Editor’s notes

Citation

Hassan, M.K. (2014), "Editor’s notes", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 No. 2. https://doi.org/10.1108/IMEFM-04-2014-0034

Editor’s notes

Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 7, Issue 2

Stock speculation is a controversial issue in the Islamic financial system and its integration with capital markets around the world. It can be argued that stock speculation is a de facto form of gambling that contributes little real economic value to financial markets. Islamic finance strictly opposes risk-taking behaviors, and, thus, regulations controlling stock speculation can play a major role in Islamic capital markets. Moderate Islamic ideologists argue that reasonable regulations restricting excessive speculation are sufficient to provide adequately liquid Islamic capital markets. However, if stock speculation is a purely monetary activity, more conservative Islamic ideologists advocate that speculation should be prohibited altogether. The Islamic stance advocating the prohibition of speculation is also consistent with classical Aristotelian philosophy regarding money; however, there are some key difference between the approaches of Islamic philosophy and that of Aristotelian philosophy.

Aristotle holds that money plays a valuable role in society; however, he argues against using trade as a way of making monetary profit. The Aristotelian view holds that economic goods have three potential purposes:

1. to be used in consumption to satisfy economic needs;

2. to be exchanged for other goods, thereby indirectly satisfying economic needs; and

3. or to be exchanged for money.

The former two transactions are considered “natural” under the Aristotelian view, while the later separates goods from monetary transactions and is, therefore, an unnatural economic artifice. This view is consistent with the ancient Greek economy, which consisted of several self-sufficient city states. Similarly, Aristotle’s philosophy toward money prohibits usury, which is also similar to that of the Islamic philosophy.

The traditional Aristotelian view of money prohibits both usury and trading profits; however, the Islamic view differs somewhat. The monetization of trade does succeed in separating the actions of the producer and consumer. As a result, it can be argued that monetary trade leads to greater economic freedom among the agents in the economy. Traders may trade monetary sums to facilitate the trade of goods, on the one hand, while satisfying their individual consumption needs, on the other. From this perspective, trade is not prohibited from an Islamic perspective, as it can lead to the fulfillment of societal goals.

Another key differentiation in Islamic finance is that money should also serve to maintain purchasing power, which is not considered in the traditional Aristotelian view of money. Aristotle views money as having several key characteristics: money is a medium of exchange, a unit of value and a store of value. However, in an Islamic context, money serves an additional purpose: to maintain purchasing power. The Muslim scholar Ibn Rush (Averroës) (1126-1198) argues that because money can be stored and used to purchase goods in the future, it must also maintain its value over time because it is the essential tool used to measure the relative value of goods. As a corollary, the idea of money as a store of purchasing power contributes to the Islamic notion forbidding stock speculation.

Aside from being inherently risky and arguably lacking real economic value, stock speculation can have major impacts on an Islamic economy. First, excessive stock speculation can cause dramatic price movements that can destabilize the economy and raise the cost of capital. Second, international flows between Islamic and outside capital markets can cause fluctuations in the exchange rate. In particular, large outflows of funds away from Islamic economics can cause a devaluation of local currencies. Thus, stock speculation can contribute to significant changes in the long run, buying power of money in the economy. The potential destabilizing effect of stock speculation on the stability of money, therefore, contributes to the notion that stock speculation is largely incompatible with Islamic economic practices.

The stability of money in Islamic economies is essential, because, from an Islamic perspective, money’s sole purpose is to facilitate the real economic transfer of goods. Just as money is inseparable from goods in Islamic trade, stability is also inseparable from the concept of money. Thus, the relative purchase and trading powers are maintained in the economy. In this context, money and trade can contribute to the welfare of all Islamic economic agents, which benefits society as a whole. On the other hand, the ban of usury in Islamic finance is justified, because, without a direct link between money, goods and price stability, moneylenders essentially redistribute wealth and create inequality, which is counter to the teachings and goals of Islam. Accordingly, regulations and practices within the Islamic finance industry prohibit the use of usury and other similar artifices, because they promote instability and inequality within society. In a similar fashion, regulations limiting or preventing stock speculation in Islamic economics also attempt to promote monetary and economic stability and fairness.

The first paper, in this issue, investigates the issue of Islamic banking performance with regard to ownership structure. Zouari and Taktak test the relationship between Islamic bank performance and the composition of the shareholders. Namely, the study tests whether a bank’s relative proportion of foreign, family, institutional or state shareholders affects its performance. The study utilizes a sample of 53 Islamic banks from 15 countries from 2005 to 2009. The results show that 49 per cent of the Islamic banks studied have concentrated ownership, and a majority of these owners are institutional, with state ownership coming in second. However, there is no evidence linking bank performance, measured by return on equity (ROE) and return on assets (ROA) with ownership concentration. However, the authors do find evidence that family-and state-owned banks tend to perform better, while institutional and foreign owners tend to reduce banking performance. A major weakness of the study is the use of dummy variables to measure the nature of the largest ownership interests. Nonetheless, the study contributes to the growing literature on corporate governance and Islamic banking institutions, which has significant industry and economic implications.

The second paper by Muhammad, Rahman and Sulaiman tests for the presence of a bank lending channel in Malaysia. The authors use key banking characteristics such as size, liquidity and capital to test the effect of a monetary policy change on the banking system from 2005 to 2010. The model used to analyze the effect of a monetary policy change is that of #B2. The results show that a policy aimed at causing a contraction of the money supply leads to a decrease in the supply of loans, as banks struggle to offset the deficit with deposits. The study finds the presence of a lending channel in the Malaysian Islamic banking system. Also, the size and liquidity of lending institutions can drive differences in the response to monetary policy changes. Finally, the study asserts that the Islamic interbank rate appears to be an effective monetary policy tool in Islamic banking.

In the third paper, Dusuki, Zainal, Ali, Jinnah and Yueh investigate how traditional takaful can be structured so that it provides similar products to that of the traditional insurance industry, but remains compliant to Shari’ah principles. The paper mostly focuses on ways to devise an alternative to the traditional guaranteed benefit life insurance policy that is consistent with the tenants of Shari’ah. The authors use an analytical and evaluative approach in evaluating the model. The wadi’ah concept is evaluated and proposed as a mechanism for providing similar products to that of guaranteed benefit policies. The wadi’ah structure has similar cash flows to that of the non-forfeiture benefits of traditional life insurance. However, the traditional insurance model employs a purchase-and-sale arrangement, whereas the takaful arrangement is based on the concept of tabarru’. This paper has a direct implication to the takaful industry and the development of wadi’ah products.

The fourth paper by Ullah examines the issue of Shari’ah compliance among Islamic banks in Bangladesh. The paper utilizes sample questionnaires and interviews as primary sources of data. In addition, the authors use information contained in the Qur’an, Hadiths, letters, manuals, journals, annual reports and bank Web sites. The study specifically examines Shari’ah compliance violations to access the status of Shari’ah compliant Islamic banking in Bangladesh. The authors conclude that Shari’ah compliance among the banks is not robust. There is a great deal of variance among compliance levels. In addition, noncompliance in investing activities is of particular concern. The authors cite several reasons for noncompliance, including the lack of knowledge and research regarding Shari’ah-compliant products, the lack of Shari’ah advisory and compliance boards and the lack of skilled members to fill such positions. This study has several important implications. It serves to bring industry professionals up-to-date regarding the status of Shari’ah compliance, illustrate which institutions have established the best practices for compliance, provide guidelines as to the current gaps in compliance and serve as a foundation for further examinations of Shari’ah compliance among Islamic banks in Bangladesh.

In the fifth paper, Asongu analyzes the knowledge economy (KE). The study utilizes the World Bank’s knowledge economy index (KEI) and other key financial intermediary variables to assess the dynamics of the KE. A principle component analysis and generalized method of moments (GMM) estimation methodologies are employed in the empirical analysis. It is concluded that education improves financial depth and efficiency, but is negatively related to size. Economic incentives like credit facilities and trade agreements do not appear to influence financial development. Information and communication technology (ICT) is positively related with size; however, it is negatively related with all other financial variables. Additionally, innovation is found to have a positive association with financial activity. This study focuses on the complex, dynamic relationship between the KE–finance nexus and financial activity. It has many important policy implications that can help guide monetary policy as a tool for the promotion of financial development.

The sixth paper, by Jalilvand, Shahin and Vosta, examines the relationship between branding and customers’ attitudes and behaviors toward banking services. The study uses a multistage cluster-sampling approach to distribute a ten-minute questionnaire among the customers of the largest national bank in Iran, Melli Bank. Responses were received from 364 customers, and the analysis was conducted using a hierarchical regression methodology. The results show that branding can have a significant impact on the attitudes and behaviors of banking customers. For example, brand image, brand awareness, perceived quality and brand loyalty all have a significant affect on affective attitude, subjective norm, perceived behavioral control and behavioral intention. The results provide insights into ways in which the banking industry may use branding and other marketing approaches to supplement other business practices and improve industry performance.

The seventh paper, by El-Kot and Burke, examines the work ethic and individualistic characteristics of manufacturing workers in Egypt. Specifically, the study looks at Islamic Work Ethic (IWE) and individualism as assessed by a sample of 484 manufacturing industry supervisors in Egypt. The workers completed questionnaires at a 48-per cent response rate. Measures of work ethic and individualism are positively correlated in the sample. Additionally, males and females scored similarly. The general results show that younger supervisors are more individualistic and, in general, the Egyptian sample of workers scored very highly in both work ethic and individualism. However, despite this result, Egypt and similar countries struggle with poor economic performance. Therefore, it is important to develop a measure of work ethic that can be related to actual job and economic performance. Future studies may help develop a measure along these lines so that managers can focus on measures of work ethic that improve worker performance.

M. Kabir Hassan
Department of Economics and Finance, University of New Orleans, New Orleans, Louisiana, USA

Reference

Kashyap, A.K. and Stein, J.C. (1995), “The impact of monetary policy on bank balance sheets”, Carnegie-Rochester Conference Series on Public Policy, Elsevier, Vol. 42 No. 1, pp. 151-195.

Further reading

Tag el-Din, S. and Kabir Hassan, M. (2007), “Islam and speculation in the stock exchange”, in Kabir Hassan, M. and Lewis, M. (Eds), Handbook of Islamic Banking, Chapter 15, Edward Elgar Publishing Company, London.