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1 – 10 of over 19000Simon Archer, Rifaat Ahmed Abdel Karim and Venkataraman Sundararajan
The aims of this paper are: first, to draw attention to the issues of displaced commercial risk (DCR) which arise as a result of the risk characteristics of profit‐sharing…
Abstract
Purpose
The aims of this paper are: first, to draw attention to the issues of displaced commercial risk (DCR) which arise as a result of the risk characteristics of profit‐sharing investment accounts (PSIA), the main source of funding of Islamic banks in most jurisdictions; and, second, to present a value‐at‐risk approach to the estimation of DCR and the associated adjustments in capital requirements.
Design/methodology/approach
The paper is based on empirical research into the characteristics of PSIA in practice, which vary to a greater or lesser extent from what one would expect them to be in principle, on an analysis of the capital adequacy and risk management implications that flow from this, and on an econometric formulation whereby the extent of DCR in Islamic banks may be estimated.
Findings
The findings are, first, that the characteristics of PSIA can vary from being a deposit like product (fixed return, capital certain, all risks borne by shareholders) to an investment product (variable return, bearing the risk of losses in underlying investments), depending upon the extent to which the balance sheet risks get shifted (“displaced”) from investment account holders to shareholders through various techniques available to Islamic banks' management. Second, the paper finds that this DCR has a major impact on Islamic bank's economic and regulatory capital requirements, asset‐liability management, and product pricing. Finally, it proposes an econometric approach to estimating DCR but report that individual Islamic banks generally lack the data needed to apply this approach, in the absence of which panel data for a population of Islamic banks may be used to estimate DCR for that population.
Research limitations/implications
Empirically, the paper is thus limited by the lack of data just mentioned. Furthermore, the application of the proposed panel data approach has been left for future research.
Originality/value
The analysis of the issues and the development of the econometric model represent in themselves an original research contribution of some significance.
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Wasim K. AlShattarat and Muhannad A. Atmeh
Islamic banks use Mudarabah contract to replace the interest-bearing deposits with profit-sharing investment accounts. The purpose of this paper is to explore the challenges and…
Abstract
Purpose
Islamic banks use Mudarabah contract to replace the interest-bearing deposits with profit-sharing investment accounts. The purpose of this paper is to explore the challenges and problems associated with the employment of Mudarabah contract by Islamic banks.
Design/methodology/approach
The study critically analyzes the Mudarabah contract used by Islamic banks. It reviews the evolution of the contract from its traditional type to more complicated types such as compound, unrestricted, commingled and continuous Mudarabah. The paper investigates the problems that have emerged from implementing such types in current business settings.
Findings
The paper proves that implementing the Mudarabah contract by banks imposes several problems among which are the following: difficulty in the determination of total profit resulting from Mudarabah and in allocating this profit to the multiple parties involved in Mudarabah; usage of reserves to cater against future losses may undermine the concept of Mudarabah profit-loss sharing and lead to earnings management; corporate governance is also a major problem in Mudarabah contract, as the depositors are exposed to risks but have no governance rights; and Mudarabah may also lessen the fair presentation of financial reporting.
Research limitations/implications
The paper examines the evolving Mudarabah contract and its implementation challenges, based on available literature (no empirical analysis was conducted).
Practical implications
The implications are significant for the future development of Islamic contracts and Islamic accounting treatments.
Originality/value
Many studies explored the Mudarabah contract from a Shariah or law perspective. However, this paper investigates the Mudarabah contract with a focus on the implication on accounting and financial reporting because of the lack of studies in this area. Furthermore, it demonstrates the persistent flaws in the Mudarabah contract, and it proposes a new model for mobilizing funds, i.e. mutual fund.
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Muhannad A. Atmeh and Abdul Hadi Ramadan
The purpose of this paper is to examine the accounting treatment for mudarabah contract and its implications on the reliability and fairness of the financial statements. In…
Abstract
Purpose
The purpose of this paper is to examine the accounting treatment for mudarabah contract and its implications on the reliability and fairness of the financial statements. In addition, the paper also aims to explore the effect of provisions and reserves on profit allocation among unrestricted investment account holders (UIAHS).
Design/methodology/approach
This study reviews the accounting treatment for mudarabah contract as stated in the Accounting Standards for Islamic Financial Institutions issued by the AAOIFI and compares it with other financial reporting frameworks, especially the IFRS.
Findings
The paper finds that presenting UIAHS in a separate category in the financial position statement (balance sheet), without reclassifying the assets in the financial position statement to reflect the assets attributable to UIAHS, suggests undue bias in the financial statements. This contradicts the concepts of full disclosure and true and fair view of the financial statements. The paper also reveals that reserves may result in profit misallocation among UIAHS. Additionally, there is an overlap between provisions and reserves, which may affect the reliability and fairness of the financial statements. It is also revealed that reserves presented under the UIAHS section could not be readily understandable since investors have no right to these reserves. The paper further finds that using a donation contract in business may result in diverting wealth from the less wealthy to the wealthier.
Originality/value
The paper criticizes the AAOIFI treatment for UIAHS and suggests an extension to this treatment by presenting assets attributable to UIAHS in order to enhance disclosure. Additionally, it questions the applicability of using donation (Tabarru) contract in transactions with profit‐making substance.
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Othmane Touri, Rida Ahroum and Boujemâa Achchab
The displaced commercial risk is one of the specific risks in the Islamic finance that creates a serious debate among practitioners and researchers about its management. The…
Abstract
Purpose
The displaced commercial risk is one of the specific risks in the Islamic finance that creates a serious debate among practitioners and researchers about its management. The purpose of this paper is to assess a new approach to manage this risk using machine learning algorithms.
Design/methodology/approach
To attempt this purpose, the authors use several machine learning algorithms applied to a set of financial data related to banks from different regions and consider the deposit variation intensity as an indicator.
Findings
Results show acceptable prediction accuracy. The model could be used to optimize the prudential reserves for banks and the incomes distributed to depositors.
Research limitations/implications
However, the model uses several variables as proxies since data are not available for some specific indicators, such as the profit equalization reserves and the investment risk reserves.
Originality/value
Previous studies have analyzed the origin and impact of DCR. To the best of authors’ knowledge, none of them has provided an ex ante management tool for this risk. Furthermore, the authors suggest the use of a new approach based on machine learning algorithms.
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Kaouther Toumi, Jean-Laurent Viviani and Lotfi Belkacem
The income is attributed to PSIAU holders after setting aside the reserves (PER and IRR) and deducting the bank's share of income called mudarib share.
Bassam Mohammad Maali and Muhannad Ahmad Atmeh
The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking industry…
Abstract
Purpose
The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking industry, and the effect of such practice on the concept of risk sharing in Islamic finance.
Design/methodology/approach
The study critically analyzes the Mudaraba contract used by Islamic banks to mobilize funds, the use of Profit Equalization Reserves and Investment Risk Reserves, the use of other income smoothing techniques and the insurance of Islamic banks’ by regulatory agencies in some countries based on the Takaful and Tabarru’ concepts.
Findings
This paper shows that Islamic banks are increasingly using the concepts of Takaful and Tabarru’, which are intended originally for social welfare, as tools to justify the move to more guaranteed-in-substance type of deposits, and hence, more risk shifting rather than risk sharing in the Mudaraba contract. This use, is argued, moves Islamic banking towards more market-oriented, but less Shariaa-compliant in substance.
Research limitations/implications
This papers examined the behaviour of Islamic financial institutions and Islamic scholars based on the available literature. No empirical analysis was conducted.
Originality/value
This paper contributes to the ongoing debate about the substance of Islamic banking transactions and the risk shifting inherent in such transactions. Furthermore, it is the first study that examines the extent of utilizing different social welfare concepts to legalize – from Shariaa perspective – Islamic banking transactions.
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This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking systems…
Abstract
Purpose
This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking systems are performing better.
Design/methodology/approach
A sample of six conventional banks (CBs) and two Islamic banks (IBs) in Egypt was selected. Using the liquidity ratios, the investigation involves analyzing the financial statements for the period of 2004-2011. The data were obtained from Bank scope database.
Findings
The research found that in Egypt, CBs perform better in terms of liquidity risk management than IBs. The liquidity risk management significant differences between IBs and CBs could be attributed more cash availability to CBs than to IBs, in addition, Egyptian Central Bank regulations on capital and liquidity requirements for IBs disconcert IBs’ performance.
Practical implications
This research facilitates the bankers, academician, scholars and bankers to have an alluded picture about Egyptian banking developments in liquidity risk management. The results can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management.
Originality/value
This research covers a period and a country that compares CBs’ and IBs’ liquidity risk management. Its value is attributed to the increasing differentiation between CBs and IBs.
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Hichem Hamza and Zied Saadaoui
This paper aims to examine the relationship between the volume of investment deposits and capitalization of Islamic commercial banks.
Abstract
Purpose
This paper aims to examine the relationship between the volume of investment deposits and capitalization of Islamic commercial banks.
Design/methodology/approach
Unlike current accounts holders, investment accounts holders may support part or all of the losses on assets value, which could be a source of moral hazard among bank managers and shareholders. To test these assumptions, the authors use the system generalized method of moments (system GMM) on a dynamic panel of 59 Islamic banks observed during the period 2005‐2009.
Findings
After controlling for a set of variables that may influence capital level, the results show a significant negative relationship between PSIA and regulatory capital ratio. This may indicate that the specific nature of PSIA can be a source of excessive risk‐taking in Islamic banks. This behavior is likely to threaten the solvency of Islamic banks and shows that some deficiencies may exist in their risk management and governance system.
Practical implications
This paper suggests some recommendations to better implement the principle of profit and loss sharing and to curb excessive risk‐taking in Islamic banks.
Originality/value
The originality of this paper is to give empirical responses to theoretical assumptions of a relationship between PSIA and moral hazard in Islamic banks.
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Zairy Zainol and Salina Hj. Kassim
This paper aims to provide a critical review of the literature on the rate of return risk faced by Islamic banks.
Abstract
Purpose
This paper aims to provide a critical review of the literature on the rate of return risk faced by Islamic banks.
Design/methodology/approach
Through a thorough review of the literature, this paper presents the discussion among scholars regarding the rate of return risk in Islamic banks.
Findings
One of the major issues highlighted is the sensitivity of Islamic banks to the changes in the conventional interest rate due to the fact that many Islamic banking products are benchmarked against the conventional interest rate. Moreover, the limited techniques and instruments available to mitigate the rate of return risk also need serious attention by the regulators.
Research limitations/implications
The study relies solely on the literature and highlights important issues in the area but does not provide any empirical evidence of the importance of rate of return risk to Islamic banks as it is beyond the scope of the paper.
Practical implications
There are several issues that should be taken into consideration. First, the dearth of empirical research on the identification of the rate of return risk in Islamic banking highlights the need to develop appropriate methodology to enrich the study on the rate of return risk. Second, more focus is needed to determine the impact of rate of return risk on the financial stability and the performance of Islamic banks.
Originality/value
This paper highlights several important issues relating to the rate of return risk in Islamic banks that are not widely discussed among researchers. In particular, this paper emphasizes the need to identify, handle and mitigate such risks to ensure the stability of Islamic banks. Therefore, this paper identifies a gap that needs further exploration so as to contribute towards enriching the existing literature in this area.
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Neila Boulila Taktak, Sarra Ben Slama Zouari and AbdelKader Boudriga
The paper seeks to examine income smoothing practices in Islamic banks. It first focuses on detecting income smoothing practices. It then seeks to test whether loan loss…
Abstract
Purpose
The paper seeks to examine income smoothing practices in Islamic banks. It first focuses on detecting income smoothing practices. It then seeks to test whether loan loss provisions (LLPs) are used for earnings management purposes.
Design/methodology/approach
The paper explores income smoothing practices on a sample of 66 Islamic banks over the period 2001‐2006 using Beidleman's and Eckel's coefficients. Data are obtained from the Bankscope database. To test the use of LLPs to smooth Islamic banks results, a regression model was developed and tested.
Findings
The results provide evidence on an extensive use of income smoothing by Islamic banks. More than 75 per cent of the examined banks have a determination coefficient between 0.5 and 1 and 44 per cent have a variation coefficient less than 0.5. However, income smoothing is not achieved through LLPs. The variable earnings before taxes and provisions are not significant in all model specifications. The paper advances that these smoothed incomes are derived rather by the use of profit equalization reserve (PER) and investment risk reserve (IRR). The finding is contradictory to the widespread view stating that those mechanisms are designed to stabilize rewards attributed to investment account holders.
Research limitations/implications
The non‐disclosure of detailed information on PER and IRR prevented the empirical testing of the assertion on the use of these discretionary items to smooth Islamic banks' incomes.
Originality/value
Unlike previous studies which implicitly assume that Islamic banks intentionally use accounting techniques to disclose smoothed results, this paper pioneers the study on detecting income smoothing practice by such institutions. Second, it explores the use of LLPs for earnings management purposes in the context of a fast growing industry where Islamic assets have grown on average by 30 per cent per year over the period 2002‐2007. Third, it is the first paper to give some evidence on the use of PER and IRR as income smoothing devices. Finally, the paper covers a larger number of Islamic banks and from various countries.
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