Guest editorial: Islamic finance in South Asia

Citation

Hassan, M.K., Choudhury, T.T. and Bhuiyan, B. (2023), "Guest editorial: Islamic finance in South Asia", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 2, pp. 229-233. https://doi.org/10.1108/IMEFM-03-2023-635

1. Introduction

This special issue of the International Journal of Islamic and Middle Eastern Finance and Management focuses on the issues surrounding the current trends and the future prospectives of the Islamic Finance environment in South Asia. Islamic Finance plays a significant role in today’s financial climate (Hassan et al., 2023; Hasan et al., 2022). The dramatic expansion of Islamic banking from almost zero in 1970 to approximately $2.8tn by 2021, with a growth rate of 17% from 2020, validates its evolution from a marginal entity to an essential part of the international financial system (Hoggarth, 2016). Islamic financial institutions’ reach and market capitalization are more important than ever in light of the fact that COVID-19 has considerably diminished economic growth across the globe. Islamic financial institutions have a significant role to play in the post-COVID world, as they have shielded market participants from a full-scale meltdown (Hassan et al., 2022, 2021; Naeem et al., 2021). Thus, there is a pressing need to research the successful management of Islamic financial institutions and clarify what stakeholders can learn from them. To this end, many studies have been published on assorted topics of Islamic Finance in South Asia, given its extensive Muslim population (Haseeb et al., 2022; Afzal et al., 2022).

Many international financial institutions and other multilateral organizations in Asia, especially small and medium organizations, are currently using Islamic Finance to promote economic development by encouraging individuals to participate in financial markets through Islamic saving and lending instruments (Abdul-Rahim et al., 2022), or on a macro level by providing Islamic approaches into the monetary system (Mojahedi Moakhar et al., 2022), or to simply hedge risk (Afzal et al., 2023; Yoon et al., 2022). Moreover, Islamic Finance has proven to be a dependable alternative to initial public offerings (Hanieh, 2023) and public–private partnership financing and entrepreneurship (Anggadwita et al., 2021), more specifically technological entrepreneurship (Motiei, 2022). It can effectively fulfill the socioeconomic needs of developing countries. This proven track record of Islamic Finance as well as its increasing public acceptance have motivated many governments to diversify their short-term financing methods through issuing Islamic working capital management (WCM) (Kayani, 2022) or through Sukuk (Nasir et al., 2022).

The possibilities of Islamic Finance in South Asian nations are especially enticing because these markets are still mostly untapped. Presently, a mere 33% of businesses in Southeast Asia have access to proper financing, 18% of adults use a bank account, 11% of adults borrow formally and 27% save formally (Wyman, 2017). Thus, the growth prospects of Shariah-compliant (SC) firms are vast (Akbar et al., 2022). However, Islamic Finance’s probability of making good on these opportunities hinge on the finance sector’s technological development. While research on Islamic financial technology (Fintech) is in its beginning stages, early signs point to its potential to harmonize Islamic financial instruments with societal expectations (Kinateder and Choudhury, 2022).

2. This issue

The special issue accepted ten articles, distributed into three major areas: Islamic SC foreign exchange and hedging issues; Islamic SC capital market issues; and Islamic Finance innovation and development issues.

2.1 Islamic Shariah-compliant foreign exchange and hedging issues

Ruzita Abdul-Rahim et al. investigate the impacts of foreign currency exposure and Shariah-agreeable status on financial hedging strategy. The authors test the effect of forex exposure due to a vector of foreign-named income (FCF) markers and firms’ Shariah-consistent grade on two intermediaries of financial hedging choices. The study proposes that Shariah-agreeable firms cease participating in currency subordinates to avoid “riba” and curb the impact to customers. The findings likewise require the Islamic market controllers to remember obligatory disclosure of ordinary currency subordinates to evaluate firms for disallowed practices to assist with upgrading the validity of the Islamic financial market (Abdul-Rahim et al., 2022). In the same way, Naeem et al. (2021) investigate the hedge and safe-haven properties of Sukuk and green securities for financial exchanges pre- and during the COVID-19 pandemic period. The authors assess the hedge proportions and hedge viability of involving Sukuk and green securities in a portfolio with economic exchanges. The hedge ratio and effectiveness show that green bonds give adequate proof of the hedge viability for different worldwide stocks – the review has critical ramifications for religious financial backers, moral financial backers, policymakers and administrative bodies. Strict financial backers can put resources into Sukuk to enjoy generally safe, premium-free speculation. In contrast, green financial backers can fulfill their socially conscious thought processes by putting resources into these venture streams.

2.2 Islamic Shariah-compliant capital market issues

Nasir et al. (2022) explain Sukuk structures independently by underscoring the fundamental differences and shared qualities in their vital perspectives. Their study finds that Malaysia is the median contributing country in Sukuk conveyances and the point of convergence of maker correspondence. The study also summarizes the differences among various Sukuk instruments and the enormous distinctions between Ijarah, Mudarabah, Musharakah and Murabahah Sukuk affiliations alluded to in journal articles. This study notably enhances the assortment of knowledge in Islamic Finance by assisting investors to understand the Shariah acceptability and unique investment nature of various Sukuk choices. Furthermore, Haseeb et al. (2022) study whether a firm’s Shariah compliance assists in diminishing firms’ explicit stock price crash risk (SPCR). Their findings uncover an enormous adverse consequence of firms’ Shariah compliance on SPCR. Their results demonstrate that SC firms are less inclined to bad news, ultimately decreasing SPCR. The study likewise uncovers a potential instrument through which SC firms diminish SPCR.

Hanieh (2023) examines the accuracy, performance and choice of IPO valuation strategies in the Islamic Republic of Iran’s emerging business sector. The Dividend Discount Model (DDM) is the most popular in Iran. Indeed, even controlling for firm qualities and market conditions, the IPO price is profoundly related to pre-IPO reports’ appraisals. The results reveal firm age and how size and profitability impact the valuation strategies. The valuers place no significant importance on forward P/E in an unpredictable market. They mainly use the P/E to value old firms. Firm size influences the loads allocated to Free Cash Flow to the Firm, and the valuers take into account the Asset-in-Place intensity to determine loads of DDM, P/E and net asset value. Finally, this study calculates the accuracy of the pre-IPO reports to be 61% and views the high precision as related to DDM.

Farman Afzal and Ayesha Shehzad examine a successful instrument for determining the cost of capital and valuing capital budgeting – a pure-play strategy is obtained to quantify systematic risk. They find that investors’ risk discernment is established according to a market point of view using national risk premium modeling. The yearly betas are determined using DCC, the end result being that using a unique model can give a special expense assessment in emerging economies. The study concludes by addressing investors’ risk discernment and the successful ramifications of CAPM using pure play and DCC-GARCH when information is not speedily available in unique circumstances (Afzal et al., 2022).

Finally, Saeed Akbar and Shehzad Khan et al. evaluate capital construction determinants’ impact on the influence levels of SC and non-compliant firms in Pakistan. The investigation discovers that various determinants unexpectedly influence both firms’ influence levels (book and market). The authors find variation in the results under different screening models. This study adds to the body of knowledge in Islamic Finance by specifying a thorough correlation of the capital construction choices of SC and non-SC firms (Akbar et al., 2022).

2.3 Islamic finance innovation and development issues

Kayani (2022) reviews and compares the traditional and Islamic viewpoints on WCM to formulate the ideal financing choice for managing working capital (WC) in South Asia. This paper gives traditional and Islamic viewpoints on WCM and finds that Islamic banks in South Asia might create strategies to make it easier for firms to use the Mudarabah mode for fulfilling their WC needs rather than traditional sources. The article likewise recognizes that Islamic banks might designate small and medium enterprises in Asian markets for supplying WC to smooth out liquidity, particularly during a financial emergency when ordinary banks will not give loans.

Mojahedi Moakhar et al. (2022) explain the Islamic way of dealing with monetary systems. They explain how cash enters in the demand for money in the overlapping age model and how it impacts consumption and production loans. They explain how the role of interest in loanable money leads to inefficiency, both in production and households and in the general equilibrium.

Finally, Motiei (2022) develops a research model on technological entrepreneurship. The findings reveal that the primary motivators of financing and entrepreneurship in Iran are increasing the efficiency of labor and products, supporting entrepreneurship and enhancing the efficacy of monetary policies at the top level. These findings are vital to scholars, policymakers and technological business visionaries as they design their financing techniques.

3. Conclusion and future research

This special issue focuses on Islamic Finance in South Asia and identifies insights into the region’s development, challenges and opportunities. The articles in this issue cover a wide range of topics, including the growth and prospects of Islamic Finance in South Asia, the regulatory environment, the role of Islamic Finance in poverty reduction and the potential for Islamic Finance to contribute to sustainable development. Overall, the articles in this special issue provide a comprehensive overview of the current state of Islamic Finance in South Asia and highlight the potential for the industry to contribute to the region’s economic development and social progress. New research in this area should include a comparative analysis of the Islamic financial systems in South Asian countries such as Pakistan, Bangladesh and India; examine the similarities and differences in these countries’ regulatory frameworks, product offerings and consumer preferences; investigate the obstacles and opportunities in maintaining Shariah compliance in Islamic financial institutions in South Asia; assess the effectiveness of Shariah supervisory boards in ensuring compliance with Islamic principles; analyze the effect of risk management frameworks on the stability and profitability of these institutions; evaluate the potential for Islamic Finance to contribute to sustainable development in South Asia; and consider the role of Islamic Finance in supporting environmentally friendly and socially responsible projects.