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The paper attempts to analyze the volatility of returns and expected losses of Islamic bank financing. In particular, it takes the case of Indonesian Islamic banking industry.
Abstract
Purpose
The paper attempts to analyze the volatility of returns and expected losses of Islamic bank financing. In particular, it takes the case of Indonesian Islamic banking industry.
Design/methodology/approach
The paper uses Value at Risk (VaR) approach to compute the volatility (risk) of returns and expected losses of Islamic bank financing. In particular, it uses variance‐covariance method to calculate VaR of multi‐asset portfolios (groups of equity‐, debt‐ and service‐based financing).
Findings
First of all, equity and debt‐based financing produce sustainable returns of bank financing. Moreover, they are also very resilient during unfavorable economic conditions. Second, the performance of service‐based financing is very sensitive to the economic conditions. Lastly, VaR computation on the volatility of returns and expected losses of bank financing finds that risk of investment and expected losses are well managed.
Practical implications
The paper demands Islamic banks to keep intensifying equity‐based financing rather than only debt‐based financing and improve the banking services to support the performance of service‐based financing.
Originality/value
To the best of the author's knowledge, this is the first paper to assist the volatility of returns and expected losses of the Islamic banking financing in Indonesian.
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Felix Iblher and Dominik I. Lucius
Innovative financing instruments are well‐known in Anglo‐American real estate finance markets. This study is the first to analyse the use and structure of the innovative financing…
Abstract
Innovative financing instruments are well‐known in Anglo‐American real estate finance markets. This study is the first to analyse the use and structure of the innovative financing instruments in Germany. Based on a survey addressed to German banks offering real estate financing, instrument‐ and bank‐type specific patterns and reimbursement schemes are examined. While the research shows that innovative instruments are not yet widely used in Germany, banks possess experience in mezzanine capital, project and joint venture financing and are optimistic regarding the future development of demand for these instruments.
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Farihana Shahari, Roza Hazli Zakaria and Md. Saifur Rahman
The purpose of this paper is to investigate the expected outcomes, both of positive and negative returns occurred by shariá credit instruments in global Islamic banks. The annual…
Abstract
Purpose
The purpose of this paper is to investigate the expected outcomes, both of positive and negative returns occurred by shariá credit instruments in global Islamic banks. The annual panel data from 2005 to 2012 is collected from 40 Islamic banks from 12 countries and value at risk (VaR) technique is employed in the investigation process. The findings of this study indicate several outcomes: first, majority of Islamic banks use debt-based financing (DBF) and avoid asset-based financing (ABF) due to the lack of secured rate of fixed returns and collateral. Second, the ABF financing shows the positive returns. Third, interestingly, DBF financing faces higher credit risk compared to ABF even DBF secures its financing through tight policy implementation. Finally, this paper comes up with policy recommendations for the further reduction of credit risks and improvement of bankers’ confidence level in implementing the ABF financing policy.
Design/methodology/approach
VaR on panel data.
Findings
Shariá credit instruments play an important role.
Research limitations/implications
Data findings.
Originality/value
Fully original.
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Norfaizah Othman, Mariani Abdul-Majid and Aisyah Abdul-Rahman
This paper aims to determine the effect of equity financing on bank stability during normal and crisis periods.
Abstract
Purpose
This paper aims to determine the effect of equity financing on bank stability during normal and crisis periods.
Design/methodology/approach
This study uses a static panel regression that includes pooled ordinary least square, random effect and fixed effect model to examine the influence of equity financing on bank stability. In estimating bank stability during a financial crisis, the authors predict the occurrence of a crisis using the early warning system (EWS). The authors then used z-score to measure Islamic banks’ stability.
Findings
Islamic banks that offer equity financing structure are more stable compared to Islamic banks without such structure. Islamic banks with medium equity financing have highest stability relative to Islamic banks with high or low equity financing. During crises, the Islamic banks with equity financing structure remain relatively stable compared to other Islamic banks.
Research limitations/implications
The sampling coverage could have included a larger number of countries and banks.
Practical implications
The authorities need to strengthen the banking framework to support the Islamic financial products by encouraging a wider use of risk-sharing instruments. Besides using a debt-like financing structure, Islamic banks should also place emphasis on equity financing in instilling the banking sector stability. In monitoring banks with equity financing, the authorities may need to look into the level of equity financing.
Social implications
Besides avoiding riba and gharar in financing, equity financing encourages cooperation and participation among society as they share the risks.
Originality/value
This paper analyses the effect of equity financing on the Islamic banks stability during normal and crisis periods. This paper further examines the intensity of the equity financing and its influence on bank stability.
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Tahir Mahmood and Noman Arshed
The ailing agriculture sector in Pakistan demands a supportive financial sector. The low adoption of Salam financing by Islamic banks does not match the potential demand…
Abstract
Purpose
The ailing agriculture sector in Pakistan demands a supportive financial sector. The low adoption of Salam financing by Islamic banks does not match the potential demand. Empirical studies identified demand-led issues that led to a low proportion of Salam financing, but the exploration of supply-side constraints is overlooked.
Design/methodology/approach
This study has applied Interpretive Phenomenological Analyses on 20 interviews with the experts in the Islamic banking industry who play a role in decisions on Salam financing to the agriculture sector. The purpose of the study is to explore the determinants of low adoption of Salam financing by Islamic banks.
Findings
The experiences led to the major reasons for the low adoption of Salam financing categorized as intentions, attitudes and behavior control which corresponds to the theory of planned behavior.
Originality/value
This study is instrumental in exploring the supply-side constraints to Salam financing and helps find aligning theory to intervene via Islamic banking regulations.
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Norhazlina Ibrahim and Safeza Mohd Sapian
The purpose of this study is to investigate whether Tawarruq Islamic home financing (IHF) products remain untouched and maintain their position as the top IHF product in Malaysia.
Abstract
Purpose
The purpose of this study is to investigate whether Tawarruq Islamic home financing (IHF) products remain untouched and maintain their position as the top IHF product in Malaysia.
Design/methodology/approach
The study adopted a qualitative research methodology that included both literature review and content analysis. Firstly, the existing studies and literature were reviewed to compare different types of IHF. The composition of IHF products offered by these Islamic banks was then investigated further to analyse each bank’s progress in IHF from 2015 to 2019. The data were gathered from bank websites, brochures, product disclosure sheets and annual reports.
Findings
The findings reveal that around 62.5% of Islamic banks offered Tawarruq for IHF in the year 2020. For the banks that offered Tawarruq, the amount of the financing continued to grow each year. The plausible reason for the preference for Tawarruq was its less risky nature, despite facing numerous operating, legal and Shariah issues.
Research limitations/implications
This study has several limitations, including the fact that it was limited to home financing products only, the methodology used and the research period.
Practical implications
This study aimed to provide beneficial insights into the use of Tawarruq, which has been a source of concern for regulators as well as steps made to reduce its usage in the industry. Islamic banks should be more proactive in developing non-Tawarruq products to enhance product innovation in the market and minimise the heavy reliance on debt-based products.
Originality/value
This study provides useful insights by analysing IHF in depth for each Islamic bank and making recommendations for future research. Specifically, the method facilitated critical discussions and comparisons to previous research findings as to why Tawarruq has remained popular.
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Mohammad Taqiuddin Mohamad, Ahmad Azam Sulaiman and Meguellati Achour
The Government of Malaysia has developed an Islamic Interbank Money Market since January 1994 with the objective to facilitate funding for the Islamic banking sector in the…
Abstract
Purpose
The Government of Malaysia has developed an Islamic Interbank Money Market since January 1994 with the objective to facilitate funding for the Islamic banking sector in the country. This platform also enables Islamic banks to obtain Sharīʿah-compliant funds from other Islamic banks. This study aims to examine the effects of interbank investment and financing risk on the financing decisions of Malaysia’s Islamic banks between 1994 and 2015. The financing decisions are used as financing measures to determine the effect of investing in the interbank market and financing risk indicators on financing.
Design/methodology/approach
The descriptive, correlation and dynamic panel analysis results are derived with the help of LIMDEP 9.0 software.
Findings
The study found a negative relationship between the interbank investment variable with the financing decisions of Islamic banks. This reflects that an increase in interbank investment leads Islamic banks to reduce their level of financing. These findings prove that the investment activities between Islamic banks had a “substitution effect” and decreased their capability of financing because of their tendency to maintain liquidity.
Originality/value
Islamic banks are confident that they will generate higher profits in the coming financial year. The economic conditions of Malaysia do not influence Islamic banks’ financing decisions, whereas Islamic banks in this study are more dependent on the balance sheet indicators.
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Today, the financing mechanisms to support small-and medium-sized enterprises (SMEs) development have been a subject of great interest and a challenge to policy makers as SMEs are…
Abstract
Purpose
Today, the financing mechanisms to support small-and medium-sized enterprises (SMEs) development have been a subject of great interest and a challenge to policy makers as SMEs are regarded as an important sector contributing to economic growth and stability. This paper is concerned with the bank financing policies to support SME development in China. The purpose of this paper is to examine the governmental financing policies and the innovation financing system of China. The discussions are focused on the bank financing policies to support SME development in China.
Design/methodology/approach
This study is a qualitative research with the use of case study methodology (Eisenhardt, 1989; Yin, 2003). The research is focused on the policy perspectives of bank financing to support SME development in the case of China, the world’s fastest-growing economy. To explore the role of financial institutions and banks in SME financing in China, the research also derives evidence from a collection of documentary investigation. The research fieldwork and interviews were undertaken in Beijing and Shanghai, major financial centers in China, with the use of semi-structured questionnaire. The analyses are undertaken to answer the key questions of: What are the Chinese government’s strategies to support the development of SMEs? To what extent the government policies in bank financing can support SMEs and promote the development of an innovative economy?
Findings
The empirical study has shown that despite the introduction of the 12th Five-Year National Economic and Social Development Plan to support SMEs development, China still needs to improve regulatory policies in support of innovative businesses which would help its transition to an innovation-driven economy. The study provides lessons and policy guidelines to improve the competitiveness of SMEs in China. The insights from this study can also be applied to other developing and emerging economies attempting to understand the role of financing mechanisms in building an innovative economy.
Originality/value
The study has addressed the policy challenges to support SME development in China, a major Asian emerging country and one of the fastest-growing economies in the world (with averaged growth rate of 10 percent per annum). The empirical study of policy challenges was undertaken in Beijing and Shanghai, major financial centers in China. The study offers insights which can be applied to other developing and emerging economies attempting to understand the role of SME financing policies and mechanisms in building an innovative economy.
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Peni Nugraheni and Istiqomah Nur Alimin
This study aims to examine the factors that influence profit–loss sharing (PLS) financing in Indonesian Islamic banks from the perspective of Islamic banks’ employees. Islamic…
Abstract
Purpose
This study aims to examine the factors that influence profit–loss sharing (PLS) financing in Indonesian Islamic banks from the perspective of Islamic banks’ employees. Islamic banks have important role in influencing the amount of PLS financing distribution through their screening process.
Design/methodology/approach
This study uses questionnaires in collecting data that are distributed to the employees who process or handle PLS financing in Islamic banks in Yogyakarta, Indonesia. The independent variables are risk, financing screening process, analysis of financial statement and competency of the employees of Islamic banks. The data are processed using multiple regression.
Findings
This study finds that risk, the quality of financing screening process and the analysis of financial statement have positive influence on the PLS financing, whereas competency of employees of Islamic banks does not influence PLS financing.
Practical implications
The results of this study are expected to give contribution to increase the role of Islamic banks in encouraging PLS financing. The adequate screening, controlling and monitoring system in Islamic banks should be strengthened to encourage the quality of financing distributed.
Originality/value
Primary data are used in this study to know the perspective of Islamic bank employees in the financing division on the PLS financing. This study attempts to identify the perspective of employees who have direct relationship with the decision of financing in Islamic banks.
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Mansor H. Ibrahim and Fadzlan Sufian
The purpose of this paper is evaluate the interrelations between Islamic financing and key economic and financial variables including real output, price level, interest rate and…
Abstract
Purpose
The purpose of this paper is evaluate the interrelations between Islamic financing and key economic and financial variables including real output, price level, interest rate and stock prices for the case of Malaysia.
Design/methodology/approach
The paper makes use of a structural vector autoregressive (SVAR) model to discern the influences of key economic and financial variables on the behavior of Islamic financing.
Findings
The basic results indicate that Islamic financing responds positively to innovations in real output. In addition, the price level shocks also tend to have significant but lagged effects on the financing provision of Islamic banks. Most interestingly, Islamic financing is impacted negatively and immediately by positive interest rate shocks, contradicting the argument that Islamic bank operations are shielded from interest rate fluctuations. Indeed, the excess sensitivity of Islamic banks to interest rate fluctuations and their lagged responses to price level shocks are found to be robust across alternative SVAR specifications.
Practical implications
Operating under a dual banking system, Islamic banks are not immune from monetary conditions of the country. Indeed, it seems to be exposed to the interest rate risk, an aspect that needs to be accounted for by Islamic banks in their risk management.
Originality/value
With the emergence of Islamic finance industry, understanding the implications of various macroeconomic factors on Islamic financing is essential. This study adds to this understanding, which has received limited attention.
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