The Stability of Islamic Banks During the Subprime Crisis

The Stability of Islamic Banks During the Subprime Crisis
Aniss Boumediene, Université Paris I Panthéon-Sorbonne - Institut d'Administration des Entreprises de Paris (IAE Paris)
Jerome Caby, ICN Business School
December 2009

Abstract: "This empirical study examines the stability of Islamic banks during the subprime crisis. It covers a sample of fourteen Islamic banks and fourteen conventional banks. The conditional variance (volatility) of returns was used to measure stability. The E-GARCH and GJR-GARCH asymmetric models were used to estimate volatility due to their ability to take into account the leverage effect. The results of this study show that conventional bank returns were highly volatile during the crisis period, while Islamic banks saw their volatility - initially low - increase during the crisis, though to a much more moderate extent. These results corroborate both the hypothesis that Islamic banks were at least partially immune to the subprime crisis and the underlying hypothesis that Islamic banks are not subject to the same risks as conventional banks - although, due to their links with the real economy, they do eventually suffer the consequences of the subprime crisis."

The Stability of Islamic Banks During the Subprime Crisis

Islamic Finance and Sharia Compliant Transactions in India and Abroad: A Comparative Study

Islamic Finance and Sharia Compliant Transactions in India and Abroad: A Comparative Study
Tanay Nandi, National Law University Jodhpur (NLUJ)
Satabdee Mohanty, Gujarat National Law University
July 2010

Abstract: "One of the fundamental principles governing Islamic financing is that the receipt of interest is prohibited. This is categorically stated in the Qur'an: "Those who devour Riba (interest) will not stand except as stands one whom the devil hath driven to madness by (his) touch" (II:275) In an investment environment, Riba is interpreted as any return on money that is predetermined in amount and therefore includes modern day interest-based financing. Islamic principles allow instead for the replacement of interest by a return that is dependent upon the profitability of the underlying investment.


In addition, Islamic principles permit the financing of sales by means of deferred payment at a premium to the spot price. Modern scholars have also encouraged asset-backed finance where the return to the financier is linked either to the provision of an asset to the client or to the acquisition of an asset from the client. In all of the above a clear linkage emerges between the earning of returns and the assumption of risk.


But, in India it is in the embryonic stage. However, there are some non-banking cooperative societies being operated across the India that follows the fundament finance law. But, still no Islamic banks as per Reserve Bank of India’s norms have been settled in India.


This paper starts off by examining the banking structures with an Islamic finance window in other countries such as UK, Malaysia, Hong Kong etc, and goes on to examine the causes for its negligible presence in India and ends with emphasizing the need for a greater participation from the bankers in India in support of Islamic Finance."

Islamic Finance and Sharia Compliant Transactions in India and Abroad: A Comparative Study

Risk & Return of Islamic Stock Market Indexes

Risk & Return of Islamic Stock Market Indexes
Conference Paper
Sam Hakim and Manochehr Rashidian
2002

Abstract: "The Dow Jones Islamic market index - US (DJIMI) tracks the stocks of corporations compatible with Islamic law. A parallel and unrestricted counterpart of DJIMI is the Wilshire 5000 Index (W5000) which tracks the price performance of the largest 5000 US companies. Of that index, approximately 75% of the companies fail to meet the Islamic criteria, leaving only approximately 700 companies as potential candidates for inclusion in the DJIMI. Using cointegration techniques we place the DJIMI under analytical scrutiny and ask (1) how has this selection restriction affected the performance of Islamic investments represented by the DJIM index? (2) is the DJIM index less diversified than the DJW index? (3) if so, to what extent has the limited diversification affected its risk and return? (4) and finally, what dynamic correlation and long-term relationship exist between the two indexes over time."

Risk & Return of Islamic Stock Market Indexes

Risk and Stability in Islamic Banking

Risk and Stability in Islamic Banking
Pejman Abedifar, Philip Molyneux, Amine Tarazi
April 2011

Abstract: "This paper investigates risk and stability features of Islamic banking using a simultaneous modeling framework and a sample of 456 banks from 22 countries between 2001 and 2008. We find no significant difference between Islamic and conventional banks in terms of insolvency risk. The results on credit risk suggest that Islamic banks write-off credits more frequently or/and have lower loan recoverability compared to conventional banks. We also observe that Islamic banks benefit less than conventional banks from the negative impact of asset size on both their credit and insolvency risks. Our results are robust to different samples, estimation procedures, risk variables and other modeling specifications."

Risk and Stability in Islamic Banking

Call for Papers - Eight International Conference on Islamic Economics & Finance

Eight International Conference on Islamic Economics & Finance
"Sustainable Growth and Inclusive Economic Development From An Islamic Perspective"
Doha, Qatar
December 25-27, 2011


Call for Papers:  The global economy continues to face the perennial problems of poverty, persistent youth unemployment, excessive inequalities of income and wealth, high levels of inflation, large macroeconomic and budgetary imbalances, exorbitant debt-servicing burdens, inadequate and aging public utilities and infrastructure, skyrocketing energy prices, and growing food insecurity. The reoccurring regional and global financial crises further intensify and magnify these problems particularly for the underprivileged segments of the world population. As a result, many countries are at the risk of failing to achieve the Millennium Development Goals (MDGs) set by the United Nations. However, some countries also present optimistic experiences to share, and from which useful lessons can be drawn for shaping the future economic scene in other countries.

The Eighth International Conference on Islamic Economics and Finance is jointly being organized by the Qatar Foundation’s Faculty of Islamic Studies (QFIS) through its Islamic Economics and Finance Center, the Islamic Development Bank Group through its Islamic Research and Training Institute (IRTI), and the International Association for Islamic Economics with the support of other stakeholders. The Conference will provide a platform for dialogue and discussions between policymakers, academics, researchers, graduate students, and practitioners to address the problems of poverty alleviation, inclusive economic growth, and macroeconomic stability from the perspective of the Islamic Economics and Finance discipline. The Conference will be held for three days during December 25 – 27, 2011 in Doha, Qatar.
Theoretical and empirical research papers are invited in Arabic and English languages for submission to the Conference in the following and related areas, subject to the conditions described in this announcement.

Tickets and Hotel: One author of each accepted paper will be paid by IRTI round-trip economy class air tickets, and hotel stay, including food during the conference.

Dates to Watch: 
Submission of abstracts with CVs April 15th
Decision of Academic Committee May 5th
Submission of First Draft of Papers July 15th
Decision of Academic Committee August 15th
Submission of Final Draft October 10th

Download Call for Papers:
http://www.qfis.edu.qa/files/pdf/Eigth%20Int%20Conf%20Call%20for%20Papers.pdf

With sincere thanks to Dr. Taruqullah Khan for highlighting this information.

Call for Papers - Eight International Conference on Islamic Economics & Finance

Are Islamic Investment Certificates Special? Evidence on the Post-Announcement Performance of Sukuk Issues

Are Islamic Investment Certificates Special? Evidence on the Post-Announcement Performance of Sukuk Issues
Christophe J. Godlewski, University of Strasbourg, LaRGE Research Center; EM Strasbourg Business School
Rima Turk Ariss, Lebanese American University
Laurent Weill, Université Robert Schuman Strasbourg III; University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)
April 2010

Abstract: "The last decade has witnessed rapid expansion of Islamic financial instruments, notably with the proliferation of Islamic investment certificates called Sukuk. Sukuk generally represent the Islamic financial instrument equivalent to conventional bonds. We evaluate the economic differences between these financing techniques and appraise the implications on the future expansion of Sukuk. We use a market-based approach to investigate whether investors react differently to the announcements of issues of Sukuk and conventional bonds. We find that the stock market is neutral to the announcement of conventional bonds, but we observe a significant negative stock market reaction to the announcement of Sukuk. We explain this different stock market reaction using the adverse selection mechanism, which favors Sukuk issuance by lower-quality debtor companies. Unlike arguments presented in prior literature, our results support the view that differences exist between Sukuk and conventional bonds because the market is able to distinguish among these securities."

Are Islamic Investment Certificates Special? Evidence on the Post-Announcement Performance of Sukuk Issues

ISRA Journal - Volume 2

ISRA International Journal of Islamic Finance
Volume 2, Issue 2
December 2010

Volume 2 of the ISRA journal is now available online, you can find the table of contents here and download individual articles directly from their site, these include:

Academic Articles:

Juristic Analysis of the Profit Distribution Method
New Musharakah Model in Managing Islamic Investment
An Overview of Shari'ah Issues Regarding the Application of the Islamic Letter of Credit Practice in Malaysia
Case Studies of the Practice of Nomination and Hibah by Malaysian Takaful Operators
An Empirical Investigation into SMEs’ Perceptions of Credit Guarantee Corporation (CGC) Malaysia Berhad: A Case Study of the Islamic Guarantee Scheme in Malaysia

Practitioner's Articles:

Islamic Liquidity Management – The Malaysian Experience

Research Notes:

Shari'ah Parameters of Hiyal in Islamic Finance
Analytical Study of the Interaction Between Fatawa, Shari'ah Rulings, Resolutions and Conventional Laws in Contemporary Islamic Finance in Malaysia with Cross Reference to the Practices in Saudi Arabia, Pakistan and the Sudan
Capital Requirements and Banking Behaviour for Islamic Banks

ISRA Journal - Volume 2

The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study

The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study
Maher Hasan and Jemma Dridi
Monetary and Capital Markets Department & Middle East and Central Asia Department
September 2010

For an additional discussion of this paper please check Blake Goud's analysis on the SharingRisk.Org blog.

Abstract: "This paper examines the performance of Islamic banks (IBs) and conventional banks (CBs) during the recent global crisis by looking at 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 2008–09, contributing to financial and economic stability. External rating agencies‘ re-assessment of IBs‘ risk was generally more favorable."

The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study

Islamic Banking: How Has it Diffused?

Islamic Banking: How Has it Diffused?
IMF Working Paper - African Department
Imam, Patrick A. and Kpodar, Kangni
August 2010

Summary: "This paper investigates the determinants of the pattern of Islamic bank diffusion around the world using country-level data for 1992 - 2006. The analysis illustrates that income per capita, share of Muslims in the population and status as an oil producer are linked to the development of Islamic banking, as are economic integration with Middle Eastern countries and proximity to Islamic financial centers. Interest rates have a negative impact on Islamic banking, reflecting the implicit benchmark for Islamic banks. The quality of institutions does not matter, probably because the often higher hurdle set by Shariah law trumps the quality of local institutions in most countries. The 9/11 attacks were not important to the diffusion of Islamic banking; but they coincided with rising oil prices, which are a significant factor in the diffusion of Islamic banking. Islamic banks also appear to be complements to, rather than substitutes for, conventional banks."

Islamic Banking: How Has it Diffused?

Islamic Banking and Finance: Fundamentals and Contemporary Issues

Islamic Banking and Finance: Fundamentals and Contemporary Issues
IRTI Seminar Proceedings
Salman Syed Ali, Ausaf Ahmad
2007

The paper "deals with the fundamentals of and the issues faced by Islamic finance at the theoretical level. It addresses various contemporary issues empirically and discusses some legal issues in the practice of Islamic banking and finance."

Islamic Banking and Finance: Fundamentals and Contemporary Issues

Determinants of Islamic and Conventional Deposits in the Malaysian Banking System

Determinants of Islamic and Conventional Deposits in the Malaysian Banking System

by Professor Sudin Haron and Dr Wan Nusofiza Wan Azmi

KLBS - Working Paper Series 007

June 2005

Determinants of Islamic and Conventional Deposits in the Malaysian Banking System

A Capital Adequacy Framework for Islamic Banks

A Capital Adequacy Framework for Islamic Banks: The Need to Reconcile Depositors’ Risk Aversion With Managers’ Risk Taking
Dadang Muljawan, Research Economist, Bank Indonesia
Humayon A. Dar, Lecturer, Department of Economics, Loughborough University, Loughborough, UK
Maximilian J.B. Hall, Professor, Department of Economics, Loughborough University, Loughborough, UK

Abstract: "This paper combines modern banking theory and principal-agent analysis to develop a framework for an optimal capital structure for Islamic banks. The proposed capital regulation includes a minimum risk-based equity capital cushion [as required under the Basel Accord], a prudent assets-liabilities [capital] structure [i.e. appropriate proportions of PLS- and non-PLS-based assets and liabilities] and a minimum ‘financial participation’ requirement."

A Capital Adequacy Framework for Islamic Banks

Islamic Investment: Evidence From Dow Jones and FTSE Indices

Islamic Investment: Evidence From Dow Jones and FTSE Indices
Khaled A. Hussein
IRTI - IDB

"Despite the increasing attention to Islamic investment, the empirical studies on Islamic indices and/or funds are scarce. Due to increased monitoring costs, availability of a smaller investment universe, and restricted potential for diversification, it has been argued that unscreened benchmarks should outperform Islamic (ethical) investment. This paper examines the impact of the Shari[ah screening on the performance of FTSE Global Islamic index and Dow Jones Islamic Market Index (DJIMI) using a number of performance measurement techniques. We particularly examine whether returns earned by investors who purchases shares in the FTSE Global Islamic and DJIMI indices are significantly different from their indices counterparts, both in the short-run and long-run. In order to capture the impact of the changes in the economic conditions on the indices performance, we divide the sample period into bull and bear market periods. Our findings provide strong evidence to reject the assumption that shari'ah investing offer inferior investment performance compared to unscreened portfolios."

Islamic Investment: Evidence From Dow Jones and FTSE Indices

Profitability Determinants of Islamic Banks: A Cointegration Approach

Profitability Determinants of Islamic Banks: A Cointegration Approach
by Professor Sudin Haron and Dr Wan Nursofiza Wan Azmi
KLBS - Working Paper Series 004
December 2004

Profitability Determinants of Islamic Banks: A Cointegration Approach

Towards Developing a Successful Islamic Financial System

Towards Developing a Successful Islamic Financial System

by Professor Sudin Haron
KLBS - Working Paper Series 003
2004

Towards Developing a Successful Islamic Financial System

Case Study: Islamic Banking in Pakistan

Our previous country-specific piece focused on Jordan, here we include a recent thesis paper which takes a comparative approach to Islamic vs conventional banking in Pakistan. We are increasingly seeing this kind of approach, in this case the author takes the analytical road using a variety of statistical tests of significance for mutiple balance sheet metrics.

Performance of Islamic Banking and Conventional Banking in Pakistan: A Comparative Study

Muhammad Shehzad Moin

University of Skövde

August 2008

Abstract: "Islamic banking and finance in Pakistan started in 1977-78 with the elimination of
interest in compliance with the Principles of Islamic Shari’ah in Islamic banking practices. Since then, amendments in financial system to allow the issuance of new interest-free instrument of corporate financing, promulgation of ordinance to permit the establishment of Mudaraba companies and floatation of Mudaraba Certificates, constitution of Commission for Transformation of Financial System (CTFS), and the establishments of Islamic Banking Department by the State Bank of Pakistan are some of the key steps taken place by the governments."

Case Study: Islamic Banking in Pakistan

Measuring the Performance of Islamic Banks by Adapting Conventional Ratios

Measuring the Performance of Islamic Banks by Adapting Conventional Ratios
Ahmed Mohamed Badreldin
The German University in Cairo
October 2009

Abstract: One consequence of the current financial crisis is that many countries began to reevaluate their financial systems and recognize its flaws and drawbacks. They also began the search for alternative systems for their economies; one of the proposed systems is the current Islamic financial model. This model is still in its infancy and many modifications and additions are required. It also lacks the necessary financial performance measurement tools similar to those used by conventional banks for managers and investors alike. This paper evaluates this lack of performance measures. It then adapts a currently applied ROE Analysis Tool used in conventional banks, to the currently established model of Islamic Banks and tests its applicability and evaluates its usefulness. The findings suggest that such an adapted model would be quite successful for use in Islamic banks and would offer much better analysis and basis of comparison within the Islamic financial system. It also suggests that much of the previously measured performance of Islamic Banks is unsound and should be revised for accuracy and reliability because of the flawed methods used for measurement in the first place.

Measuring the Performance of Islamic Banks by Adapting Conventional Ratios

Determinants of Islamic Bank Profitability

Determinants of Islamic Bank Profitability

by Professor Sudin Haron

KLBS - Working Paper Series 002

March 2004

Determinants of Islamic Bank Profitability

Adopting and Measuring Customer Service Quality in Islamic Banks

Adopting and Measuring Customer Service Quality in Islamic Banks: A Case Study of Bank Islam Malaysia Berhad

by Shahril Shafie, Dr Wan Nursofiza Wan Azmi and Professor Sudin Haron

KLBS - Working Paper Series 001

2004

Adopting and Measuring Customer Service Quality in Islamic Banks

Islamic Mutual Funds' Financial Performance and Investment Style

This particular study scrutinizes the performance of Islamic funds with much more comprehensive data of the existing universe of investment products and at the same time delving deeper into the implications of the data. While some of the conclusions would have been voiced within the industry, this study provides much more solid evidence to support/substantiate them.

Islamic Mutual Funds' Financial Performance and Investment Style: Evidence from 20 Countries
Andreas G. F. Hoepner (1), Hussain G. Rammal (2) & Michael Rezec (1)
(1) School of Management, University of St. Andrews, UK
(2) International Graduate School of Business, University of South Australia, Australia

September 2009

Abstract: "We contribute to the investment literature by pursuing the first sophisticated, large scale analysis of a strongly growing mutual fund type: Islamic funds. Despite hundreds of Islamic funds exist the few previous studies investigate the financial performance of less than 60 and the investment style of 6 funds. Based on unique data access, we analyse the financial performance and investment style of 262 Islamic equity funds from twenty countries. We develop a (conditional) three level Carhart model to simultaneously control for their exposure to different national, regional and global equity markets and investment styles. Our findings are fourfold. First, Islamic funds from eight (mainly western) nations significantly underperform their international equity market benchmarks, while funds from only three nations do the opposite. Second, Islamic funds generally prefer small stocks but have no preference for other investment styles. Third, Islamic funds from the Gulf Cooperation Council (GCC) or Malaysia neither significantly underperform nor clearly prefer small stocks. These three findings have some theoretical appeal, as Islamic funds’ investment universe is limited to Shari’ah law compliant companies, which are more likely small and present in economies with a higher density of Muslims. Fourth, we find some evidence that Islamic equity funds exhibit a hedging function, as their investment universe is limited to low debt/equity ratio stocks."

With thanks to Andreas Hoepner for providing the paper.

Islamic Mutual Funds' Financial Performance and Investment Style