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Article
Publication date: 10 June 2014

Yasushi Suzuki and S.M. Sohrab Uddin

This paper aims to draw on the bank rent approach to evaluate the existing pattern of financing of Islamic banks and to propose a fairly new conceptualization of Islamic…

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Abstract

Purpose

This paper aims to draw on the bank rent approach to evaluate the existing pattern of financing of Islamic banks and to propose a fairly new conceptualization of Islamic bank rent.

Design/methodology/approach

The bank rent theory is adopted to generate the theoretical underpinnings of the issue. After that, empirical evidence from the banking sector of Bangladesh is used to support the arguments.

Findings

Repeated transactions under murabaha are observed in the Islamic banking sector of Bangladesh. The asset-based financing gives the Bangladeshi Islamic banks relatively higher Islamic bank rent opportunity for protecting their “franchise value” as Shari’ah-compliant lenders, while responding to the periodic volatility in transaction costs of profit-and-loss sharing.

Research limitations/implications

The bank rent approach suggests that the murabaha syndrome can be ironically justifiable. On the other hand, the current profit-and-loss sharing risk provides an idea of the difficulty in assuming the participatory financing with higher credit risk in practice. Islamic scholars and the regulatory authority need to design an appropriate financial architecture which can create different levels of rent opportunities for Islamic banks to avail the benefit from the variety of Islamic financing as declared by Islamic Shari’ah.

Originality/value

This paper introduces a fairly new concept of “Islamic bank rent” to make sense of the murabaha syndrome. This approach also contributes to clarifying the unique risk and cost to be compensated with the spreads that Islamic banks are expected to earn. To draw empirical evidence, as far as it could be ascertained, the data of both Islamic banks and conventional banks with Islamic banking windows/branches are used for the first time.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 7 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 8 July 2019

Bijan Bidabad, Mahmoud Allahyarifard and Mahshid Sherafati

This paper aims to explain a new system of accounting for partnership financing that applies in Rastin profit and loss sharing banking. In this system, the interest rate…

Abstract

Purpose

This paper aims to explain a new system of accounting for partnership financing that applies in Rastin profit and loss sharing banking. In this system, the interest rate is not used in calculations and accounting, and instead, the “time value” of capital based on the amount and duration of the partnership is used.

Design/methodology/approach

Rastin Partnership Accounting principles have been founded on off-balance-sheet items and on the basis of the institutions’ obligations to the depositors and receivers of financial resources, and they are in compliance with the nature of the financial intermediary activity (a partnership of depositor in the yields of the fund receiver via the bank).

Findings

The distribution of profit among stakeholders (including workforce and capital owners) is accomplished according to the share of each beneficiary in the created value added. In this regard, Euler’s theorem, as the best mathematical-economic innovation for distribution of income is applied.

Research limitations/implications

This system is novel, and it is required to be more elaborated for further practical development and adjustment.

Practical implications

In this accounting system, the return of the partnership is distributed among sharers based on the amount and duration of their partnership. The penalty for delay in payment is calculated from the amount of the incurred loss due to negligence or blameworthy of the undertaker and not upon a penalty interest rate.

Social implications

Interest rate as an essential factor in conventional accounting is not usable in Islamic banking and other similar institutions that work based on partnership, such as mutual funds and saving and loan associations. The proposed system removes this shortage and is fairer than the conventional accounting.

Originality/value

Approach of this accounting system is fully different from the conventional accounting because of intrinsic characteristics of the intermediary role of financial partnership institutions and Islamic banks.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 4
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

5548

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 31 May 2022

Amine Ben Amar and AbdelKader O. El Alaoui

The purpose of this study is to understand the profit-sharing structure at equilibrium of the two-tier mudharaba contract in a pure Islamic banking system and then in a…

Abstract

Purpose

The purpose of this study is to understand the profit-sharing structure at equilibrium of the two-tier mudharaba contract in a pure Islamic banking system and then in a dual banking system.

Design/methodology/approach

This paper aims to better understand the profit-sharing structure at the equilibrium of the two-tier mudharaba. It first assumes a purely Islamic banking system and then introduces a risk-free asset to simulate trade-off opportunities in a dual banking system.

Findings

First, by using a model inspired from a neoclassical framework and assuming that the Islamic banks are the only channel for financing the economy, the results suggest that the profit-sharing structure built up by the three parties, the bank, the depositor and the entrepreneur, at the time of signing the Mudharaba contract has to be drawn up in the way that, at the ex post, the remuneration of each necessary production factor, capital and labor, should equal its marginal productivity. Second, the authors relax the hypothesis of a purely Islamic financial system and introduced a risk-free asset in favor of the depositor. Thereby, the authors are able to apprehend the financial balance of the two-tier mudharaba contract by simulating the trade-offs that can occur in a dual banking system. The findings suggest that the profit-sharing structure is not the same whether we are at the level of bank assets (bank–entrepreneur relationship) or liabilities (bank–depositor relationship). For the asset side, an increase (respectively decrease) in the expected profit of the mudharaba implies a decrease (respectively increase) in the share of the bank, whereas an increase (respectively decrease) in the return of the risk-free asset and/or the risk underlying the project implies an increase (respectively decrease) of the bank’s share in the expected profit.

Originality/value

Theoretical work that has studied the determinants of the ratio of profit sharing between capitalists and entrepreneurs in the context of mudharaba has omitted that this contract should be assessed at both asset and liability sides of the bank. To overcome this theoretical gap, this paper aims to better understand the structure of profit sharing at the equilibrium of the two-tier mudharaba, while taking into account the contractual specificities between the different stakeholders.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1753-8394

Keywords

Book part
Publication date: 19 December 2016

Mohammad Ashraful Ferdous Chowdhury, Mohammad Shoyeb, Chowdhury Akbar and Md. Nazrul Islam

The purpose of this study is to examine the effect of risk sharing and non-risk sharing instruments on both the profitability of Islamic banks and the economic growth of…

Abstract

Purpose

The purpose of this study is to examine the effect of risk sharing and non-risk sharing instruments on both the profitability of Islamic banks and the economic growth of the country. This study also aims to improve the profit and loss sharing-based asset growth of Islamic banks.

Methodology/approach

The data for this study are obtained from the annual reports of all Islamic banks from Bangladesh using Bank scope database and annual report for the period of 1983–2014. The research uses Autoregressive Distributive Lag approach.

Findings

The findings reveal that risk sharing instruments are positively related to profitability and the economic growth of the country. This study also finds that non-risk sharing instruments play a predominant role in the profitability of the Islamic bank but are negatively related to the economic growth of the country.

Research implications

Banks and other financial institutions need to pay greater attention to systemic risk created by risk transfer and apply risk sharing methods of financing more vigorously than has hitherto been the case.

Originality/value

This study will also contribute to the literature as relatively few Islamic financial literatures deal with the relationship between equity financing and profitability which may make a strong contribution to the area of Islamic finance.

Details

Advances in Islamic Finance, Marketing, and Management
Type: Book
ISBN: 978-1-78635-899-8

Keywords

Article
Publication date: 23 November 2012

Rihab Grassa

The purpose of this paper is to analyze the income structure of Islamic banks in the Gulf Cooperation Council (GCC) countries and to explore the effect of the…

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Abstract

Purpose

The purpose of this paper is to analyze the income structure of Islamic banks in the Gulf Cooperation Council (GCC) countries and to explore the effect of the diversification of banks' earning on risks that may harm these latter.

Design/methodology/approach

Using data from 2002‐2008 for 42 Islamic banks, this article provides descriptive and analytical analysis and multiple regression equations.

Findings

This article reveals that greater reliance on the income share of the profit‐loss‐sharing products is associated with higher risk and higher insolvency risk for both listed Islamic banks and non‐listed Islamic banks. However, no effect has been observed between the operation income of non‐profit‐losses‐sharing products and risk levels. That is why listed banks prefer to invest less in non‐profit‐loss‐sharing products than in profit‐loss‐sharing products.

Research limitations/implications

Financial regulators in emerging Islamic financial market should help Islamic banks to find equilibrium between the expansion of the Islamic financial market and respect for the raison d'être of Islamic finance: the profit and loss sharing mechanisms.

Originality/value

To the best of the author's knowledge, this is the first article that empirically tests why Islamic banks prefer to invest less in profit‐loss‐sharing products. Also, this article contributes to studying the relationship between Islamic finance and risk.

Details

Accounting Research Journal, vol. 25 no. 3
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 23 November 2010

Adel Ahmed

The purpose of this paper is to initially contribute the literature linking the global financial crisis and the Islamic finance model which is competent of playing down…

30443

Abstract

Purpose

The purpose of this paper is to initially contribute the literature linking the global financial crisis and the Islamic finance model which is competent of playing down the severity and frequency of financial crises, by introducing the financial system based on sharing in the risk. It links credit expansion to the growth of the real economy by allowing credit primarily for the purchase of real goods and services which the seller owns and possesses, and the buyer wishes to take delivery. It also requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby ensuring that he evaluates the risk more carefully. It is important for everyone's future that we study the current crisis in order to develop sustainable financial practices and in quest of a new business model based on sharing the profit and loss.

Design/methodology/approach

The divergence approach is used for exploring possibilities and constraints of inherited situations by applying critical thinking and analysis through the published literature in Islamic finance. This is to create new understandings of international finance and using new banking business model towards better design solutions for the current global financial crisis and preventing more collapse in the future.

Findings

A new business model for the banking system based on non‐interest‐based transactions but profit and loss sharing should be in practice at the financial system. The financial institutions should encourage business and trade activities that generate fair and legitimate profit. In Islamic finance, there is always a close link between financial flow and productivity. This intrinsic property of Islamic finance contributes towards insulating it from the potential risks resulting from excess leverage and speculative financial activities which are part of the root causes of the current financial crisis.

Research limitations/implications

This paper is based on published research papers but does not include empirical investigation.

Practical implications

The new business model based on Islamic finance principles will help in financing businesses by using alternative methods to the banking systems or as a different way to run our banking system. The Islamic finance system with proper checks and controls introduces greater discipline into the economy and links credit expansion to the growth of the real economy.

Originality/value

The paper sheds new light on the relationship between the Islamic finance model and a new business model for the financial institutions to be used in order to think through how to prevent future financial collapses and make capital markets work more effectively.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 3 no. 4
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 14 April 2014

Nada Lahrech, Abdelmounaim Lahrech and Youssef Boulaksil

The purpose of this paper is to assess whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. Another objective is to…

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Abstract

Purpose

The purpose of this paper is to assess whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. Another objective is to appraise whether Islamic banks' performance affects management incentives to distribute profit (and loss) to investment account holders.

Design/methodology/approach

To investigate the research issue, the authors conducted an empirical study. Data of 25 global operating Islamic banks have been collected and analyzed for the period 2006-2010. The authors also developed a mathematical model based on the generalized least-squares principle.

Findings

The research results showed that enhancing transparency will prevent Islamic banks from shadowing their profit allocation practices and place investment account holders in a better position to manage their invested funds. The study also showed that bettering Islamic banks’performance will induce them to manager profit-sharing investment account holders’ funds under bonafides.

Research limitations/implications

The main limitation is data availability. The maximum number of Islamic banks that disclose financial data covering the period of 2006-2010 limited the scope of the study to 25 banks.

Practical implications

The findings are very valuable for designing policies and standards as well as for the enforcement of these standards to improve transparency in Islamic banking.

Originality/value

The study outcome is vital to many parties involved in the Islamic banking field and can be taken as a strong foundation to make appropriate actions that would help grow and sustain Islamic banking development globally.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 7 no. 1
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 10 May 2013

Rifki Ismal

This paper attempts to construct Islamic gracious monetary instruments namely Qardh hassan, Waqf and Gift central bank certificates. The certificates do not only function…

Abstract

Purpose

This paper attempts to construct Islamic gracious monetary instruments namely Qardh hassan, Waqf and Gift central bank certificates. The certificates do not only function as monetary instruments per se, but also give economic and social benefit for the public such as the needy. However, the central bank and its counterparts still need to manage the funds professionally to produce profit, maintain the values of the funds and prevent business losses. As such, this theoretical study aims to offer alternative Islamic monetary instruments for the central bank to manage liquidity and especially to improve the welfare of the people.

Design/methodology/approach

The paper exercises three Islamic gracious monetary instruments (Qardh hassan, Waqf and Gift central bank certificates) for both investment based (Mudarabah and Musharakah) financing and trading based (Ijarah and Murabahah) financing. Every instrument is elaborated mathematically to analyze its economic impact, treatment of profit and loss coming from the business and status of the funds. Finally, the paper compares every gracious certificate and explains the terms and conditions to use them optimally.

Findings

The exercises find unique characteristics, operations and contribution of every Islamic gracious monetary instrument to the economy. Based on economic impact, nature of the contracts and management of the funds, the central bank can now have alternative Islamic monetary instruments to be offered to the generous depositors to improve the welfare of the people particularly the needy.

Research limitations/implications

The paper only assesses the feasibility of three Islamic gracious monetary instruments. There might be more alternatives of Islamic gracious monetary instruments to be considered and elaborated.

Originality/value

To the best of author's knowledge, this is the first paper to try to exercise the alternative of the Islamic gracious monetary instruments.

Details

Journal of Economic and Administrative Sciences, vol. 29 no. 1
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 29 April 2021

Ssemambo Hussein Kakembo, Muhamad Abduh and Pg Md Hasnol Alwee Pg Hj Md Salleh

Despite the fact that small and medium enterprises (SMEs) play a crucial role in strengthening the financial sector within developing and emerging economies through…

Abstract

Purpose

Despite the fact that small and medium enterprises (SMEs) play a crucial role in strengthening the financial sector within developing and emerging economies through providing employment opportunities to the rural and urban population, capacity building in the form of skills training and economic empowerment, they still face a plethora of challenges that continue to threaten their existence, performance and growth. Access to operational and administrative funds needed to execute their activities effectively is a significant challenge and detrimental to the growth of SMEs in Uganda. Conversely, Islamic microfinance has been noted as a panacea to the challenges of financial inaccessibility among SMEs, especially in developing countries. The purpose of this paper is therefore to investigate how the adoption of Islamic microfinance can play a fundamental role in enhancing the sustainability of microfinance institutions (MFIs) while meeting the financing challenges of SMEs in Uganda.

Design/methodology/approach

In this study, a review of existing literature was carried out to critically examine relevant information (literature sources) and empirical studies on SMEs, their performance and challenges. The study being conceptual tries to understand how Islamic microfinance could be adopted as an alternative scheme of financing to bridge the gap and mitigate the financial challenges facing SMEs.

Findings

The study finds that the existing MFIs have failed to achieve their objectives of providing financial services to the poor and SMEs while remaining sustainable. This has left the majority of SMEs within Uganda's informal sector financially handicapped, thus leading to their failure in meeting their expectations and eventually collapsing even before celebrating their third or fourth birthdays. However, the enactment into law of the Financial Institutions Amendment Act 2016 that paved the way for the introduction of Islamic finance in Uganda, and the Tier 4 Microfinance Institutions and Money Lenders' Act, 2016 that incorporated the aspects of Islamic microfinance within the existing microfinance framework as seen and is perceived as a key factor in addressing the financial challenges faced by MFIs and the SMEs if fully adopted.

Research limitations/implications

This study is conceptual with no empirical investigation and discussion of key theories. On the contrary, it will be imperative and useful when carrying out more extensive hypothetical studies by future researchers, specifically in the area of Islamic microfinance that is relatively new in Uganda.

Practical implications

Practically, this paper will serve as a guide to policymakers and practitioners in the field of microfinance by adding a flair that could enable in bridging the challenges associated with inadequate financing of SMEs in Uganda.

Social implications

Socially, the social aspects of charity (Zakah and Sadaqah) will help to improve the livelihood of the poorest of the poor who cannot engage in active business through meeting their basic needs of life without begging thereby preventing them from being social outcasts.

Originality/value

The study establishes Islamic microfinance (IMF) as a promising and unexplored viable option potentially needed in intensifying the financing needs of SMEs in Uganda. The paper provides an entirely new dimension in nature and way microfinance products should be structured with a view of ensuring that there is sustainable provision of financial services to SMEs. The paper adds real value to the existing conventional microfinance products and services in Uganda, given the ethical and moral attributes of Islamic microfinancing practices that are assumed to efficiently and effectively motivate SME owners and other small entrepreneurs to thrive.

Details

Journal of Small Business and Enterprise Development, vol. 28 no. 4
Type: Research Article
ISSN: 1462-6004

Keywords

1 – 10 of over 3000