Intertemporal Test of Beta Stationarity Performance of Islamic Sector Structured Mutual Funds

Intertemporal Test of Beta Stationarity Performance of Islamic Sector Structured Mutual Funds
By Mahmoud Haddad, Ghassem Homaifar, Said Elfakhani and Hikmat Ahmedov

Abstract: "The purpose of this research paper is to examine social Islamic mutual funds’ financial performance. Since Islamic mutual funds have only been around for the past two decades, most of the research on this topic is fairly new. In this study we apply the single factor model of Schwert and Seguin (1990) to a sample of Islamic mutual funds. The Islamic mutual funds market is one of the fastest growing sectors within the Islamic financial system. Several studies have investigated the characteristics of individual Islamic mutual funds (see Elfakhani, et al (2006), Elfakhani ,et al (2005), and Hassan, et al (2005). We are not aware of any studies that have applied the Schwert and Seguin methodology to Islamic mutual funds. Such an application is important because it allows for studying the impact of market volatility on the time variation of monthly betas and the corresponding returns. Using the S&P 500 and the FTSE Global Islamic indices on sector structured Islamic mutual funds, our results suggest that the volatility of the market and that of the Islamic mutual funds portfolio behave differently with inter and intra market proxies. There is also evidence that the volatility persistence of each Islamic mutual fund portfolio and its systematic risk are significantly related. Hence, the systematic risks of different portfolios tend to move in a different direction during periods of increased market volatility. As a result, we gain an insight into the return dynamics and the process by which Islamic mutual funds prices are determined."

Intertemporal Test of Beta Stationarity Performance of Islamic Sector Structured Mutual Funds

The FTSE Global Islamic and the Risk Dilemma

The FTSE Global Islamic and the Risk Dilemma
Noor Hashim
American International University-Bangladesh, Office of Research and Publications
March 2008


Abstract: "Risk typically represents investments’ double-edged sword. Quantifying the adequate amount of risk to be assumed could be difficult, especially when “too much risk could turn out to be too little.” Under Islamic finance, managing risk is even more challenging. On the one hand, assuming high levels of risk is not encouraged. On the other, Islamic screening rules restrict investment and consequently stimulate risk. This paper considers the above dilemma by examining the effect of adopting screening rules on stock indices risk. The study, conducted using monthly data from FTSE Global Islamic, tests the hypothesis that the Islamic index yields adequate returns for the level of risk undertaken. Results show that the Islamic index surpasses the socially responsible index in performance while operating in line with the market. This risk assessment result does not resolve the dilemma but assures the economic appropriateness of the procedures adopted in managing the Islamic index."

The FTSE Global Islamic and the Risk Dilemma

Rural Finance and Farmers' Indebtedness: A Study of Two Punjabs

Rural Finance and Farmers' Indebtedness: A Study of Two Punjabs
Singh, Lakhwinder (October 2008)
Punjabi University

Abstract: "Economic development theory has recognized that access to finance enables economic agents of production to exploit growth opportunities. The governments of less developed countries since world war two have been striving hard to enacting suitable policies to enable rural households in accessing timely credit. This has led to a rise in the agricultural production and productivity. The pattern of economic transformation followed by less developed countries, which has squeezed agriculture sector surpluses without reducing the burden of population dependent in such economic activities. Consequently, the borrowing generally in such kind of economic transformation process becomes burden some. The modern development process in both the rural economies of Indian and Pakistani Punjab could also not able to replace the older money-lending system, which remained excessively exploitative. This process of financing rural economic activities can be called as double squeezing of agricultural households. An attempt has been made here to examine the growth, structure and deficiencies in the rural financial systems of two Punjabs during the period 1975-76 to 2003-04. Some suggestions related to public policy for providing timely and adequate credit have also been made."

Rural Finance and Farmers' Indebtedness: A Study of Two Punjabs

Islamic Microfinance: A New Approach to Help Small Enterprises

Islamic Microfinance: A New Approach to Help Small Enterprises
ABAC Malaysia
August 2008

"It is estimated that about 35% of the world’s 1.2 billion Muslims are poor, thus creating a large market for microfinance. However, there are very few Islamic MFIs and Islamic banks involved in microfinance. Many MFIs are operating under the conventional system, while Islamic banks tend to favor larger firms."

Islamic Microfinance: A New Approach to Help Small Enterprises

Opalesque Islamic Finance Intelligence XIII

Welcome to the thirteenth edition of OIFI (download PDF version), we hear from various parts of the world and this reflects how the industry has been growing and evolving over time. So many efforts and initiatives might seem local or market-specific but they are all contributing their grain of sand to the dissemination of Isamic finance globally. The Editorial Section discusses Islamophobia and how it affects the Islamic finance industry. Our Featured Resource is a compilation of material relating to Islamic microfinance, this includes various industry reports, empirical studies and some discussions on possible models as well.

The Featured Structure section is a continuation of Nikan's previous discussion on Istijrar, as he focuses on the sale at market price which highlights the need to understand price uncertainty and how it is viewed by Scholars. We also welcome Monem Salam of Saturna Capital in our Fund Manager Interview as he shares some insights into the history of their Amana funds.

Furthermore, the Industry Snapshot contains an in-depth analysis of stock screening, as Mehdi Popotte explores the mechanisms behind it and some of the issues that arise when establishing an equity screening solution. Joy Abdullah shares his views on how Islamic finance can expand its appeal to a wider market in the Opinion Column, with some revealing insights and suggestions.

As always, we are keen to hear your comments & suggestions and remember that you can visit our online archive (see reference link) for access to our ever-growing databank of Opalesque Islamic Finance Briefing as well as all of the back issues of Opalesque Islamic Finance Intelligence.

Download the complete issue of Opalesque Islamic Finance Intelligence here.

Alternatively you can read each article separately in the OIFI Archive:
Editor’s Note: Islam Süss
Featured Resource: Islamic Microfinance
Featured Structure: Istijrar Revisited - Bay' bi Sir' al Suq
Fund Manager Interview: Monem A. Salam, Director of Islamic Investing, Saturna Capital
Industry Snapshot: Opening the Black Box of Shariah Stock Screening
Opinion Column: Islamic Finance - Niche or Ubiquitous

Opalesque Islamic Finance Intelligence XIII

Value Through Diversity: Microfinance and Islamic Finance and Global Banking

Value Through Diversity: Microfinance and Islamic Finance and Global Banking
Nicoletta Ferro
Fondazione Eni Enrico Mattei (FEEM)
June 2005

Abstract: Internet resources, extended media coverage and international organizations' reports recently witness the increasing interest of western banks in new models of finance, particularly Islamic finance and microfinance. This new trend is not only channeled through the frame of corporate social responsibilities programs and policies or limited to ad hoc financial institutions (like microcredit banks or Islamic banks) as it is entering the financial offer of mainstream banks. The paper primarily outlines that many elements of microfinance could be considered consistent with the broader goals of Islamic banking. Apart from pure economic considerations which are not the aim of this analysis, the paper supports the thesis that by addressing new markets and embracing unconventional financial proposals, the global banking sector can contribute to the quest for diversity-oriented policies posed by an increasingly globalised scenario. The consequences this new trend is likely to have on inner banking structures are still unknown and are likely to interest the issue of wealth distribution. Moreover, from a more general point of view, by showing that even different moral ethos deep rooted in different cultural paradigms can be as profitable and available as western capitalistic ones, the banking sector can play a potential role in disseminating awareness on specific cultural and religious issues, resulting in increased integration of Muslim communities and low income investors in the long run and supporting commercial banks the close relation between economy and culture.

Value Through Diversity: Microfinance and Islamic Finance and Global Banking

The Contribution Of Islamic Microfinance Institution In Increasing Social Welfare In Indonesia

The Contribution Of Islamic Microfinance Institution In Increasing Social Welfare In Indonesia
H. Nur Kholis, S.Ag, M.Sh.Ec
Head of Islamic Economic Department, Faculty of Islamic Studies
Islamic University of Indonesia, Yogyakarta, Indonesia
November 2009

The Contribution Of Islamic Microfinance Institution In Increasing Social Welfare In Indonesia

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment
Aaron Z. Pitluck
Illinois State University - Sociology
March 2008

Abstract: "This paper addresses the puzzle of why the inclusion of non-financial social justice or religious criteria by professional fund managers has been so popular in Malaysia and yet has had to date relatively little influence in the United States stock market. Drawing from over 125 ethnographic interviews with financial workers in Malaysia, this paper argues that moral investment behavior in stock markets is shaped primarily by 'market structure' rather than by 'mandates.' In both countries mandates are a weak form of social control of fund manager's behavior. This is because mandates are not principal-agent contracts but are primarily marketing exercises and cultural tools. Social investing in the United States is weak because it relies solely on mandates to communicate clients' ethical desires to their fund managers. Islamic and Ethical finance in Malaysia is strong because Islamic social movements have reformed the Malaysian stock market's structure. Specifically, a uniform interpretation of Islamic investing was institutionalized with the creation of a nearly-unique quasi-governmental body. As a consequence, Islamic principles systematically influence the behavior of corporations listed in Malaysia, at present narrowly, but with the potential for wider influence in future. The paper closes with implications for social investment in the United States."

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment

Case Study: Islamic Banking in Bangladesh

Islamic Banking in Bangladesh: Achievements & Challenges
Abdul Awwal Sarker
IBTRA
2005

Abstract: "For a continued expansion of the Islamic Banking system, however, a number of issues that pose serious problems for Islamic banks will need to be carefully addressed. This paper discusses and makes recommendations on the more pertinent of these issues, viz., the development of an Inter-Bank Islamic Money Market, activation of Shariah Supervisory Boards, enactment of a full-fledged Islamic Banking Act, development of New Financial Products in line with the Islamic Shariah, and extension of investment in line with PLS framework, especially by constituting consortium or syndication by the Islamic banks. The paper suggests that micro, small, and medium enterprises (MSMEs) should get priority in the investment decisions of the Islamic banks."

Case Study: Islamic Banking in Bangladesh

Islamic Banking and Its Potential Impact

Risk Management : Islamic Financial Policies

Islamic Banking and Its Potential Impact
Thomas A. Timberg
Nathan Associates, Inc.

"Indonesia, with the world’s largest population of Muslims, has come to Islamic or shariah banking fairly late. Many of Indonesia’s Muslim leaders do not believe that commercial interest in its modern form is prohibited, although others do. After some false starts, Islamic financial institutions are developing rapidly and have the enthusiastic support of many young people and intellectuals. The work of the Shariah Bureau of Bank Indonesia demonstrates that Indonesia, especially in particular parts of the country, has considerable unmet demand for Islamic banking."

Islamic Banking and Its Potential Impact

The Compatibility of Islamic Financial Services and Microfinance

The Compatibility of Islamic Financial Services and Microfinance: A Little-Explored Avenue for Expanding Outreach
By Dahlia El Hawary, Consultant, Financial Sector Operations and Policy Department, and
Wafik Grais, Senior Advisor, Financial Sector Vice Presidency
World Bank

The Compatibility of Islamic Financial Services and Microfinance

Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context

Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context
Gianfranco Forte, Bocconi University
Federica Miglietta, Bocconi University
August 2007

Abstract: "Defining social investing and its boundaries is a challenging task. Since the religious beginning of ethical investments, many overlapping investment styles have been grouped into the bucket of socially responsible investments, or SRI. This includes, for instance, faith-based investments. In this paper we study the underlying principles of SRI and Islamic funds as investment classes, and try to determine whether Islamic mutual funds, as faith-based investments, can be included into the category of socially responsible mutual funds, or if they exhibit distinguishing characteristics that indicate that they would be more fittingly grouped in a separate investment family. We address the question from both a qualitative and quantitative point of view. Comparing ideas, ratios and investment styles underlying SRI and comparing them to Islamic portfolios, we identify the potential inconsistencies related to some of the investment decisions. Together with a qualitative assessment of the differences and similarities, we discuss, in the quantitative section of our study, the different sector and country composition of two generic portfolios, SRI and Islamic (proxied by relevant European indices), derived from the application of the investment screens. In addition, through a cointegration analysis on FTSE indices, we show that FTSE Islamic, exhibits peculiar and interesting portfolios' differences in terms of econometric profile, compared to conventional and SRI indices. This paper attempts to unify the studies regarding SRI, with the available studies on Islamic investments. To the best of authors' knowledge, this is the first time that SRI and Islamic indices are analysed and compared."

Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context

Case Study: Farmers Commercial Bank

Risk Management: Islamic Financial Policies
Case Study of Farmers’ Commercial Bank

Ahmed Gaber

Farmer’s Commercial Bank

Case Study: Farmers Commercial Bank

Role of Islamic Banks in Economic Development

Role of Islamic Banks in Economic Development
Shahid Saleem
University of Punjab, Pakistan - CIMA UK

Abstract: The purpose of this working paper is to give the real meaning of DEVELOPMENT from Islamic perspective. Most of Muslim countries are LDCs and using the religious and social ideology of Islam is very useful to establish institutions and to bring moral and ethical change for development in these countries. Islam appears to be the only dynamic religion and tells us about prevention of interest, similar to Christian and Jewish theologies. But at the same time gives a comprehensive setoff trade and financing modes, not easily and completely described in any other religion or social order. Even TFP, a modern concept for collective efficiency has been advised in Islam, shunning to self interest and individualism of materialistic economics. Some scholars of WEST consider use of Islamic banking more suitable for economic development, while others consider Islam as obstacle & threat to development of Muslim countries. We hope that the paper will be useful in this regard to provide another valuable theoretical dimension to this field of study.

Role of Islamic Banks in Economic Development

What Does Islam Say About Corporate Social Responsibility (CSR)?

What Does Islam Say About Corporate Social Responsibility (CSR)?
Asyraf Wajdi Dusuki
Assistant Professor, Department of Economics
Kulliyyah of Economics and Management Sciences, IIUM

May 2008

"The escalating social and economic problems brought about by globalization have raised new questions as well as expectations about governance, ethical and social responsibilities. Consequently Corporate Social Responsibility (CSR) has emerged and developed rapidly as a field of study. Many Western theoreticians attempt to provide theoretical, moral and ethical groundings for CSR initiatives. Nevertheless such endeavors have received wide criticisms for problems relating to justification, conceptual clarity and possible inconsistency. The endeavors also fail to give adequate ethical guidance to business executives who must decide which courses to pursue and how much commitment to give. The main objective of this paper is to study the concept of CSR, which has gained popularity and wide acceptance amongst Western business community today from an Islamic perspective. This paper provides discussion on the Islamic alternative views on the various theories underpinning the construct of CSR. This view, which prevailed within the ambit of Shari’ah, is very influential in dominating the thinking and behaviour of approximately 1.6 billion Muslims across the globe."

What Does Islam Say About Corporate Social Responsibility (CSR)?

IFSB-IRTI-IDB Islamic Finance and Global Stability Report

Islamic Finance: Global Financial Stability
IFSB-IRTI-IDB
April 2010

"The Report examines the intrinsic strength of the Islamic finance model, the state of the Islamic financial services industry and challenges and strategies for strengthening financial stability in the Islamic financial services industry."

To read the press release click here.
To download the complete report click here.

Contents:
A. Appreciating the Islamic Finance Model
I. Key Principles

B. The State of Islamic Financial Services Industry
I. Increasing Significance of Islamic Finance in the Global Financial System
II. Performance of Islamic Banks
III. Performance of Islamic Indices

C. Challenges and Strategies for Strengthening Financial Stability in the Islamic Financial System
I. Strengthening Islamic Financial Infrastructure
II. Accelerating Effective Implementation
III. The Establishment of a Platform for Constructive Dialogue: Islamic Financial Stability Forum

IFSB-IRTI-IDB Islamic Finance and Global Stability Report

Islamic Microfinance Challenge 2010

Islamic Microfinance Challenge 2010: Innovating Sustainable, Scalable, and Market-Driven Models

"CGAP, Deutsche Bank, Islamic Development Bank, and Grameen-Jameel are pleased to announce Islamic Microfinance Challenge 2010: Innovating Sustainable, Scalable, and Market-Driven Models. The contest is a joint initiative to promote the innovative design of Shariah-compliant products for Islamic microfinance clients.

We are seeking original Islamic microfinance business proposals which are profitable, sustainable, scalable, and Shariah-compliant. Finalists of this competition will be awarded with grant funds as well as need-based technical support to launch a pilot project of their proposed business idea.

This is an opportunity for you to showcase innovative business ideas, gain industry-wide recognition, and benefit from the funds and technical expertise of leading institutions in the microfinance and Islamic finance sectors."

The deadline for submission is May 3rd, 2010.
For further details check their website here.

Islamic Microfinance Challenge 2010

Social Responsibility Trends at Islamic Financial Institutions

DinarStandard and Dar Al Istithmar, have just announced the release of a first-of-its-kind report on Corporate Social Responsibility (CSR) in Islamic Finance Institutions as well as recognizing social responsibility leaders from within the respondents with the Maqasid Al-Shari’a Awards. In fact it was in mid-2009 that we first encountered this survey (blog post here) and we look forward to its future editions. It is refreshing that the actual report is being disseminated upfront (in this space there seems to be an over-supply of press releases disguised as news) and most importantly we should note that the awards are based on a defined and objective set of criteria (i.e. not a popularity contest). This is a very positive signal which others in the industry will hopefully follow.

The full report is available here (pdf document).

Excerpt: The Social Responsibility Trends at Islamic Financial Institutions Report presents the aggregate results of an extensive survey on Social Responsibility at Islamic Financial Institutions (IFIs) carried out during summer and fall of 2009.

Some key findings of the survey:

Charity: 76% indicated that they had polices for charitable activities whilst 17% had none. Charitable activities remains a strong priority for IFIs, but most do not consider utilising their fund mobilizing capabilities to raise funds for charities or emergency causes (only 34% said they do.)

Responsible Investments: 55% responded yes to having some policy in investment quotas on social, developmental and environment orientated investments, whilst 38% did not have such policy. However, amongst the three types, environmental related investment quotas had the least focus (38%).

Clients: 100% of respondents answered yes to having a policy to screen prospective clients which is actively implemented. Similarly 97% have an organizational policy that deals with client responsibly.

Employees: 83% of respondents’ state having policies that provide equal opportunity to all their employees, 93% have policies that ensures merit-based salary and promotion, and 86% having policies that specifically prohibits any kind of discrimination. However, when it comes to having policy to monitor employees from different backgrounds and gender, the response was mix with only 52% admitting to having such a monitoring policy and 48% not having any such policy.

A sincere thanks to Dr. Sayd Farook for providing the report.

Social Responsibility Trends at Islamic Financial Institutions

Markets and the role of government in an economy from Islamic perspective

Markets and the role of government in an economy from Islamic perspective
Hasan, Zubair (2008)
INCEIF

Abstract: "This paper explains the notion of market in historical perspective and the role markets play in free enterprise economies. It lists the major market failures and the role governments are expected to play in regulating and supplementing markets including the promotion of CSR from Islamic perspective. The discussion is limited to product and factor markets."

Markets and the role of government in an economy from Islamic perspective

UNEPFI & Islamic Finance

Over the recent past many parallels have been drawn between Islamic finance and sustainability, with further suggestions of convergence towards its CSR and SRI cousins (for instance refer to these various articles on Islamic finance and ethics).

Recently Michael Gassner (islamicfinance.de) has highlighted how Islamic finance institutions could (and should) support the United Nations Environment Program Finance Initiative (UNEP FI) which aims to forge a stronger link between sustainability and financial institutions around the globe.

There are currently two signatories (out of 200) that are loosely related to Islamic finance (namely NBK and Bank Muscat) and hopefully many more will follow - membership information of UNEP FI is available here.

There is further scope if one considers the United Nations Principles for Responsible Investing (UN PRI), so clearly much to look forward to if Islamic finance institutions truly recognize the reason for their existence. It is a difficult road ahead but something that deserves support and encouragement from all of us.

UNEPFI & Islamic Finance