ahead for Islamic banks to be able to comply with international
standards and guidelines. A key issue relates to the implementation
of Pillar 1 of the Basel II accord, or capital adequacy requirements
that were originally set to capture different types of risks faced
by conventional banks, and which do not cater for the risk specificities
of Islamic banks. The objective of this paper is to provide an
empirical fieldwork to study the implications of applying Pillar
1 to a major Islamic bank following recent IFSB guidelines for
risk management and capital adequacy. We specifically raise serious
issues related to the nature of risks arising from the uses of
funds of Islamic financial institutions and their implication
on the banking book of the Islamic financial institution. Still
other challenges lie ahead of international regulatory bodies
in order to cater for other types of risks that are unique to
Islamic financial institutions.
Rima Turk is Assistant
Professor of Finance, School of Business, Lebanese American University,
Beirut, Lebanon,, and works as a consultant to the Economic and
Social Commission for Western Asia of the United Nations. She
holds PhD from the University of Wales in the UK and Masters of
Money and Banking from the American University in
Beirut.
Yolla Sarieddine
is Head Credit Department of Khalafat, a Lebanon based financial
company that assists SMEs and holds MBA from the American University
of Beirut.
The
Responsibility and Independence of Shari’ah Supervisory
Boards of the Indonesian Islamic Banks
Despite the present guidelines developed by National Shari’ah
Council-Indonesian Ulama Council (NSC-IUC) and Bank Indonesia,
there is a lack of sufficient guidelines related to the existence
of Shari’ah Supervisors (SSs) in Islamic Banks (IBs) in
Indonesia. Therefore, this study is designed to examine the perceptions
of managers and SSs of IBs in Indonesia on the responsibility
and independence of SSs. The study utilizes questionnaires to
obtain the perceptions of IB managers while it uses interview
to obtain the perceptions of SSs of IBs. The study shows that
the respondents perceived that the SSs are responsible for ensuring
that the products, contracts and transactions of IBs are in compliance
with Shari'ah principles. In order to improve the independence
of SSs, the respondents viewed that the SSs should be prohibited
from becoming consultants and majority shareholders of the IBs
for the same IBs in which they act as SSs.
Ade Wirman Syafei
is Deputy Director Academic Affair, Postgraduate Studies on Islamic
Economics, Islamic University of Azzahra. . He has M.Sc in Accounting
from the International Islamic University Malaysia (IIUM), and
has got his Bachelors of Economics from the University of Andalas,
Padang, West Sumatra, Indonesia.
Performance
Evaluation of Islamic Commercial Banks in Indonesia after the
Financial Crisis
This study evaluates intertemporal and interbank performance of
Islamic commercial banks from 1999-2006 or after the financial
crisis vis-à-vis interest based conventional banks in Indonesia
focusing on profitability, liquidity, solvency risk and their
contribution to small and medium enterprises. Financial ratios
are employed to measure their performance. Meanwhile, t-test and
F-test are applied to determine their level of significance. The
Islamic interbank study found that Bank Muamalat Indonesia performed
better in terms of profitability and liquidity. Meanwhile there
is no significant difference in performance between Islamic commercial
banks and conventional banks in Indonesia. However the contribution
of Islamic and conventional banks in financing small and medium
enterprises showed significant differences. It is found that Islamic
commercial banks performed relatively better than conventional
banks.
Ahmad Affandi is
the Head of Department of Islamic Economics, Tazkia Islamic Business
School Bogor. He has Masters in Economics from the University
of Malaya and has got his Bachelors in Economics from the International
Islamic University Malaysia.
Yulizar Sandrego
is Editor in Chief, Tazkia Islamic Finance and Business Review
(Journal). He is M.Sc candidate at the International Islamic University
Malaysia and has a Bachelors of Islamic Economics from Djuanda
University, Indonesia.
Assets
Liabilities Management In Islamic Banking
The paper studies assets and liabilities management (ALM) structure
and instrument in Islamic banking. Since in Islamic banking depositors
take partnership in benefits of bank so Islamic banking follows
to maximizing benefits of beneficiaries and among them depositors.
Therefore, there are dissimilarities between ALM approaches in
Islamic banking and conventional banking. First, this dissimilarity
comes from differences on accounting system in Islamic banking
in comparison to conventional banking. Secondly, usury illegalness
and its related jurisprudence specifications indicate that time
is not the solely the effective factor on increasing equity (deposited
capital) return; but profit and loss sharing resulted from investment
in real economy sector is the essential base in monetary transactions.
These two important factors are considerable factors in Islamic
ALM. In this paper we consider influence specifications of these
factors in two banking approaches for creating economic value
added (EVA). Comparison of financial indices for the two type
of banking leads us that Islamic banking is more efficient than
conventional banking.
Mahmoud Allahyarifard
works at the Research and Development Department of Bank Melli
Iran, and holds Master of Science in Economics from Azad University,
Tehran, Iran. He has BA Economics from the School of Economics
Sciences, Alamehtabatabaee Tehran, Iran.
Bijan Bidabad has
PhD in Economics from Islamic Azad University, Tehran Iran and
teaches at the Islamic Azad University in Tehran, Iran. He has
MS in Economic Development and Planning from Shiraz University,
Shiraz, Iran, and BA in Political Sciences from the School of
Political and Social Sciences, Tehran, Iran.
DEA/C&R:
DEA with classification and regression tree: A case of banking
efficiency
Data Envelopment Analysis (DEA) is a non-parametric technique
for measuring efficiency and productivity of decision making units
(DMUs) (Charnes, Cooper, Rhodes, 1978). On the other hand data
mining techniques allow DMUs to explore and discover meaningful,
previously hidden information from huge organizational databases.
Classifications and regression (C&R) is the commonly used
decision tree in data mining that was developed by Breiman, et
al. (1984) and further improved by Ripley (1996). The results
shows that on average banks located in UAE and Kuwait seem to
be more efficient while banks located in Bahrain seem to be less
efficient. The Conventional banks are more efficient than Islamic
banks; on other hand price book value is the most important variable
in determining the most efficient banks, price earning index and
country are the second and third important variables. The number
of branches and the operation style seem to be less important
in the classification of the efficient banks.
Abdel Latef Anouze
is a lecturer at the Aston University and Coventry University
in the UK. He is doing his PhD in Operation and Information Management
at Aston University. He has MBA from the University of East London,
and Masters of Public Administration from Yarmouk University,
Jordan.
Ali Emrouznejad
PhD in Operational Research and systems, and M.Sc in applied mathematics
from Warwick Business School, UK.
Capital
and Risk Adjustments under Risk-Based Capital regulations and
Diversification Loss
In the last two decades, regulators have focused on the enforcement
of minimum capital requirements on banks. Excessive risk-taking
might otherwise have been encouraged by the principle of limited
liability and by the availability of deposit insurance. Strengthened
capital regulation has resulted in improved capital ratios for
banks, and a more stable financial system. However, the changes
to the regulatory system have been criticized on the grounds that
an increased regulatory capital standard may encourage an increase
in leverage and portfolio risk. Both the theoretical literature
and the empirical literature on the impact of capital regulation
have produced heterogeneous results concerning the capital and
risk adjustment behavior of banks. This study uses a cross-sectional
time-series data set on commercial banks that is longer and more
recent than in most other studies. We estimate the effect of changes
in portfolio risk on the capital adjustment and of risk-based
capital regulation on portfolio risk adjustment, using a simultaneous
equations model. We find support for the capital buffer theory,
which suggests that banks increase their capital holdings in response
to an increase in portfolio risk, in order to avoid regulatory
penalties. We also find evidence that banks increase their loan
portfolio concentration in order to increase their regulatory
capital ratios, suggesting that improvements in capital ratios
are achieved at a cost in terms of the degree of diversification
of the banks' portfolios.
Dawood Ashraf is
SME Advisor to TD Canada Trust and has PhD from the University
of Wales, UK. He did his Masters of Economics at the Faculty of
Economics, Kyushu University, Fukuoka, Japan.
Measuring
Service Quality of Malaysian Banking Industry: A Comparison between
Islamic and Conventional banks
This study aims to develop the SERVQUAL model to access the customers’
satisfaction in Malaysia banking sector.
Further, the dominance analysis technique is used to examine the
relative importance of different service quality dimensions as
extracted from the factor analysis. Finally, it compares the conventional
bank with that of Islamic bank in terms of each service quality
dimension and measures their relative importance in bridging the
overall gap between expectation and perception. The application
of factor analysis is able to detect only four dimensions –
Tangibility, Reliability, Competence and Convenience. The results
reveal that there are significant differences between the respondents’
expectation and their perceptions. It is found that the expectation
on Competence and Convenience are significantly different between
Conventional banks and Islamic banks, whereas, the perception
on Tangibility and Convenience are found to be significantly different
between the above two types of banks. The application of dominance
analysis to predict the SERVQUAL gap indicates that the difference
between the two types of banks is in terms of degree and not in
terms of pattern. The Competence and Convenience are found to
be the relatively more dominating dimensions in both types of
banks. These two dimensions together can help to reduce the overall
service quality gap to an extent of 72% in the case of Conventional
bank and 85% in the case of Islamic banks. The Malaysian banking
sector needs to take initiative to become more competent by being
more responsive and fulfilling the assurance of the customers
and providing the banking facilities more conveniently.
Mukesh Kumar, MA
and PhD in Economics from the Indian Institute of Technology,
Associate Professor at the Faculty of Business Management &
Professional Studies, Management and Science University (MSU),
Shah Alam, Kuala Lumpur, Malaysia.
Amat Taap Manshor,
Professor, Faculty of Business Management & Professional Studies,
Management and Science University (MSU), Shah Alam, Kuala Lumpur,
Malaysia
Risk
Management Assessment Systems: An Application To Islamic Banks
Risk management is central in operations of financial institutions,
both from business and regulatory perspectives. Risk management
is not only about identifying and mitigating risks, but involves
a strong risk management system that includes establishing appropriate
risk management environment, maintaining an appropriate risk management
process, and instituting adequate internal controls. This paper
provides a measurable tool to assess the risk management framework
in Islamic banks. The structured assessment methodology provides
indices that gives a quantitative assessment of not only the overall
risk management system of a financial institution, but also indicates
the strengths and weaknesses of various aspects of this system.
The assessment process can be used by Islamic banks and regulatory
authorities to identify the weaknesses and improve upon the risk
management framework. The paper provides examples of how the assessment
method outlined can be used to estimate the status of risk management
system for two Islamic banks.
Habib Ahmed, Professor
of Islamic Finance, Durham University, United Kingdom, holds PhD
Economics from Connecticut University USA and MA Economics from
Oslo University Norway.
Financial
Stability and Early Warning Systems: Implications for Islamic
Finance
This paper overviews early warning systems (EWS) and analyzes
their implications for Islamic finance. The main purpose of early
warning systems is to generate ex-ante warnings of potential problems
that may emerge or develop in the future on account of the current
risk profile of a financial institution. There are various approaches
to model prediction of financial risks. Three approaches of signal
extraction, limited-dependent variable and contingency claim are
explained in detail. The paper will also analyze limitations of
these early warning systems for Islamic finance. To sustain its
long-term growth, Islamic finance needs regular risk assessment.
In this regard, development of suitable early warning systems
for Islamic finance is necessary. It is claimed that a comprehensive
early warning system for Islamic financial system has to take
into consideration all qualitative and quantitative risk factors.
Many of these risk factors have well known indicators and can
be constructed for individual Islamic financial institutions and
aggregated for the whole system. However, many of other qualitative
risk factors including institutional and Shariah compliance factors
are yet to be constructed and incorporated into the early warning
system.
Kazim Yavari is
Senior Economist at IRTI, the Islamic Development Bank and holds
PhD Economics from University of Toronto and MA Economics from
the same University as well as from imam Sadeq University Tehran,
Iran.
Neutralizing
Disincentives for holding Profit Sharing Instruments: The role
of regulators and the capital adequacy ratio
Recent calls by prominent Islamic scholars to shift the focus
of Islamic Finance away from bond-like sukuk have been met with
great unease by bankers in the industry. Islamic Financial Institutions
(IFIs), which hold the majority of all sukuk issued, face deposit
side constraints on the types of returns they distribute, due
to a need to match returns to market based deposit interest rates.
Hence, it is in their interest to hold assets that provide stable
benchmark based returns. This study proposes that regulators require
banks to include a greater proportion of risk weighted assets
funded by unrestricted investment account holders (UIAH) in the
denominator of their capital adequacy ratio, based on the extent
to which the particular bank engages in smoothing returns to investment
depositors. Providing true returns to UIAH will consequently minimize
incentives for IFIs to hold assets that return benchmark interest
rates and allow them to hold assets that provide for variable
returns.
Sayd Farook is
Research and Development Manager/Senior Lecturer at the Bahrain
Institute of Banking and Finance. He is also a Governance Standards
Consultant to AAOIFI. He is currently completing his PhD at the
University of Technology, Sydney, Australia.
Exploring
Corporate Social Responsibility Disclosure of Islamic Banks With
Special Reference to Disclosure
Practices Under the AAOIFI Standard
Corporate social responsibility (CSR) is an issue of growing interest
and many multinational companies and banks are voluntarily disclosing
information regarding their CSR activities. For Islamic banks,
one of the avenues to demonstrate their acceptability and commitment
to serving the needs of the Muslim community, and society in general,
is via disclosure of relevant and reliable information in their
annual reports. In this study, we explore whether any discrepancy
exists between the corporate social activities disclosed in the
annual reports of the Islamic banks and CSR information deemed
to be vital, based on the Islamic business ethics framework. Using
content analysis and disclosure measured by an index score, our
longitudinal survey results indicate the overall mean CSR disclosure
index of only one Islamic bank out of seven surveyed to be above
average. The CSR disclosure of the remaining six Islamic banks
falls significantly short of our expectations. It is also found
that the largest inconsistency in reporting to be related to four
CSR dimensions: commitment to community development, disclosure
of clear cut ethical behavior, stakeholders’ engagement
and customer relation; research, development and training; and
corporate governance related to top management. The results have
important implications for Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI) in developing a CSR
reporting/disclosure standard if Islamic banks are to enhance
their image and reputation globally, as well as to remain competitive.
Abul Hassan is a lecturer
in Finance and Research Fellow at the Markfield Institute of Higher
Education of The Islamic Foundation, UK. He holds PhD from Durham
University (UK) and has his M.Sc in International Banking and
Finance from Loughbrough University(UK).
Sofyan Syafri Harahap,
PhD, Professor of Accounting, Faculty of Economics, Trisakti University,
Indonesia.
Efficiency
of Islamic Banks in Selected Member Countries in the Organization
of Islamic Conference (OIC) Region
This study investigates the relative efficiency of 25 Islamic
banks in selected 14 OIC member countries during 2002 to 2006.
These countries are classified into three groups: least-developed
member countries (LDCs) medium-developed member countries (MDCs)
and energy-exporting member countries (FECs). The study employs
Data Envelopment Analysis (DEA) method by using the intermediation
approach. The inputs used are total deposit, overhead expenses
and fixed assets, while the outputs are total loans, other operating
incomes, and total earning assets.
Additionally, regression method is used to find the correlation
between the efficiency scores and some of the banks’ performance
indicators. The result shows that during 2002-2006, Islamic banks
in the LDCs were more efficient than Islamic banks in the other
two groups. Lastly, the efficiency level of Islamic banks in the
study was significantly and positively influenced by Earnings
to Total Assets Ratio, Return on Average Assets, and Loan to Deposit
Ratio. In contrast, efficiency score is negatively related to
Operating Expense to Operating Income.
Miranti Kartika Dewi
is a Lecturer at the University of Indonesia and works as Research
Manager of the Centre for Islamic Economics and Business (PEBS).
She has MBA in finance from International Islamic University Malaysia.
Maliah Sulaiman
is a fellow of the Association of Chartered Certified Accountants
(UK), and holds PhD from Otago University, New Zealand. She also
has her MBA from Duquesne.
Ilham Reza Ferdian
is a Teaching staff at the University of Indonesia. He is currently
pursuing his Master Degree in Islamic Banking and Finance at the
International Islamic University Malaysia.
Impact
of Capital Regulations on Capital Ratios and Risk Taking of Islamic
Banks
Effectiveness of regulation in enhancing capital adequacy ratios
of weakly capitalized banks has been the subject of current research
and the results generally suggest successes. This study uses the
same methodologies to the BankScope dataset of 67 Islamic banks
in 11 countries. The results suggest that Islamic banks’
capital ratios have not been enhanced during the 1999-2004 period
and these banks generally have taken imprudent capital risks.
The policy implication is that regulators have to be concerned
with capital adequacy ratios in Islamic banks, particularly, in
response to the requirements of adopting Basel II.
M. Kabir Hassan
PhD, Department of Economics and Finance, University of New Orleans,
New Orleans, LA 70148, USA.
M. Ershad Hussain
PhD, Department of Economics and Finance, Dillard University,
2601 Century Boulevard, New Orleans, LA 70122.
Capital
Adequacy Requirements for Sukuk Securitisations and Real Estate
Investments
The Exposure Draft (ED) of Capital Adequacy Requirements for Sukuk
Securitisations and Real Estate Investment deals with aspects
of regulatory capital requirements for institutions offering Islamic
financial services (IIFS) in respect of Sukuk that are not covered
in IFSB-2 (Capital Adequacy Standard). These include capital requirements
for IIFS in relation to Sukuk and securitisations process. In
respect to real estate investment, the ED deals primarily with
capital requirements for an IIFS that invests in real estate investment
activities..
Abdullah Haron,
Assistant Secretary General, Islamic Financial Services Board,
Kuala Lumpur, Malaysia.
Guiding
Principles on Governance of Islamic Collective Investment Schemes
The Exposure Draft (ED) of Guiding Principles on Governance for
Islamic Collective Investment Schemes aims to complement IFSB-3
(Corporate Governance) and other internationally recognised governance
Standards, by reinforcing international best practices while addressing
the specificities in the governance of Islamic Collective Investment
Schemes (ICIS). The ED covers approach to general governance,
transparency and disclosure, compliance with Shari'ah rules and
principles, and additional protection for ICIS investors.
Madzlan M. Hussain,
Senior Project Manager, Islamic Financial Services Board, Kuala
Lumpur, Malaysia.