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1 – 10 of 27This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the…
Abstract
Purpose
This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the short-term money market from the view point of co-movement and transmission.
Design/methodology/approach
The non-stationary time series models such as cointegration and Granger causality tests are applied to analyze the daily data.
Findings
Islamic rates of return and conventional interest rates co-move in the Malaysian deposit market. The Islamic rates of return propel conventional interest rates in the three-, six-, and 12-month maturities. Islamic rates of return and conventional interest rates form a short-term money market with KLIBOR rates.
Research limitations/implications
The author analyzes econometrically the sample period from May 16, 2005 to January 12, 2012. This paper concentrates on the period after the development of Islamic banking in Malaysia.
Practical implications
Islamic and conventional deposit markets are competitive in Malaysia; in particular, the competition in the one-month deposit market is very keen. Islamic rates of return have more impact on the formation of short-term interest rates than conventional interest rates.
Originality/value
This paper makes three contributions to the related literatures. First, it uses daily data in the maturities of one month, three months, six months and 12 months for its analyses. Second, it uses the Granger causality method of Toda and Yamamoto to avoid the issue of the non-stationarity of the data. The results of the Granger causality tests in this paper are different from related literatures. Third, this paper focuses on the relationship of KLIBOR rates and Islamic rates of return, and of KLIBOR rates and conventional interest rates.
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The purpose of this study is to evaluate the Islamic Interbank Benchmark Rate (IIBR) and investigate its relationship to conventional benchmark rates.
Abstract
Purpose
The purpose of this study is to evaluate the Islamic Interbank Benchmark Rate (IIBR) and investigate its relationship to conventional benchmark rates.
Design/methodology/approach
The methodology in this study relies extensively on multivariate regression and Granger Causality analysis, using data culled for IIBR, conventional interest-dependent benchmark rates and oil prices which were collected daily over a period spanning from November 2011 to June 2015.
Findings
The main finding of this study is that there is significant negative correlation between the IIBR and London Interbank Offered Rate (LIBOR) and other conventional interbank benchmark rates. This negative linear relationship is due to the IIBR representing a substitute investment for international investors when traditional rates fall in relation to the IIBR.
Practical implications
This study seeks to bring research on IIBR and Sharia finance into the mainstream. It provides new insights into the IIBR as an independent interbank benchmark rate, exploring and confirming its status as a Sharia complaint financial tool.
Originality/value
This study is a comprehensive investigation of the relationship between the IIBR and conventional counterpart benchmark rates (LIBOR, Kuala Lumpur Interbank Offered Rate [KLIBOR], Effective Federal Funds Rate [EFFR] and conventional rates in GCC countries). The study contributes to the understanding of the IIBR’s framework principles and its value as a solution to current and future Sharia-complaint short-term interbank market funding for the Islamic finance industry.
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The purpose of this study is to evaluate the Islamic Interbank Benchmark Rate (IIBR) and investigate its relationship with conventional benchmark rates.
Abstract
Purpose
The purpose of this study is to evaluate the Islamic Interbank Benchmark Rate (IIBR) and investigate its relationship with conventional benchmark rates.
Design/methodology/approach
This study relies extensively on multivariate regression and Granger causality analysis, using data culled for the IIBR, conventional interest-dependent benchmark rates and oil prices. The data was collected daily over a period spanning from November 2011 to June 2015.
Findings
The main finding of this study is that there is a significant negative correlation between the IIBR and London Interbank Offered Rate (LIBOR) and other conventional interbank benchmark rates. This negative linear relationship is due to the IIBR representing a substitute investment for international investors when traditional rates fall in relation to the IIBR.
Practical implications
This study seeks to bring research on the IIBR and Sharia finance into the mainstream. It provides new insights into the IIBR as an independent interbank benchmark rate, exploring and confirming its status as a Sharia complaint financial tool.
Originality/value
This study is a comprehensive investigation of the relationship between the IIBR and conventional counterpart benchmark rates (LIBOR, Kuala Lumpur Interbank Offered Rate, effective federal funds rate and conventional rates in the Gulf Cooperation Council countries). The study contributes to the understanding of the IIBR’s framework principles and its value as a solution to current and future Sharia-complaint short-term interbank market funding for the Islamic finance industry.
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Azlin Alisa Ahmad, Mohd Hafiz Mohd Dasar and Nik Abdul Rahim Nik Abdul Ghani
This study aims to analyse the Shariah issues in the implementation of tawarruq contract in the Islamic profit rate swap (IPRS) instrument in Malaysia.
Abstract
Purpose
This study aims to analyse the Shariah issues in the implementation of tawarruq contract in the Islamic profit rate swap (IPRS) instrument in Malaysia.
Design/methodology/approach
This is a qualitative study in applying data analysis and semi-structured interview approaches. Data was collected from various documents including journals, articles and past studies conducted by scholars. To achieve the purpose of this study, the data is analysed based on thematic analysis.
Findings
The study found several Shariah issues regarding the implementation of tawarruq contract in the IPRS instruments, which have remained a dispute amongst the Islamic financial scholars such as its profit-making purpose, encouragement of debt, impediment of shared risk concept, disputed underlying assets, a deception towards allowing riba and dual agency.
Research limitations/implications
This study recommends several improvements such as the establishment of a neutral agency that does not represent any banking institution to manage the tawarruq contract commodity purchase from Bursa Suq al-Sila’ (BSAS). In addition, a neutral agency can provide aid in terms of transaction facility or at least consultation service for clients to enable them to conduct the commodity transactions independently.
Practical implications
Moreover, guidelines should be established on the separation of the deadline to sign the agreement of appointment of a bank as the commodity purchase agent and the agreement of appointment of the bank as the commodity sale agent on behalf of clients. All transactions related to tawarruq contract commodity must be done through BSAS. The regulators and industry experts may create a guideline for the IPRS based on the issues and recommendations that have been discussed in this study.
Originality/value
On the basis of the analysis of the criticisms and issues in the implementation of tawarruq contract in the IPRS instrument, the current study found that an intermediating institution is allowed to gain profits from transactions conducted so long as they are based on Shariah principles of contract in Islam. As there is no parameter specifically for IPRS, thus the suggested parameter can be used by policymakers such as the Central Bank of Malaysia to ensure the industry complies with Shariah principles.
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Essia Ries Ahmed, Md Aminul Islam, Tariq Tawfeeq Yousif Alabdullah and Azlan bin Amran
The purpose of this paper is to find applicable Islamic pricing benchmarks (IPBs) instead of the market interest rates which are currently used in Islamic finance as benchmark.
Abstract
Purpose
The purpose of this paper is to find applicable Islamic pricing benchmarks (IPBs) instead of the market interest rates which are currently used in Islamic finance as benchmark.
Design/methodology/approach
The suggested model (Islamic pricing benchmark model (IPBM)) obviously reveals the feasibility and practical effectiveness of a substitute to London Interbank Offered Rate (LIBOR) and as an evaluator tool to suggested investment projects. The model is a suggested mechanism which could be used as an alternative choice to the conventional borrowing based on the forbidden Riba or on interest. The suggested IPBM depends on estimating the rate of return for any project on consideration of the cash flows in future which is expected to be relative to the invested capital.
Findings
The IPBM approach might be applied to financial tools, where the fund owner bears the loss since it is not because of negligence. An instrument to help identify the investment for target rates of return (as an alternative choice to LIBOR) to identify a breakeven point based on expected cash flows for the project to be financed instead of based on seeking the indicators of interest or Riba (as LIBOR). This feature of the IPBM model as an Islamic benchmark renders it as a Shariah pricing mechanism for the Islamic financial products.
Practical implications
The IPBM could be used as a financial instrument to assist in identifying the investment for the target return rates to determine a breakeven point based on expected cash flows for the project to be funded instead of being based on seeking the interest indicators or Riba (as LIBOR). This feature as an Islamic benchmark is considered as a Shariah pricing mechanism for the Islamic financial products. In particular, the proposed model incorporates the Shariah parameters. In that, it is hoped that the Islamic financial instruments will be more comprehensive in their Shariah compliance and thereby may bring more credibility to the Islamic financial system in general.
Originality/value
This paper highlights several important issues related to the IPBMs in Islamic financial institutions which are not widely discussed among researchers. This study contributes to finding an alternative IPB for the Islamic financial products which is currently using the conventional interest rate (LIBOR) as its benchmark. The current study provides empirical evidence for the possibility of relying on the IPBM as an Islamic benchmark to price Islamic financial transactions.
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Md. Faruk Abdullah and Asmak Ab Rahman
The objective of the chapter is to discuss the role of wa’d (promise) to mitigate risk in different Islamic banking products. The chapter will illustrate the element of wa’d in…
Abstract
Purpose
The objective of the chapter is to discuss the role of wa’d (promise) to mitigate risk in different Islamic banking products. The chapter will illustrate the element of wa’d in different Islamic banking products in Malaysia.
Methodology/approach
The study has adopted the document review method to get information on different banking products. Moreover, it conducted semi-structured interviews with bankers to get in-depth information.
Findings
The study finds out that wa’d plays a vital role in structuring several products including retail products, trade financing products, and treasury products. Along with the unilateral wa’d there is a usage of double wa’d (wa’dan) in some product structures. In most of the products, wa’d is included as a risk mitigation instrument along with other major underlying Shari’ah contracts. Some Shari’ah issues are involved with these products namely the Shari’ah rulings related to wa’dan, “form over substance,” etc.
Originality/value
This is an in-depth field study which adds new knowledge on wa’d-based products. The experience of Malaysia might be a lesson for other countries to minimize risk in their Islamic banking products.
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Fauziah, Taib and Mansor Isa
This paper seeks to focus on examining unit trust performance in Malaysia over the period 1991‐2001.
Abstract
Purpose
This paper seeks to focus on examining unit trust performance in Malaysia over the period 1991‐2001.
Design/methodology/approach
The broad based study covers full economic cycles using 7 different performance measures: raw return, market adjusted return, Jensen's alpha, adjusted Jensen's alpha, Sharpe Index, adjusted Sharpe Index, and Treynor Index.
Findings
The results show that on average the performance of Malaysian unit trust falls below market portfolio and risk free returns. However, the variance of unit trust monthly returns is less than the market. Performance by type of funds indicates that bond funds show relatively superior performance, over and above the market and equity unit trusts. This is due to the high interest rate kept during the crisis period. Findings also suggest that there is no persistency in performance as there is no significant inter‐temporal correlation between past and current performance.
Research limitations/implications
The issue of inferior performance needs further investigations to adjust for great importance placed on maintaining consistent dividend distribution. In addition, ill‐managed funds must be separately analysed to see if limited budget, less qualified managers, use of limited information and less sophisticated software could explain the poor performance.
Practical implications
A very useful source of information for potential investors and portfolio management companies looking for opportunities to invest.
Originality/value
The paper contributes to the present body of knowledge by offering broad based performance evidence from an emerging market with strong government back up for unit trusts investment.
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The purpose of this paper is to emphasize that interest-rate benchmark cannot be used for pricing of Islamic financial products. This paper will help in pricing basis for Islamic…
Abstract
Purpose
The purpose of this paper is to emphasize that interest-rate benchmark cannot be used for pricing of Islamic financial products. This paper will help in pricing basis for Islamic financial products, which are currently based on interest-rate benchmarks. Shariyah perspective and ground realities are considered as evident to the viewpoint.
Design/methodology/approach
Viewpoint has been evident through comparison of conventional and Islamic financial product pricing, and through comparison of interest rate with macroeconomic indicators to analyze whether interest really represent economy, since Islamic finance based on real economic activities.
Findings
It has been analyzed that interest based benchmarks do not represent real economic activities.
Originality/value
This paper brings new light to the product development in Islamic financial instruments and institutions. Islamic finance should have its own footings in terms of product development.
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Md. Faruk Abdullah and Asmak Ab Rahman
– The study aims to consider wa’dan-based products in Islamic banks in Malaysia and discuss the validity of wa’dan in those products from the perspective of Shari’ah.
Abstract
Purpose
The study aims to consider wa’dan-based products in Islamic banks in Malaysia and discuss the validity of wa’dan in those products from the perspective of Shari’ah.
Design/methodology/approach
Case studies were conducted of three Islamic banks in Malaysia. Semi-structured interviews were carried out with bankers as well as Shari’ah scholars. The document analysis method was adopted to strengthen the findings.
Findings
The study shows that three Islamic banking products: Musyarakah Mutanaqisah (MM) home and property financing; Al-Ijarah Thumma Al-Bai’ (AITAB) vehicle financing; and Ijarah rental swap (IRS) use wa’dan in their product structures. After discussing the different views of the scholars, the study concludes that wa’dan should be allowed in the above-mentioned products because it is different from muwa’adah. In wa’dan, every single wa’d is separate from each other, as every one of them is related to different types of events. With regard to the issue of Shari’ah in MM home and property financing, it was concluded that wa’d from the customer to purchase the bank’s share is not a capital guarantee. Moreover, IRS is not a form of gambling but is in line with Maqasid al-Shari’ah.
Research limitations/implications
The study is limited to three Islamic banks in Malaysia that focus on retail and commercial banking products. Therefore, the study excludes application of wa’dan in sukuk and some other Islamic derivatives that are not the practice of these three banks.
Originality/value
This empirical study adds new knowledge by developing the concept and practice of wa’dan. Wa’dan as an innovative tool for product development to overcome Shari’ah issues in conventional banking may be of interest to practitioners all around the world.
Abdelmonem Oueslati and Yacine Hammami
This paper aims to investigate the performance of various return forecasting variables and methods in Saudi Arabia and Malaysia. The authors document that market excess returns in…
Abstract
Purpose
This paper aims to investigate the performance of various return forecasting variables and methods in Saudi Arabia and Malaysia. The authors document that market excess returns in Saudi Arabia are predicted by changes in oil prices, the dividend yield and inflation, whereas the equity premium in Malaysia is predicted only by the US market excess returns. In both countries, the authors find that the diffusion index is the best forecasting method and stock return predictability is stronger in expansions than in recessions. To interpret the findings, the authors perform two tests. The empirical results suggest irrational pricing in Malaysia and rationally time-varying expected returns in Saudi Arabia.
Design/methodology/approach
The authors apply the state-of-the-art in-sample and out-of-sample forecasting techniques to predict stock returns in Saudi Arabia and Malaysia.
Findings
The Saudi equity premium is predicted by oil prices, dividend yield and inflation. The Malaysian equity premium is predicted by the US market excess returns. In both countries, the authors find that the diffusion index is the best forecasting method. In both countries, predictability is stronger in expansions than in recessions. The tests suggest irrational pricing in Malaysia and rationality in Saudi Arabia.
Practical implications
The empirical results have some practical implications. The fact that stock returns are predictable in Saudi Arabia makes it possible for policymakers to better evaluate future business conditions, and thus to take appropriate decisions regarding economic and monetary policy. In Malaysia, the results of this study have interesting implications for portfolio management. The fact that the Malaysian market seems to be inefficient suggests the presence of strong opportunities for sophisticated investors, such as hedge and mutual funds.
Originality/value
First, there are no papers that have studied the return predictability in Saudi Arabia in spite of its importance as an emerging market. Second, the methods that combine all predictive variables such as the diffusion index or the kitchen sink methods have not been implemented in emerging markets. Third, this paper is the first study to deal with time-varying short-horizon predictability in emerging countries.
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