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1 – 10 of 101Kaouther 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.
Reports that, unlike Western commercial banks, Islamic banks are prohibited by Islamic precepts to receive or pay interest, inter alia, in all their transactions. Argues that the…
Abstract
Reports that, unlike Western commercial banks, Islamic banks are prohibited by Islamic precepts to receive or pay interest, inter alia, in all their transactions. Argues that the Basle capital adequacy ratio (CAR), which was implemented in 1992 by regulatory authorities in many countries, is irrelevant to Islamic banks because it does not accommodate, among other things, one of the major instruments ‐ investment accounts ‐ through which Islamic banks mobilize funds on the basis of profit sharing. Develops four possible scenarios for the treatment of these accounts in the calculation of CAR and examines their impact on the financial and marketing strategies of Islamic banks in the light of the risk‐return relationship between the funds contributors of these banks.
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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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The purpose of this paper is to examine the classification of profit-sharing investment accounts (PSIAs) under various accounting standards, and determine whether Islamic banks…
Abstract
Purpose
The purpose of this paper is to examine the classification of profit-sharing investment accounts (PSIAs) under various accounting standards, and determine whether Islamic banks maintain uniform practices when the same accounting standards are applied. It also aims to determine whether Islamic banks consider investment account holders (IAHs) important financial statement users by disclosing necessary information pertaining to PSIAs.
Design/methodology/approach
A sample composed of financial statements from 63 Islamic banks from 15 countries is compared with respect to the information related to PSIAs.
Findings
The results show heterogeneity of classification for PSIAs. Applying the same standards does not lead to the uniform classification of PSIAs when banks apply International Financial Reporting Standards, while financial statements applying Financial Accounting Standards by the Accounting and Auditing Organization for Islamic Financial Institutions are more similar. The perplexity in classifying PSIAs brings obscurity on the treatment for PSIA-related accounts, particularly returns attributable to IAHs. The fact of fewer disclosures pertaining to PSIAs in Islamic banks – which apply accounting standards not specifically tailored to Islamic finance – suggests that IAHs receive less attention under those accounting standards.
Research limitations/implications
The main limitation relates to the lack of financial statements available online and the possibility of sample selection bias toward larger Islamic banks.
Originality/value
This research contributes to the limited literature on accounting for PSIAs, and reveals the diversity of reporting methods for unique transactions in Islamic banks and the insufficiency of current accounting standards to guide them, which create possible challenges of comparability.
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Jamshaid Anwar Chattha and Simon Archer
This paper aims to provide a methodology for designing and conducting solvency stress tests, under the standardised approach as per IFSB-15, including the establishment of…
Abstract
Purpose
This paper aims to provide a methodology for designing and conducting solvency stress tests, under the standardised approach as per IFSB-15, including the establishment of macro-financial links, running scenarios with variation of assumptions and stress scenario parameters; apply and illustrate this methodology by providing a stylised numerical example through a tractable Excel-based framework, through which Islamic Commercial Banks (ICBs) can introduce additional regulatory requirements and show that they would remain in compliance with all capital requirements after a moderate to severe shock; and identify the potential remedial actions that can be envisaged by an ICB.
Design/methodology/approach
The paper uses the data of the one of the groups to which certain amendments and related assumptions are applied to develop a stylised numerical example for solvency stress-testing purposes. The example uses a Stress Testing Matrix (STeM; a step-by-step approach) to illustrate the stress-testing process. The methodology of the paper uses a two-stage process. The first stage consists of calculating the capital adequacy ratio (CAR) of the ICB using the IFSB formulae, depending on how the profit sharing investment account (PSIA) are treated in the respective jurisdiction. The second stage is the application of the stress scenarios and shocks.
Findings
Taking into account the specificities of ICBs such as their use of PSIA, the results highlighted the sensitivity of the CAR of an ICB with respect to the changes in the values of alpha and the proportion of unrestricted PSIA on the funding side. The simulation also indicated that an ICB operating above the minimum CAR could be vulnerable to shocks of various degrees of gravity, thus bringing the CAR below the minimum regulatory requirement and necessitating appropriate remedial actions.
Practical implications
The paper highlights various implications and relationships arising out of stress testing for ICBs, including the vulnerability of an ICB under defined scenarios, demanding appropriate immediate remedial actions on future capital resources and capital needs. The findings of the paper provide a preliminary discussion on developing a comprehensive toolkit for the ICBs similar to what is developed by the International Monetary Fund Financial Sector Assessment Programme.
Originality/value
This paper focuses on the gap with respect to the stress testing of capital adequacy. The main contribution of the paper is twofold. The first is the development of an STeM – a step-by-step approach, which provides a method for simulating solvency (i.e. capital adequacy) stress tests for ICBs; the second is the demonstration of the potentially crucial impact of profit-sharing investment accounts and the way they are managed by ICBs (notably the smoothing of profit payouts) in assessing the capital adequacy of the ICBs.
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This paper aims to assess the effects of deposits structure and ownership structure on the GCC Islamic banks’ corporate governance disclosure (CGD) practices.
Abstract
Purpose
This paper aims to assess the effects of deposits structure and ownership structure on the GCC Islamic banks’ corporate governance disclosure (CGD) practices.
Design/methodology/approach
The study is based on a sample of 38 Islamic banks operating in five Gulf Cooperation Council (GCC) countries, and the authors observed them over the period from 2006 to 2011. The authors used the transparency and disclosure score, developed by Standard & Poor’s (S&P), to identify the sample’s CGD scores.
Findings
This paper’s findings suggest that the level of CGD is lower for Islamic banks with higher ownership concentration, for levered Islamic banks and for Islamic banks with greater concentration of nonprofit-sharing investment accounts (PSIA) and is higher for Islamic banks with greater concentrations of PSIA; the Islamic bank size; the bank age; listed bank and the country transparency index. By disaggregating the total CGD into the three sub-categories, the authors are able to specify, also, the components of corporate governance (CG) impacted by various determinants.
Research limitations/implications
This paper is subject to a number of limitations. First, there is manual scoring of annual reports (subjectivity). Second, the research focuses exclusively on the GCC context and excludes the other Middle East, Southeast Asia and Far East countries, where ownership structure and deposits structure might affect CGD differently. Third, the governance score, which is used in this research, is developed by S&P and does not take into account the characteristics of Islamic banks.
Practical implications
The findings of this paper suggest many policy implications. First, through the optimization of ownership structure, GCC countries’ regulators have to improve the Islamic banking system’s CG mechanisms through the optimization of ownership structure (dispersed ownership) to promote transparency and disclosure. Second, regulators and policymakers should revise guidelines with the main purpose of protecting PSIA’ holders (considered to be minor shareholders without voting power) through promoting disclosure and transparency. Third, the findings can be useful for many international supervisory bodies, like the Islamic Financial Services Board (IFSB) and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), in evaluating transparency and disclosure standards.
Originality/value
This study is expected to be useful for all market participants, namely, investors, financial analysts, managers, marker regulators and many international Islamic supervisory bodies, such as the IFSB and AAOIFI, by providing new requirements on CGD in the GCC region and in better understanding its determinants for Islamic banks in this region.
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Simon 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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The purpose of this study is to investigate the two components of market discipline, investment account holder (IAH) monitoring and the consequent reaction of the Islamic banks in…
Abstract
Purpose
The purpose of this study is to investigate the two components of market discipline, investment account holder (IAH) monitoring and the consequent reaction of the Islamic banks in GCC countries for the 2004–2013 period, including the recent financial crisis of 2008.
Design/methodology/approach
We address the research question that Investment Account holders (IAH) in GCC countries suc as Kingdom of Saudi Arabia (KSA), Bahrain and United Arab Emirates (UAE) monitor their banks. Regression analysis was used to examine the dependence level of profit-sharing investment account (PSIA) growth rate on bank risk characteristics (CAMEL variables). Then, the reaction of banks by regression influencing CAMEL variables of one-lagged period on PSIA growth rate was verified.
Findings
The results provide evidence of the first component of market discipline, i.e. the IAH monitoring, in KSA, Bahrain and UAE. The common result to the three countries is that market actors are concerned with accounting information on capital adequacy. However, in UAE, they are also interested in assets performance, whereas they look more at earnings in Bahrain. The results show evidence of the second component in Bahrain; the bank reaction to IAH monitoring and subsequently IAH discipline in Bahrain. Finally, the results do not support any impact of the financial crisis.
Research limitations/implications
The sample size is small although it is constituted by banks having a sufficient number of observations.
Practical implications
This study highlights the importance of IAH discipline, which would help prudential bank monitoring by regulators and wealth development for both investors and managers. It should increase the disclosure of relevant information as for the part of effective accountability of Islamic banks’ governance.
Originality/value
This study contributes to the literature on market discipline by dealing with Islamic banks. It is one of the very few studies to investigate IAH discipline in Islamic banks and the second component of market discipline, i.e. the influence of monitoring on banks.
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This paper aims to examine the effect of the concentration of ownership concentration and the deposits structure on the link between income structure and insolvency risk in…
Abstract
Purpose
This paper aims to examine the effect of the concentration of ownership concentration and the deposits structure on the link between income structure and insolvency risk in Islamic banks operating in Gulf Cooperation Council (GCC) countries.
Design/methodology/approach
Using data for 43 GCC Islamic banks over the period from 2005 to 2012, this paper specifies a three-stage least-squares model in which the impact of the concentration of ownership concentration and the deposits structure on income diversification and insolvency risk is jointly analyzed to address the problem of endogeneity.
Findings
The findings show that the income structure influences the insolvency risk in Islamic banks with a concentrated ownership structure. This is because the deposits structure and large shareholders influence strategic decisions.
Research limitations/implications
This paper is, also, subject to a number of limitations. First, this study focuses exclusively on the GCC context and excludes the other Middle East and Far East countries. Second, the paper does not take into consideration banking regulation.
Practical implications
The paper findings shed light on the ongoing debate about the benefits of revenue diversification and also provide valuable insights for market participants, regulators and supervisors about what drives performance in Islamic banks.
Originality/value
The paper fills the gap in the existing literature on insolvency risk in Islamic banks. It is expected to provide useful information for policy makers and Islamic bankers to develop a sound Islamic banking industry in the GCC region. In addition, the link identified between ownership concentration, deposits structure and revenue diversification is a novel way of analyzing the impact of the latter on insolvency risk in Islamic banks.
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The purpose of this paper is to empirically assess the impact of the principle of profit- and loss-sharing (PLS) on the exposure to liquidity risk of Islamic banks in Gulf…
Abstract
Purpose
The purpose of this paper is to empirically assess the impact of the principle of profit- and loss-sharing (PLS) on the exposure to liquidity risk of Islamic banks in Gulf Corporation Council (GCC) countries. The Islamic bank activity is distinguished by a PLS principle, which is likely to involve specificities in the bank liquidity issue.
Design/methodology/approach
This paper investigates the determinants of Islamic bank liquidity over the period 2005–2016 using a panel of 23 Islamic banks in GCC. The system of generalized method of moment estimators is applied.
Findings
The findings reveal that while profit-sharing investment accounts (PSIAs) are inversely proportional to Islamic bank liquidity, the PLS investment does not seem to act as a determinant of the bank liquidity. The fact that PSIAs are globally short-run accounts, but finance long-run projects leads to a substantial maturity mismatches, which limits the availability of liquidity buffer and exacerbates the bank’s exposure to liquidity risk. Moreover, capital adequacy ratio has significant and positive association with bank liquidity, as a strong capital ratio helps to strengthen the liquidity control. However, return on assets has a negative significant impact on bank liquidity. For instance, if the bank holds more cash, it deprives itself from placing funds and earning returns, which causes its profitability to decline.
Practical implications
This paper gives further insights to better improve the liquidity risk management in a context of scarcity of Shariah-compliant instruments. Islamic bank needs to determine the PLS purpose and goals to be consistent with the “bank’s financing policy” and convince its depositors to use their deposits for medium and long-run investments.
Originality/value
Unlike previous empirical research, this investigation tries to better grasp the Islamic bank liquidity issue by focusing on the PLS impact on liquidity risk. It aims to fill in the gap in the empirical literature on this topic.
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