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Article
Publication date: 20 January 2020

Yasushi Suzuki, S.M. Sohrab Uddin and A.K.M. Ramizul Islam

The skyrocketing rise of Islamic banking is noticeable in not only Islamic countries but also non-Islamic countries during the past few decades. Many conventional banks…

Abstract

Purpose

The skyrocketing rise of Islamic banking is noticeable in not only Islamic countries but also non-Islamic countries during the past few decades. Many conventional banks have started Islamic banking generally by maintaining separate branches/windows and occasionally by pursuing a complete conversion strategy. Following the global trend, two of the full-fledged Islamic banks adopted a conversion strategy consecutively in 2004 and 2008 in Bangladesh. The number of the conversion case is still limited. At this backdrop, this study aims to identify the incentives in the conversion strategy into Islamic banks.

Design/methodology/approach

Using the secondary data from the annual reports of the sample banks for both pre- and post-conversion periods, this study adopts the “case study” approach upon the comparison with the performance of conventional banks and other types of Islamic banks.

Findings

It is apparent that higher reserve requirement for conventional banks provides the incentive for the conversion into Islamic banks given with less reserve requirement. Under the protective regulatory framework, these converted Islamic banks may have enjoyed the rent for learning during the initial phase after the conversion, even though majority of the funds of these banks are collected from high-cost mudaraba time deposits. Basically, the credit strategy of the converted banks has been quite conservative, resulting in the concentrated portfolio selection on the asset-backed financing. However, the recent engagement of these banks in the Shari'ah-based participatory financing makes their performance a bit vulnerable.

Research limitations/implications

It is becoming difficult to justify a protective regulatory framework for incubating infant Islamic banks if the rent for learning given under the framework would not encourage them to challenge and absorb the risk and uncertainty associated with Shari’ah-based participatory financing. The current mode of profit–loss sharing (PLS) makes it difficult for the regulators to create an appropriate incentive for Islamic banks to challenge the equity-based financing.

Originality/value

The number of the conversion case is limited. Less has been done to investigate the reasons why the conventional banks opt for the conversion into Islamic banks, particularly in Bangladesh.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 2
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 7 May 2019

Yasushi Suzuki, S.M. Sohrab Uddin and Pramono Sigit

This paper aims to draw upon existing debate over “financial sector rent” (bank rent) to analyze the current pattern of financing of Bangladeshi and Indonesian Islamic…

Abstract

Purpose

This paper aims to draw upon existing debate over “financial sector rent” (bank rent) to analyze the current pattern of financing of Bangladeshi and Indonesian Islamic banks during the period of 2011 and 2015.

Design/methodology/approach

The empirical evidence through a comparative approach of analyzing the performance of Islamic banks with that of conventional banks in respective countries – two of the largest countries where majority of the population are Muslims – is drawn to demonstrate the objective.

Findings

While Islamic banks in Bangladesh are primarily concentrating on the murabaha (mark-up contract) mode of financing, some transactions under musharaka (partnership/equity-based contract) are observed in the Indonesian Islamic banking sector. This anomaly in Indonesia can be explained by the nature of their musharaka financing which is not of the purely “participatory” financing type. As a result, we can observe the quasi-murabaha syndrome in Indonesian Islamic banking sector. The concentration of asset-based financing including consumers’ financing (hire purchase) in the credit portfolio gives Islamic banks relatively higher Islamic bank rent opportunity for protecting their “franchise value” as Sharīʿah-compliant (Islamic law-compliant) lenders. However, Indonesian Islamic banks share a still infant Islamic banking market, and enjoy less rent opportunity under a severe competition with conventional banks.

Research limitations/implications

The bank rent approach suggests that the syndrome observed both in Bangladesh and Indonesia can be ironically justifiable. Moreover, the mode of profit-and-loss sharing provides, in practice, an idea of the difficulty in managing the participatory financing embedded with high credit risk. Under this scenario, it is necessary for Islamic scholars and the regulatory authority to design an appropriate financial architecture, enabling Islamic banks to avail the benefit from a wider variety of Sharīʿah-based Islamic financing.

Originality/value

This paper expands the newly emerged concept of “Islamic bank rent” to make sense of the murabaha syndrome in Bangladesh and the quasi-murabaha syndrome in Indonesia. This approach also contributes to clarifying the unique risk and cost to be compensated with the spreads that Islamic banks are expected to earn.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 3
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 10 August 2020

Yasushi Suzuki and Mohammad Dulal Miah

This paper aims to propose two benchmarks “Shari’ah-compliant” benchmark and “Shari’ah-based” “raf’ al-haraj” (the removal of hardship) benchmark. The former benchmark can…

Abstract

Purpose

This paper aims to propose two benchmarks “Shari’ah-compliant” benchmark and “Shari’ah-based” “raf’ al-haraj” (the removal of hardship) benchmark. The former benchmark can be applied to ensure that a transaction brings “profits on sales” and not “profits on loan”, and the latter benchmark should be addressed to ensure that a transaction does not exploit the customers of Islamic banks.

Design/methodology/approach

The authors draw upon the theory of institutional economics, in particular, instrumental and procedural rationality, to argue that the believers can pay their best effort as an exercise of ijtihad to understand and incarnate the logic and rationales implicit in the Qur’anic text.

Findings

Currently, there is no benchmark that determines the profit ceiling on murabaha. The authors suggest two types of “gray-zones” – the “Shari’ah-compliant but less contributing to the removal of hardship” and the “controversial on compliance but contributing to the removal of hardship in borrowers” to use as a benchmark in endorsing less shariah-compliant Islamic products.

Practical implications

There is no benchmark or a clear-cut demarcation that can be used to endorse less Shari’ah-compliant Islamic finance. Thus, Shari’ah-compliant’ benchmark and “Shari’ah-based” “raf’ al- haraj” benchmarks can be used to guide whether a financial transaction is acceptable or not. This guideline can be of huge practical relevance for Islamic finance.

Originality/value

There is no sensible study that offers such guidelines that can be used to demarcate whether a particular financial transaction, which has no clear-cut fatwa, is acceptable or not. Hence, the current research is novel and contributes to the existing literature of Islamic finance.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 14 no. 1
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 29 January 2020

Mohammad Dulal Miah and Yasushi Suzuki

This paper aims to explain the “murabaha syndrome” of Islamic banks. It further attempts to offer alternatives for the expansion of profit and loss sharing (PLS)-based financing.

Abstract

Purpose

This paper aims to explain the “murabaha syndrome” of Islamic banks. It further attempts to offer alternatives for the expansion of profit and loss sharing (PLS)-based financing.

Design/methodology/approach

Audited financial statements of 18 Islamic banks in the GCC countries are analyzed to assess the financing structures of banks. Moreover, additional data about financing pattern of Islamic banks in other Muslim majority countries are collected from the Islamic finance literature. A comparative analysis is offered to examine the financing structures of Islamic banks.

Findings

The paper confirms murabaha (mark-up financing) concentration of Islamic banks. About 90 per cent of the total financing are concentrated on murabaha, which is the result of existing institutional underpinnings. Islamic banks would logically be involved with PLS-based financing only limitedly unless the current governing institutions are changed. Entrepreneurs’ financing needs based on PLS contracts should be catered by venture capital, whereas micro-finance enterprises can meet the demand for funds of marginal clients.

Practical implications

PLS investment in the portfolio of Islamic banks would result in higher risk and uncertainty. Ambiguity, or its equivalent uncertainty, is prohibited in Islam. This is a dilemma which the existing literature does not sufficiently explain.

Originality/value

Ideally, Islamic banks should practice PLS-based financing; otherwise, their raison d’être would be difficult to justify. Islamic finance literature does not shed sufficient analytical lights in explaining Islamic banks’ preference of mark-up financing to PLS-based financing. Moreover, strategies to ameliorate this condition have largely remained unexplored.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 7
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 3 October 2021

A.K.M. Kamrul Hasan and Yasushi Suzuki

The purpose of this paper is to investigate the impact of basel accord on the Bangladeshi bank performance including Islamic banks and the role of subordinated debt…

Abstract

Purpose

The purpose of this paper is to investigate the impact of basel accord on the Bangladeshi bank performance including Islamic banks and the role of subordinated debt (sub-debt) as basel regulatory capital (BRC).

Design/methodology/approach

The authors conducted the empirical investigation by adopting a quantitative approach and using the secondary data available in the annual reports of the sample banks between 2009 and 2018. This paper develops an econometric model to compare and analyze the regression result under two states of capital-to-risk adjusted assets ratio (CRAR) with sub-debt and CRAR without sub-debt. This paper analyzes the impact of sub-debt in the largest Islamic bank for the year 2007 as a case study for endorsing the findings.

Findings

This paper finds that CRAR has positive alignments with return on equity (ROE) and cash dividend when sub-debt is considered as Tier 2 capital. This paper observes that the huge bad loan write-off supports to downsize the asset size thus temporarily enhance the return on assets (ROA). In a nutshell, sub-debt gives banks an ill incentive to disburse steady cash dividends instead of injecting genuine equity capital, encouraging them to take more credit risk. In fact, more private commercial banks (PCBs) issued huge sub-debts between 2009 and 2018 under a unique arrangement, which the authors termed as the “sub-debt trap.”

Research limitations/implications

This paper draws policy implications for the banking regulator to identify and rectify a systemic problem of the “sub-debt trap” which hinders the regulatory purpose from the implementation of basel accord II and III. A limitation of this study is the authors shed analytical light on Bangladeshi banks, i.e. it a single country analysis which may not be generalized to other developing countries except matching with a similar context.

Originality/value

The paper contributes to accumulating empirical studies on the effectiveness of basel accord implementation in developing countries. In most of the developing countries, where institutional loopholes are a major concern, the research provides evidence that how weak institutional settings are largely responsible for harvesting the potential benefit from micro-prudential regulation such as the basel accord. To shed analytical light on developing country context, the study document that sub-debt has been instrumentalized to maintain minimum capital ratio and banks managers tends more focus on improving ROE instead of ROA. The findings of the study are supportive to other developing countries where sub-debt considered as BRC and issued through private placement. To the best of the authors’ knowledge, it is the first attempt to cast doubt on the impact of sub-debt as a BRC, given the uniqueness of the Bangladeshi banking industry, on the PCBs including Islamic banks.

Details

Journal of Islamic Accounting and Business Research, vol. 12 no. 8
Type: Research Article
ISSN: 1759-0817

Keywords

Content available
Article
Publication date: 4 August 2021

Mohammad Dulal Miah, Yasushi Suzuki and S. M. Sohrab Uddin

This paper aims to assess the probable impact of COVID-19 on the Islamic banking system in Bangladesh. More specifically, it attempts to test the hypothesis that Islamic…

Abstract

Purpose

This paper aims to assess the probable impact of COVID-19 on the Islamic banking system in Bangladesh. More specifically, it attempts to test the hypothesis that Islamic banks are exposed to increased risk because of their role as a provider of “merchant capital” including financing for trade, commerce and working capital, which are believed to be severely disrupted by the COVID-19.

Design/methodology/approach

The paper draws upon the Marxian tradition on the identification of the circuit of “merchant capital” separated from the circuit of “interest-bearing capital.” Moreover, the research adopts the balance sheet approach to trace the sectoral distribution of investment as well as sources of income of Islamic banks.

Findings

The research supports the hypothesis that the investment pattern of Islamic banks is skewed toward the trade and merchant’s financing. More than two-third of Islamic banks’ investment, and income thereof, is concentrated on working capital and trade finance. As these sectors are largely vulnerable to the economic shock resulting from COVID-19, Islamic banks in Bangladesh are likely to be affected through this channel.

Research limitations/implications

The research focuses only on Islamic banks in Bangladesh. Further study can assess the impact of COVID-19 on conventional and Islamic banks in other countries to find similarities and differences with the findings of the current research.

Practical implications

The finding of this research will be useful for bank managers, policymakers and users of financial services. In particular, this study provides important information useful for regulators in devising appropriate policies which aim to mitigate the adverse impact of COVID-19.

Originality/value

To the best of the authors’ knowledge, this is the first study that attempts to examine the impact of COVID-19 on Islamic banking system in Bangladesh, a country where Islamic banks occupy one-third of the total banking system’s assets.

Details

Journal of Islamic Accounting and Business Research, vol. 12 no. 7
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 20 June 2016

Yasushi Suzuki and Mohammad Dulal Miah

This paper argues how Islamic altruism and reciprocity can enhance or drain the supply of Islamic equity finance. The paper also analyzes the feasibility of Islamic equity…

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Abstract

Purpose

This paper argues how Islamic altruism and reciprocity can enhance or drain the supply of Islamic equity finance. The paper also analyzes the feasibility of Islamic equity finance through the lens of new institutional economics (NIE) and transaction cost economics (TCE).

Design/methodology/approach

One of the salient contributions by NIE is to support the proposition that effective contracting depends greatly on institutions in terms of “rules that constrain economic behavior”, including informal or intangible institutions, such as religion, culture and customary practices. This paper draws on the theoretical contributions of the NIE and TCE and applies some of these contributions to an analysis of general altruism and reciprocity in Islamic economies.

Findings

It is said that solutions based on the Islamic injunctions (collectively termed as spiritual quotient) could serve to mitigate agency risks. However, in theory, the Muslim principal (particularly fund providers) is exposed to higher agency risk unless appropriate rules of protecting the right of the principal (or of punishing the agent when its opportunistic behavior is revealed) are devised, because the Muslim fund providers have the divine obligation to share risks in enterprise under the profit-loss sharing (PLS) scheme as well as to share a portion of income with the poor or those entrepreneurs who face difficulties in fund-raising.

Originality/value

Many scholars refer to the lack of the “formal” institutions that hinder the sound development of Islamic venture capital (VC). This paper contributes to shedding an analytical light on the unique feature of the Muslims’ “informal” constraints which make them hesitate to invest in Islamic VC. To develop the Islamic VC market, this paper provides a theoretical background to suggest how important it would be for the national financial system to devise some tangible provisions by installing enterprise-friendly regulations as well as adequate incentive and protection mechanisms consistent with Islamic principles.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 9 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Book part
Publication date: 1 October 2014

Yasushi Suzuki

This chapter challenges a commonly accepted view such that the increase in monetary supply aiming to lower the market rate and/or aiming to ease liquidity conditions would…

Abstract

This chapter challenges a commonly accepted view such that the increase in monetary supply aiming to lower the market rate and/or aiming to ease liquidity conditions would encourage the banks as financial intermediaries or the investors as fund providers to provide more funds, which results in stimulating the macro-economy. This chapter suggests that there is no clear-cut mechanism in the economic theory for underpinning the commonly accepted view upon which the Quantitative Easing policy is based. This theoretical analysis suggests that there may exist an appropriate level of market reference rate, which can encourage the investors to absorb the relatively wider range of credit risk in the bond market. Extremely higher market rate would discourage the borrowers to raise funds, while lower market rate would drain “risk” funds in the bond market. In this context, the appropriate level of market rate may stand on a narrow range of the kind of “knife-edge,” though the level per se does not always guarantee the optimal allocation of financial resources.

Details

Risk Management Post Financial Crisis: A Period of Monetary Easing
Type: Book
ISBN: 978-1-78441-027-8

Keywords

Article
Publication date: 8 February 2016

Yasushi Suzuki and S. M. Sohrab Uddin

– This paper aims to assess recent trends in lending modes and to address the reasons for and consequences of changes in Bangladesh’s Islamic banking sector.

Abstract

Purpose

This paper aims to assess recent trends in lending modes and to address the reasons for and consequences of changes in Bangladesh’s Islamic banking sector.

Design/methodology/approach

Theoretical discourse is used to generate an underpinning for the issues covered by the study. In addition, empirical evidence from the banking sector, including the information derived from interviews with the staff of three Islamic banks, is presented to achieve the research objectives.

Findings

The findings clearly demonstrate that the Islamic banking sector has experienced a paradigm shift from participatory financing to asset-based financing. In particular, the murabaha mode of financing dominates the current lending structure, which follows the general trend of the global Islamic banking sector.

Research limitations/implications

It is necessary to concentrate on the potential negative outcomes of the trade-based murabaha mode of financing in a developing country such as Bangladesh, as banks have less incentive under protective rent (profit) opportunities to train the experts to screen and monitor projects in other socially desirable sectors such as agriculture and manufacturing including the small and medium enterprises.

Originality/value

Despite substantial growth of the Islamic banking sector, less research has been conducted to shed analytical light on the operations of Islamic banks from the perspective of loan disbursement to identify the disparities, if any, in between theory and practice in countries where both Islamic and conventional banks operate simultaneously. Using country-specific evidence, this study contributes to the debate by highlighting the paradigm shift of Islamic banks from participatory financing to the dominance of asset-based murabaha and other modes of lending, by identifying the fundamental causes that contribute to such a shift and by highlighting the consequences of such changes.

Details

Journal of Islamic Accounting and Business Research, vol. 7 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

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…

3216

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

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