Search results

This paper aims to compare the rebate computation in Islamic sale-based financing contracts as proposed by Bank Negara Malaysia (BNM) in its guidelines on ibrāʾ (rebate) – with the rebate computation in conventional finance that is applicable to conventional loans, thus examining if there is a significant difference between the two approaches.

The paper employs the qualitative analysis method, involving review and discussion of relevant literature. Subsequently, a quantitative analysis is utilized to compare both rebate computations: the one proposed by BNM for Islamic sale-based financing contracts and the conventional finance computation that is utilized in conventional loans.

BNM's rebate computation for debts resulting from sale-based financing contracts does not differ from the conventional finance rebate computation applied to conventional loans; such similarity may raise the usury concerns that the conventional finance rebate computation raises.

The paper focuses only on the fixed profit rate rebate computation proposed by BNM guidelines.

The results highlight the need for seeking another rebate computation to be applied in Islamic financial institutions in the case of mandatory bilateral rebate for sale-based financing contracts – a computation that differs from the practice utilized in conventional loans in order to avoid any usury implications associated with conventional finance computation.

The paper examines the rebate practice proposed by BNM for sale-based financing contracts. Forcing a predetermined rebate computation in sale-based financing contracts could be plausible as BNM requires; however, the suggested computation might be questionable because it resembles conventional finance computation.

This paper aims to study a strategic decision of banks in Thailand to signal their types to the market and derive the optimal credit derivatives contract to guarantee their loans and credibly signal their quality under different economic determinants, namely, the maximum credit risk investment constraint, opportunity cost and opaqueness of the credit derivative market.

Contract theory is deployed to derive the expected payoff of different bank types under different economic and financial constraints. Hence, different bank types offer derivatives contracts to signal their loan quality and resell their loans in the secondary loan markets of Thailand.

The optimal derivatives contract is constructed on a basis of asymmetric information when banks have more private information concerning quality of their loans. A digital credit default swap is an optimal derivatives contract to send credible signal when banks are restricted to the maximum investment constraint. Moreover, profit of banks is reduced, as the optimal derivatives contract is more costly when banks are subjected to positive opportunity cost and opacity of the credit derivatives market. These results depict impact of changes of the maximum credit risk investment constraint on Thai credit derivatives market.

The optimal credit derivatives design that signifies bank types and facilitates loan purchase agreement has not been studied in Thai secondary loan markets before. In addition, this study provides insights of banks' strategic decisions to signal their types and transfer risk to risk buyers in Thai markets.

The purpose of this paper is to fill this void in the existing literature and investigate how firms’ disclosure policies influence bank loan contracting in emerging markets after controlling for the influence of borrowers’ private information obtained by banks. Furthermore, the paper examines how firms’ disclosure and non-disclosure governance interact to affect financial contracts.

The key variables Disclosure and Firm Governance are based on a survey by Credit Lyonnais Securities Asia (CLSA) in 2000. The paper hand-merges CLSA disclosure and governance data with the Dealscan database and Worldscope database by firm names. The paper conducts a multivariate analysis to investigate how firms’ disclosure policies influence bank loan contracting and how firms’ disclosure and non-disclosure governance interact to affect financial contracts.

The authors found that firms with superior disclosure policies obtain bank loans with more favorable loan contracting terms, such as larger amounts, longer maturity, and lower spread. In addition, the effects of disclosure on bank loan contracting are more pronounced for borrowers with superior firm-level non-disclosure governance or firms located in a country with better country-level governance.

The paper provides a more comprehensive view of the effects of corporate disclosure has on financial contracts in emerging economies.

The authors construct two time-varying political connection (PC) indexes to measure a firm's political tendencies toward ruling and opposing parties and analyze whether a firm with ruling party tendencies obtains better bank loan contracts compared to the contracts obtained by a firm with opposing party tendencies and a firm with fixed PC tendencies.

Linguistic text mining is used to construct the two time-varying PC indexes from news sources that reflect the tone and frequencies of characteristic texts to determine a firm's tendencies to favor the ruling or opposing parties.

The results show that varying PC firms connected to the ruling party receive preferential loan contracts when their political tendencies increase but varying PC firms connected to the opposition party do not. In contrast, fixed PC firms gain similar benefits only when the connection is determined in the presidential election year but not in other years. Firms supporting two parties receive minimal financial rewards in terms of loan terms.

In past studies, once a firm is identified as having a connection with a political party, it is assumed to have PC throughout the sample period (i.e. fixed PC firms). The authors lift this assumption and examine how varying PC affect bank loan contracts. The two time-varying PC indexes can identify a firm's more immediate party tendencies and more precise effects of a firm's party tendencies on bank loan contracts.

The purpose of this paper is to examine the effect of a firm’s customer base concentration on its loan contract terms and how this effect varies with the strength of its customer relationship.

This study is an archival research based on a sample of US public firms that have loan contract data between 1990 and 2008. Major customer sales data are used to construct customer concentration and customer relationship measures. A debt contract model is employed to relate loan spread and other contract terms to customer concentration and relationship.

This study finds that firms with more concentrated customer bases have higher loan spread and shorter loan maturity and are more likely to issue secured loans. These negative effects disappear when the supplier firm maintains strong relationship with its customers.

Additional forward-looking measure of customer relationship could benefit future research.

A firm’s customer base characteristics can have significant impacts on the terms of its loan contracts. Findings from this study support the notion that customer relationship is an important intangible asset that is informative to stakeholders of the firm.

This study proposes a new measure of customer relationship based on the past repeated relationships between a firm and its major customers. It shows that customer characteristics may affect firms’ contracts with creditors: customer base concentration increases credit risk whereas strong customer relationship improves credit quality.

The purpose of this paper is to examine how a firm’s investment behavior relates to its subsequent bank loan contracting.

Using a sample of US firms during the period 1992-2011, the authors examine the association between overinvestment (underinvestment) and three characteristics of bank loan contracts: loan spread, collateral requirement, and loan maturity.

The authors find that overinvesting firms obtain loans with higher loan spreads. Additional tests show that the effect of overinvestment on loan spreads is generally more pronounced in firms with lower reputation, weaker shareholder rights, and lower institutional ownership. The effect of overinvestment on collateral requirement is mixed, and investment efficiency has no significant relation to loan maturity.

The results are subject to the following caveats. First, while the study provides empirical evidence that investment efficiency affects bank loan contracting terms, especially the cost of bank loans, the underlying theory is not well-developed. The authors leave it up to future research to provide a theoretical framework to clearly distinguish the cash flow and credit risk effects of past investment behavior from those of existing agency conflicts. Second, due to data limitation, the sample size is small, especially when the authors control for corporate governance measured by G-index and institutional ownership.

The finding that overinvestment is costly to corporations suggests that managers should consider the potential trade-offs from such investment decisions carefully. The evidence also alerts shareholders and board members to the importance of monitoring management investment decisions. In addition, the authors find that corporate governance moderates the relationship between investment decisions and cost of bank loans, suggesting that it would be beneficial to design effective governance mechanisms to prevent management from empire building and motivate managers to pursue efficient investment strategies.

First, the findings enhance understanding of the potential economic consequences of overinvestment decisions in the context of a firm’s private debt contracting. The evidence suggests that lenders perceive higher credit risk from overinvestment than from underinvestment, likely because firms squander cash in the current period by investing in (negative net present value) projects that are likely to result in future cash flow problems. Second, the study contributes to the literature on the determinants of bank loans by identifying an observable empirical proxy for uncertainty in future cash flows that increases credit risk.

This paper aims to examine how a firm’s political party orientation (Republican or Democratic), which is measured as the composite index based on the political party leanings of top managers, affects bank loan contracts. This study also investigates how the political culture of local states has a significant impact on loan contracts.

This research uses various databases including the Loan Pricing Corporation’s DealScan database, financial covenant violation indicators based on the Securities and Exchange Commission (SEC) filings, firm bankruptcy filings and political culture index data to examine the impact of political orientation on the cost of debt. This paper also includes the state level of gun ownership and bachelor’s degrees to investigate how local political culture affects the loan contract. To control endogenous concerns, this paper uses an instrumental variable analysis.

Firms that have Republican-oriented political identities pay lower yield spreads for the main costs of debt including all-in-spread-drawn and all-in-spread-undrawn. This pattern is consistent with other fees of bank loans. This paper finds that an increase in conservative political policies toward Republican orientations is negatively associated with the cost of debt. The main findings also show that the political culture in the state where the headquarters of the borrowing firm are located plays an important role in bank loan contracts.

The findings in this paper provide evidence that a firm’s political party orientation significantly affects the loan contract terms in both pricing and non-pricing terms. To the best of the author’s knowledge, this is the first study that shows the importance of political party identification on loan contracts by separating the sample into Republican, neutral and Democratic.

The current credit rationing strongly influences the viability of SMEs innovation projects. In this context, the practice of screening borrowers by project success probability has become a paramount consideration for both lenders and firms. The aim of this paper is to test the screening role of loan contracts that consider collateral-interest margins simultaneously.

This paper presents an empirical analysis that uses a unique data set composed of 323 bank loans granted by 28 banks to SMEs backed by a Spanish Mutual Guarantee Institution.

The results show that appropriate combinations of collateral and interest rates can distinguish between borrowers with different project success probability: low success probability borrowers finance its projects without collateral and with high interest rates, whereas high success probability borrowers accept loans with real estate collateral and low interest rates.

This screening mechanism reduces credit rationing, thus increasing good projects' access to credit.

This study provides the first empirical evidence on the effectiveness of collateral-interest pairs as a self-selection mechanism.

An important question is whether lenders perceive politically connected firms as having less or higher default risk, and thus provide them with more or less preferential loan terms compared with non-connected firms. This paper aims to examine the relationship between political connections of corporate board members and cost of debt and loan contracting in the Gulf Cooperation Council (GCC) countries.

The initial sample comprises 288 GCC firm-year observations from 227 publicly listed firms in Oman, Qatar, Saudi Arabia and United Arab Emirates for the period from 2011 to 2015. It includes all the GCC publicly listed firms, excluding those in the financial, insurance and banking sectors because these entities are subject to different regulations. The ordinary least squares, logit regression and other sensitivity tests have been used to analyse the data and enhance reliability of the results.

This study finds that politically connected firms, particularly those connected through ruling royal family members, are associated with lower cost of debt, greater amounts of loans and longer-term government loans. Therefore, these findings support the prediction that political connections benefit GCC firms in the form of access to favourable terms from both government and commercial banks.

This study contributes to the extant literature by providing insightful analysis using unique political features of the GCC, integrated with agency and resource dependency theories. In particular, this study fills the gap in understanding the nature of loan contracting offered by government and commercial banks in the presence of politically connected boards within GCC setting.

The purpose of this paper is to analyze the issue of bayʿ wa salaf (the combination of sale and loan contracts in a single arrangement) from the Sharīʿah perspective. Based on the Sharīʿah findings on the issue, the paper examines the existing Islamic banking products and services that use these two specific contracts to determine whether the current practice is in line with Sharīʿah.

The paper uses the qualitative method by reviewing and analyzing relevant literature and operational structures to comprehend the issues pertaining to bayʿ (sale) and salaf (loan). It then provides Sharīʿah parameters for bayʿ wa salaf before applying them in assessing some existing Islamic banking products and practices. Subsequently, the compliance status of the banking operations that use these contracts in a specific product structure can be ascertained.

The paper finds that the bayʿ wa salaf arrangement in the existing Islamic banking products and services, as elaborated in the paper, does not fall under the prohibited category. This deduction is made in accordance with the parameters derived from jurists’ discussion on the issue of bayʿ wa salaf. It also takes into consideration other factors influencing the existence of such arrangements.

This conceptual research highlights the jurists’ discussion on the issue of bayʿ wa salaf and the compliance status of the current products and services that use the contracts in a single arrangement (specifically in the case of Malaysia) without discussing other possible structures that can be applied as an alternative to the bayʿ wa salaf arrangement.

Thorough understanding of the issue can strengthen the industry’s confidence in executing operations that conform to Sharīʿah principles.

The paper provides comprehensive deliberation on the ruling of bayʿ wa salaf from various schools of thought and exhaustive elaboration on existing Islamic banking products that apply bayʿ wa salaf in their structures. This contributes in reinforcing the stakeholders’ confidence in the operations of Islamic banking and finance.