The Growth of Islamic Finance and Banking: Innovation, Governance and Risk Mitigation
The growth of the Islamic finance and banking industry – Book Sample
An introductory note
This edited volume comprises of the best papers chosen from those pre-sented at the First World Islamic Economics and Finance Conference (WIEFC 2018), held on 3 and 4 January, 2018. The conference was organized by the Minhaj University Lahore (MUL) in collaboration with the Islamic Development Bank’s Jeddah-based Research Institute (IRTI) and La Trobe University, Melbourne, Australia. The theme of the conference was devel-oping Muslim economies through Islamic finance.
This edited volume con-tains 19 chapters based on selected articles, each reviewed by two referees and the editorial committee. The volume begins with a preface by Rodney Wilson, an Emeritus Professor at Durham University, and an introductory note by the editors, H. M. Qadri and M. I. Bhatti, summarizing the con-tents. The book covers the following important topics;
- Standardization of Islamic banking and finance (IBF) products under inclusion (Taqlid al-Madh’hab)
- Islamic bonds (sukuk)
- Islamic insurance (takāful)
- An information technology-based zakat distribution model
- Fatawa on the IBF industry
- The Islamic Interbank Offer Rate (IBOR)
- The pricing volatility of Islamic stocks and sukuk
- Provision on interest (riba)
- Misconceptions concerning IBF
- Islamic commercial and social finance
- Tale of two similar credit-rated bonds (sukuk)
- Islamic finance disputes and arbitration
The book begins with Chapter 1 by Shaykh-ul-Islam Professor Dr Muhammad Tahir-ul-Qadri, Chairman of MQI, BOG and MUL. He argues the case for the standardization of the IBF products across various schools of Islamic thought. Tahir- ul-Qadri proposes the adoption of a uniform model of IBF products using Taqlid al-Madh’hab – an inclusive research methodology which is ac-ceptable to the adherents of the major schools of Islamic economic thought.
2 Hussain Mohi-ud-Din Qadri and M. Ishaq Bhatti
In Chapter 2 M. Ishaq Bhatti, Naseem Al Rahahleh and Hussain Mohi-ud-Din Qadri discuss recent developments in Islamic finance and the financial products currently offered. The authors briefly review the historical development of IBF products from the early days of Islam to the 21st century. They address the issue of risk management in the IBF industry. The ability of IBF institutions to safeguard the global finance industry during periods of financial crises is also explored, particularly how the performance of IBF institutions is anti-cyclical, providing a hedge for international finance.
Chapter 3 deals with the issuance of Islamic bonds (sukuk), focusing on the role of ownership and governance structure in raising capital. A sukuk case study undertaken by Mohsin Khawaja and M. Ishaq Bhatti addresses the issue of whether the ownership and the governance structure of firms influence the decision to raise funds. They also address the question of how to select financial instruments to ensure Shari’ah compliance.
In Chapter 4, Hafiz Mohamed of the Stellar Consulting Group of Singa-pore addresses the topic of Islamic insurance – takāful, using an innovative block-chain approach. The takāful Islamic insurance industry is evolving processes to safeguard the assets of its clients from losses and reduce un-certainty. It may be described as a social device to reduce or even eliminate the risks of loss to life and property. In this chapter, the author provides a strategic discourse on how the adoption of a block-chain methodology can provide additional value to the insurance and takāful industries. Hafiz Mohamed demonstrates his detailed understanding of the industry by iden-tifying the issues which need urgent attention, in order to achieve the pro-jected cost savings through careful risk management.
In Chapter 5 the merits of the application of information technology to zakat collection are discussed. The five co-authors, Umar Draz, Tariq Ali, Sana Yasin, Ahmad Shaf and Raiha Tallat, propose the establishment of an information technology-based finance hub at a local Union Consul (UC) level rather than the collection of zakat being centralized at national level, as is currently the policy in Pakistan and several other countries. The au-thors believe a UC level hub collection could improve the current zakat col-lection and distribution system, which would result in greater confidence among zakat donors by ensuring local accountability.
In Chapter 6, Professor Masudul Alam Choudhury proposes a method for standardizing Islamic economic, financial and banking practices through the adoption of consensual, comprehensive fatawa. The author critically examines current practices of ensuring Shari’ah compliance, in particular the increasing diversity of fatawa concerning matters of mua-malat, finance, banking and the real economy. To overcome the inevitable confusion Masudul Alam Choudhury proposes a unified system for the is-suance of fatawa.
Chapter 7 contains an examination of the fallacy of using conventional benchmarks in IBF. Imam Uddin and M. Shujat Saleem use archival data to demonstrate why it is inappropriate to use conventional indices, especially
Growth of Islamic finance & banking industry 3
as Shari’ah compliant indices have been developed in recent years, which are already widely used. Researchers and professional financial analysts who use Shari’ah compliant indices have found them to be useful bench-marks when measuring the performance of Islamic securities. The two au-thors of the chapter advocate the use of the IBOR instead of conventional benchmarks, as this minimizes misconceptions and misunderstandings among end users.
Chapter 8 is an empirical study authored by Ummara Fatima of MUL. The focus of the study is on the influence of leverage on the ownership structure- performance relationship. Through the use of panel data, it provides in-teresting insights into the ownership structure-performance relationship of Islamic and conventional banks on parallel lines. The findings provide a better understanding of the management challenges facing both Islamic and conventional banks. Ummara Fatima explores how both Islamic and conventional banks can improve their systems of ownership structure to im-prove their financial performance.
In Chapter 9 Masoumeh Shahsavari from Iran’s Fara Bourse considers the dynamic correlation and volatility linkages between stocks and sukuk. He explores the issue of how volatility influences investment behavior and the statistical co-variance between returns on sukuk and Iran’s Islamic stock indexes. The author explains the main reasons for the importance of insti-tutional investors and asset managers. Especially crucial are their timing and expertise in selecting securities in order to maintain a diversified sukuk portfolio, a challenge which demands specialist skills.
In Chapter 10 the acceptability or rejection of riba in various religious faiths is examined. A key disputed issue is whether riba, an addition to a principal sum, equates with interest or usury or both. Excessive interest payments on debt are often argued as being exploitative, with excessive power in the hands of the lending institutions, which may offer unfair con-tracts given their monopolistic or oligopolistic positions in the absence of meaningful competition. The critique in this chapter adopts a comparative analysis starting from ancient scriptures regarding riba and examining how attitudes have evolved over the centuries until the present day. In some re-spects the treatment is evidence based, with the examination of riba based on its social impact as a matter of historical fact.
In Chapter 11 Malik Shahzad Shabbir and Awais ur Rehman of the Uni-versity of Brunei Darussalam examine the misconceptions surrounding IBF. The authors focus on the threats, challenges and opportunities which confront Islamic banks and the implications for portfolio management by investors. The misconceptions about Islamic banking by depositors, cli-ents who have obtained finance and potential, but skeptical, customers are addressed.
Pakistan is one of the most important markets for IBF, and the confer-ence upon which this book is based was held in Lahore. Hence, the volume would not have been complete without a country study of IBF in Pakistan.
In Chapter 12 Salman Ahmed Shaikh of Greenwich University undertakes a review of Islamic commercial and social finance in Pakistan. There is an objective evaluation of the growth of the IBF industry in Pakistan focusing on its achievements and ongoing challenges. The chapter covers the finan-cial performance of Shari’ah compliant equities and sukuk. In addition, the author also provides a brief account of the Islamic asset management sector and the footprint of the Islamic microfinance sector in Pakistan.
In Chapter 13
Shair Ali Khan of the International Islamic University of Islamabad provides a translation of the verses in the Quran dealing with economic issues. The author draws on earlier translations, notably that by Shaykh-al-Islam Professor Dr Tahir-ul-Qadri. The main aim of the chap-ter is to elaborate on the translational strategies used by Tahir-ul-Qadri in comparison with the translations of three other renowned translators of the Quran: Mohammad Asad, Pickthal and Abdullah Yousaf Ali. Shair Ali Khan also analyses the structural level of both the source language and target language. He also examines the level equivalence in terms of termi-nologies, specifically those of an economic nature.
In Chapter 14,
Najam Abbas of the East West Research Centre in London highlights the contribution of IBF to socio-economic development, a largely neglected topic in the field. The focus is on the teaching of Ali ibn Talib on socio-economic development, notably his advocacy of collective responsi-bility toward the destitute in a multi-ethical society, and how the destitute can be employed in modern economies.
The findings from an empirical study of sukuk pricing by M. Ariff, A. Zarei and M. I. Bhatti are presented in Chapter 15. The investigation is of two similar credit-rated sukuk and conventional bonds with different yields. The theory of sukuk and conventional bond pricing is the same for both types of security as yields are determined by market expectations and rat-ings by independent agencies, the latter reflecting risk perceptions. The empirical data is drawn from Malaysia where both the government and cor-porations raise funds by issuing sukuk. The sukuk market in Malaysia is the most developed in the world in terms of both issuance and trading. Never-theless, the lessons from this study have relevance for other countries, even though their markets are less active.
In Chapter 16
Maria Bhatti addresses the issue of resolving IBF disputes through arbitration with special references to the Middle East. This region has experienced rapid growth in IBF while becoming a significant player in international commercial and financial markets. A crucial issue is whether disputes involving Islamic financial institutions can be dealt with by na-tional secular courts or arbitration bodies. As Islamic financial contracts are subject to Shari’ah law, it can be argued that disputes would be best dealt with by Shari’ah courts, where scholars specialized in fiqh can adjudi-cate. Maria Bhatti finds that Islamic traditions influence arbitration in the Middle East, and therefore Islamic jurisprudence plays a crucial role when Growth of Islamic finance & banking industry 5
trying to understand and analyze the function of international commercial arbitration in resolving IBF disputes. Nevertheless, she argues that it is vital for countries in the Islamic Middle East to consistently recognize and en-force arbitral awards under the New York Convention, and ensure Shari’ah laws are in harmony to avoid legal conflict and uncertainty.
In Chapter 17 Toseef Azid, Osamah Al Rawashdeh and Muhammad Omer examine the formation of tangible and intangible capital
through venture philanthropy from an Islamic finance perspective. The authors ar-gue that philanthropy can be significant in strengthening social solidar-ity and community bonds. There is a two-way causality of happiness and satisfaction between givers and receivers. Moreover, there is a gap in the provision of goods and services which cannot be filled by either the pub-lic or private sectors. This gap can instead be filled through philanthropy involving the voluntary sector. In the western society, this sector is well organized, as governments provide tax deductions which encourage char-itable donations, whereas in Islamic societies the voluntary sector is often unorganized. The chapter concludes by suggesting that Islamic financial intuitions can play a significant role in strengthening the relationship in between the market and philanthropy with a resultant positive impact on social well-being. An active voluntary sector comprising of Islamic char-ities can facilitate economic inclusion and help ensure the poor become stakeholders in wider society.
Hussain Qadri, the author of Chapter 18,
discusses the development of the IBF industry in Pakistan from an ideological, practical and legal perspective. He reviews the workings of various socio-economic systems, notably those based on capitalism and socialism, and then presents an alternative Islamic economic system based on Shari’ah compliant finance. Hussain Qadri fo-cuses on Pakistan as a case study that demonstrates the shortcomings of capitalism and socialism, both of which are incompatible with religious val-ues as is apparent from discourses by academics, students, religious scholars and government agencies. In contrast, the adoption of Shari’ah compliant finance as a way forward for economic development appears to have wide-spread support.
In the last chapter, Chapter 19, Shirazi analyses poverty in the context of Pakistan. Although the government introduced multiple measures to tackle this challenge in the last six decades, there was no sign of this problem being significantly slowed down. This article overviews the incidence of poverty, social safety nets including Islamic social finance programs of the country and discusses why these programs did not bring results as expected. From his analysis, Shirazi also highlights some recommendations to efficiently mitigate poverty in Pakistan.
Concluding remarks are provided by the editors in the Conclusion, which evaluates the contribution of this volume to wider literature on Islamic eco-nomics and finance.
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