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This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative financial strength of Islamic banks and their contribution toward the financial stability. They also examine the relationship between the competitive conduct of banks and banking system stability.

The authors use quarterly data of ten conventional banks, four full-fledged Islamic banks and six standalone Islamic branches of conventional banks of Pakistan for the period 2006-2012. The z-score has been computed and used as the measure of stability of banks and the random effects estimator applied to quantify the impact of bank-specific variables and macroeconomic indicators on the financial stability. The empirical framework used in the paper enables the authors us to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks. To check the robustness of the results, the authors have estimated several models with different specifications.

The regression results indicate that income diversity, profitability ratio, loan to asset ratio, asset size and the market concentration ratio of banks have significant effects on the stability of banks. Comparing Islamic and conventional banks, notable differential effects of the empirical determinants of financial stability for Islamic and conventional banks have been observed. The results suggest that Islamic banks have performed better as compared to conventional banks and contributed more effectively in the stability of financial sector. Overall, the results depict that the contribution of Islamic banks toward the financial stability has been reasonable and prospective.

The empirical results of the paper are very useful not only for banks’ managements but also for the investors, bank customers and policymakers. Specifically, the findings help in enhancing our understanding as to how the bank-specific variables and macroeconomic indicators are related to the financial stability of the banking system. The results also help understand the role of both Islamic and conventional banks in the financial stability. Further, the results suggest that the financial soundness can be enhanced by creating healthy competition in the banking industry. The results about macroeconomic indicators imply that protective measures are required to intensify (mitigate) the positive (negative) effect of gross domestic product (inflation) on banks’ financial stability.

This paper provides an overall comparative analysis of financial stability of both Islamic and conventional banks of Pakistan. First, the paper computes the z-score for each bank included in the sample, and then, it performs the regression analysis to study how bank-specific variables and macroeconomic factors are related to the financial stability of banks. Unlike the previous studies, our empirical framework enables the authors to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks.

The purpose of this paper is to find out the possible gaps in the Sharīʿah governance, and suggest how to fill the same, in line with the principles of Islamic finance and the global developments regarding social and value-based financial intermediation.

The paper uses secondary data gathered through analysis of documents and regulations to portray the current Sharīʿah governance framework and to suggest a unique paradigm to be adopted by the regulators of Islamic financial institutions.

The paradigm encompassing value-oriented financial ecosystem would need a comprehensive set of discipline, accountability and governance for making the pursuit of sustainable development goals and corporate social responsibilities effective in a well-defined schedule prepared and implemented by the regulators.

The scope of this research is limited to theory building in the light of emerging trends in responsible and social finance. It is not to empirically test the impact of the governance framework in terms of social justice, corporate responsibility and sustainability.

It would help the policy makers, regulators, researchers and the practitioners in finance to align banking and finance with social and environmental responsibility, and equity through governance and accountability for realizing the sustainable development goals.

It links the regulatory approaches to the emerging paradigm and ecosystem comprising sustainability and value-based governance, awareness and corporate social responsibility.

The paper adds value to the current regulatory frameworks enabling the Islamic financial institutions to realize the economic, social and sustainability objectives, in addition to Shariah legitimacy and enhanced credibility.

The unique characteristic of Islamic bank leads in governance and disclosure. Using stakeholder, signaling, and market discipline theory, governance and adequate disclosure may increase bank soundness. This study aims to investigate the relationship of sharia disclosure and Sharia Supervisory Board in influencing Islamic bank soundness in the different regulatory framework of the country. Using purposive sampling, the research covered 84 Islamic banks in 16 countries during the period 2013–2015 with lag data of Islamic bank soundness. The result shows sharia disclosure influences on Islamic bank soundness for management efficiency, capital adequacy ratio, asset quality, and liquidity. The results also show that sharia disclosure mediates the indirect effect of SSB on Islamic bank soundness. The regulatory framework (sharia accounting standard and SSB regulation) shows moderating effect of regulation framework proved on the association of sharia disclosure with management efficiency, capital, and liquidity. The effect is indirectly depending on the regulatory framework for proxy management efficiency, capital, and liquidity. The implication of the research suggests that sharia disclosure could increase the market discipline mechanism of Islamic bank stream. The Islamic bank can increase the transparency using sharia disclosure as a branding for increasing public trust, even though in the deficient Islamic bank regulation countries.

This study aimed at exploring the differential effects of different corporate governance (CG) indicators on risk management practices in Islamic financial institutions (IFIs) and conventional financial institutions (CFIs) of Pakistan. It also investigated the moderating role of institutional quality (IQ) in shaping the effects of CG practices on financial institutions of Pakistan.

A sample of 57 financial institutions including commercial banks, insurance companies and Modarba companies over the period 2006–2017 is used to carry out the empirical analysis. The authors applied the robust two-step system-generalized method of moments estimator, which is also called the dynamic panel data estimator. They also built the PCA-based composite index of CG and IQ by using different indicators to investigate the moderating role of IQ. They used three proxies for risk taking, five for CG and one for Shari’ah governance. To test the validity of the instruments, they applied the Arellano and Bond’s (1991) AR (1) and AR (2) tests and the J-statistic of Hansen (1982).

The results provided strong evidence that several individual characteristics of CG and the composite index are significantly related to the operational risk, the liquidity risk and the Z-score (a proxy for solvency risk). The results also revealed that IQ significantly and substantially contributes in reducing the level of risks. Finally, the estimation results indicated that the effects of CG on risk management are significantly different at IFIs and CFIs. This differential impact is mainly attributed to the fundamental differences in business models, operational strategies and contractual obligations of both types of institutions.

The findings of this study are important for enhancing our understanding of how CG relates to risk taking in Islamic and conventional financial services industries and how good quality institutions are important for formulating the governance effects on the risk-taking behavior of financial institutions. The findings suggest that a suitable size of board should be chosen to manage the risk effectively. As the findings show that the risk-taking behavior of IFIs differs from that of CFIs, the regulators and international standard setting bodies should tailor the regulatory frameworks accordingly.

This paper is different from the existing studies in four aspects. First, to the best of the authors’ knowledge, this is the first empirical investigation in Pakistan, which does the comparison of IFIs and CFIs while examining the impacts of CG on risk management. Second, the paper constructs the composite index of CG by considering several different indicators of governance and examines the combined effect of governance indicators on risk management process. Third, this paper adds to the growing literature on the role of IQ by investigating whether it acts as a moderator between CG structures and risk management and if yes, then whether this moderating role is different for IFIs and CFIs. Finally, the paper builds upon the existing research work on the CG effects for different types of financial institutions by proposing a single regression based analytical framework for comparing the effects across two different types of institutions, harvesting the benefits of higher degrees of freedom and avoiding/minimizing the measurement error.

Sharia compliance states that the compliant company operates not only under regulations but also to the restrictions and permission of Islam. This study aims to reveal whether Sharia compliance enhances the financial reporting quality.

The sample is constructed from 15 Muslim majority countries, 2,300 companies for the periods between 2005 and 2017 with 23,810 firm*year observations. Financial reporting quality is measured with discretionary accruals and audit aggressiveness. Discretionary accruals is the absolute of Kothari, Leone and Wasley’s (2005) “performance matched discretionary accruals model.” Audit aggressiveness is calculated with Gul, Wu and Yang’s (2013) model.

This study reveals the behavioral differences in financial reporting quality between Sharia-compliant and non-compliant companies. According to the analyzes, Sharia compliance increases the financial reporting quality by decreasing the discretionary accruals and audit aggressiveness. This result is supported by the robustness tests.

Sharia compliance is not limited to business activity, financial restrictions and supervisory board for Sharia-compliant companies. It also enhances the companies’ financial reporting quality. Robustness analysis also showed that the International Financial Reporting Standards (IFRS) increases the financial reporting quality by reducing discretionary accruals and audit aggressiveness.

This study contributes to the accounting literature by providing an insight on the use of Islamic financial instruments. The empirical results also show that the use of IFRS and Islamic financial instruments decreases the discretionary accruals and audit aggressiveness.

This study aims to investigate and propose the potential practice of hibah al-ʿumra as a Shari‘ah-compliant policy that would encompass the disbursement of death benefits and facilitate their smooth distribution among the projected beneficiaries of the family Takāful.

This study uses a qualitative approach. It conducts semi-structured interviews with different Takāful practitioners in Malaysia. This study also consulted a few Shari‘ah scholars regarding their opinions on the application of hibah al-ʿumra in disbursing family Takāful benefits. The thematic analysis is carried out to analyse qualitative data.

From both Shari‘ah and the relevant industry perspectives, the notion of hibah al-ʿumra has a great potential to disburse the family Takāful benefits to the Takāful participants or nominated beneficiaries. Given the conditional nature of hibah in Takāful, it is argued that there is a scope for imposing some conditions to make hibah al-ʿumra a life grant gift. This is expected to play a significant role in resolving the issues relating to the disbursement of family Takāful benefits among the beneficiaries, where it becomes irrevocable.

In the current practice of family Takāful, in the event of the recipient’s death or divorce, the application of absolute hibah results in the disbursement of Takāful benefits among undesirable beneficiaries. In contrast, in hibah al-ʿumra, it is expected that subject to a condition of withdrawal, its practice would help manage any unwanted situation if other potential beneficiaries are nominated upon signing the agreement at the outset.

This study is expected to contribute to help channel the family Takāful benefits into the desired beneficiaries being the proposed hibah al-ʿumra as a form of conditional hibah. Besides, this type of hiba can be treated as a solution in any adverse situation.

God promised pious individuals who obey to His commandments, to increase their economic well-being. Although it is difficult to demonstrate with figures in hand this causality relationship, Muslims must believe in its existence and robustness at both the individual and collective levels, as it is argued in Qur'an and the Prophetic Narration. We aim in this paper to model this positive relationship between Islamic work ethics and economic growth and prove theoretically its existence.

We develop an endogenous growth model very close technically to Lucas–Uzawa model (1988) in which the human capital defined as the individual's skill level acquired through formal education and learning by doing is replaced by ethical capital (piety).

The model proves theoretically that Islamic ethics are a key engine of endogenous economic growth and that the underdevelopment of Muslim populations is due to their low ethical capital (lack of piety).

The study recommends some policies such as providing formal religious education at all educational levels (elementary, secondary and higher levels) and promoting ethical values such as piety, sincerity, transparency, etc., through media and cultural institutions. Also, managers could provide courses and training to their workers to teach them Islamic work ethics.

This paper is the first to mathematically model Islamic work ethics as endogenous phenomena in socioeconomic systems and study theoretically their contributions to economic growth.

Co-creation fosters customer’s involvement for innovation in products/services and is used as a tool to develop competitive edge for better entrepreneurship. Based on limited evidence, the study aims to examine the factors contributing to the co-creation and the relationship of co-creation with customer satisfaction.

A sample of 384 customers from selected banks in Pakistan was selected. The study adopted quantitative, explanatory and cross-sectional research design. Structural equation modeling is used for analysis.

The results revealed a positive and significant relationship between co-creation with customer satisfaction. Further results revealed that access to information, risk assessment and transparency have a positive relationship with co-creation for innovation. The study is significant for customers and management of banks to understand the implications of co-creation to increase customer satisfaction.

Few banks with a small number of customers were selected for the study.

Managers must consider customer’s access to information, risk assessment and transparency of information as necessary factors for co-creation that foster innovation and entrepreneurial opportunities because co-creation strengthens customer satisfaction.

Adopting the co-creation process brings long-lasting harmony between customers and banks, and customers may consider the banks as being socially responsible by inviting the opinions of their customers.

Model is re-tested in the context of Pakistani banks with selected variables affecting co-creation for innovation. Moreover, the relationship of co-creation with customer satisfaction is examined.

The purpose of this paper is to investigate the effect of earnings quality on banking stability in Gulf Cooperation Council countries. First, the author isolates the discretionary loan loss provision (DLLP) to investigate the impact of total LLP, DLLP, discretionary accruals and a small positive variation in net income on bank stability. Second, the author investigates differences that may exist between Islamic banks (IBs) and conventional banks (CBs) in terms of the impact of DLLP on bank stability.

This research is based on unbalanced panel data for 39 IBs and 64 CBs in the six Gulf Cooperation Council countries over the 2000–2014 period.

The findings indicate that the extent of stability is negatively associated with the level of DLLP. This study also found significant differences between the two banking sectors in the effect of DLLP on bank stability.

This study has various practical implications. First, it provides insights for governments and regulators about introducing instruments like borrower restrictions and dynamic provisions to reduce LLP, because it negatively affects banking stability. Second, bankers should carefully assess the effects of their LLP strategies to overcome any negative effects. Third, the findings are also relevant to shareholders, investors and bank customers. More specifically, the results will help to improving their understanding of how LLP is not a financial strength and it is subject to managers’ opportunism that can lead to a financial instability. Finally, this study’s results encourage researchers to investigate an unexplored question, namely, the procyclicality of LLP and its determinants and effects.

To the best of the author’s knowledge, this is the first study to investigate differences that may exist between Islamic and CBs in terms of the impact of DLLP on bank stability.

The purpose of this research is to compare the board quality's (BQ) impacts on the financial performance (FP) of conventional and Islamic banks (IBs) after the Subprime financial crisis. The main reason is to help financial stakeholders choose the best performing and most appropriate bank type with its engagement based on the BQ index.

Based on the existing gap in previous researches and by using the GLS method (Generalized Least Squares method), the author compared the BQ's impacts on the FP of conventional and IBs. Settings of the FP and BQ were collected from 30 countries located on 4 continents. Two equal samples were tested; each of them is composed of 112 banks. The author concentrated only on the banks that have published regularly the banks' annual reports over the period 2010–2018.

Cylindrical panel results revealed that in conventional banks (CBs), the BQ has negatively affected banks' FP, while in IBs the BQ's impacts on the banks’' FP is ambiguous. Nevertheless, the positive impacts are more significant on the IBs' FP than the negative impacts on the IBs' FP.

The main practical contribution is the identification and distinction between the impacts of board determinants' quality on the shareholders' profits in the case of conventional and IBs. Hence, conventional or IBs which have a bad BQ will generate less FP and will be classified as a lender of bankruptcy danger for the bank customer. Besides, whatever the bank type, in a financial stable period, good BQ positively influences FP and provides a good impression to stakeholders. Otherwise, FP indicates that the banks suffer from the weaknesses of the board quality determinants.

Returning to the finance and banking governance literature, the author's article provides the first conditional and demonstrative analysis that detailed a logical comparative process to analyze the correlation between the board determinants' quality and the financial performance of conventional and IBs. However, previous research has always discussed the main role of the board as an internal governance mechanism on the FP separately in each bank type.