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A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Banking and Finance".

Deadline for manuscript submissions: closed (31 March 2023) | Viewed by 73811

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Prof. Dr. Muhammad Ishaq Bhatti

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Guest Editor

Department of Economics and Finance, La Trobe Business School, La Trobe University, Melbourne, VIC 3108, Australia
Interests: oil prices; stocks; forecasting; copula; DCC models; wavelets; financial econometrics
Special Issues, Collections and Topics in MDPI journals

Dr. Lukman Arbi

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Department of Economics and Finance, La Trobe Business School, La Trobe University, Bundoora, Australia

Special Issue Information

Dear Colleagues,

The objective of this Special Issue is to consolidate rigorous research work focusing on risk management in Islamic finance. While Islamic finance traditionally carries a disposition towards legal matters, recent strides in its implementation and research have made it accessible to contemporary economic and financial theory. Academic works, such as those of El-Gamal (2008), Jobst (2009), and Ariff et al. (2012), have highlighted that Islamic finance securities (IFSs) have unique characteristics that can render conventional financial approaches inadequate. For example, one of the characteristics of Ṣukūk is that it must be backed by real economic assets and is subject to specific trading constraints. Alam et al. (2018) look into the possibility of such characteristics affecting issuer default using value-at-risk techniques, whereas Samsuddin et al. (2011) consider the applicability of the more sophisticated Merton model of default risk.

Other academic works focus on the role of Islamic law in defining Islamic financial practices, whether by analysing its mechanisms or implications. Examples include the universe of assets implied by Islamic law as in Derigs and Marzban (2008), strategies implied by said characterisation as in Derigs and Marzban (2009), and applications of Islamic law as a norm to corporate finance as in Basov and Bhatti (2013). There are also works such as Klein et al. (2017) and Khawaja et al. (2018), which analyze the behavior of IFS issuers and investors.

Prospective papers would be focused on risk-related topics such as identifying risks unique to Islamic finance and especially rigorous risk-management strategies. However, we do note that the types of risks encompassed by the Islamic finance literature is quite broad, including things such as Sharī`ah risk. Therefore, a discussion of topics such as how the distribution of financial practices adopted can affect certain financial variables would also be considered.

References

Alam, N., Bhatti, M. I., & Wong, J. T. F. 2018. Assessing Sukuk defaults using value-at-risk techniques. Managerial Finance, https://doi.org/10.1108/MF-05-2018-0218

Ariff, M., Iqbal, M., & Mohamad, S. (Eds.). 2012. The Islamic Debt Market for Sukuk Securities: The Theory and Practice of Profit Sharing Investment. Edward Elgar Publishing, Cheltenham.

Derigs, U. & Marzban, S. 2008. Review and analysis of current Shariah-compliant equity screening practices. International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1, No. 4, pp. 285-303.

Derigs, U. & Marzban, S. 2009. New strategies and a new paradigm for Shariah-compliant portfolio optimization. Journal of Banking & Finance, Vol. 33, No. 6, pp. 1166-1176.

El-Gamal, M.A. 2008. Islamic Finance: Law, Economics, and Practice. Cambridge University Press, New York.

Jobst, A. A. 2009. Islamic Securitization After the Subprime Crisis. The Journal of Structured Finance, Vol. 14, No. 4, pp. 41-57.

Khawaja, Mohsin and Bhatti, M. Ishaq and Ashraf, Dawood and Henry, Darren, The Role of Ownership and Governance Structure in Raising Capital: An International Study. 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018, organised by the La Trobe University Business School on January 15, 2018, http://dx.doi.org/10.2139/ssrn.3102108

Klein, P.-O., Turk, R., Weill, L., 2017. Religiosity vs. well-being e ects on investor behavior. Journal of Economic Behavior & Organization 138, 50-62.

Samsuddin, S., Tafri, F. H., Nawawi, A. H. M. & Aziz, N. A. 2011. Measuring the Default Risk of Sukuk Holders for Shariah Compliance Companies in Malaysia: Using Merton’s Model with Maximum Likelihood Estimator. Paper presented at the 2011 IEEE Symposium on Business, Engineering and Industrial Applications, IEEE, Langkawi, 25-28 September 2011.

Prof. Dr. M. Ishaq Bhatti
Dr. Lukman Arbi
Guest Editors

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Keywords

Islamic finance
Securitisation
Risk Management
Financial management
Behavioural finance
Insurance/Takaful
Contract theory/ Mechanism design in Islamic finance

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Published Papers (12 papers)

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Research

17 pages, 2393 KiB

Open AccessArticle

Make the Best from Comparing Conventional and Islamic Asset Classes: A Design of an All-Seasons Combined Portfolio

by Andrea Delle Foglie and Gianni Pola

J. Risk Financial Manag. 2021, 14(10), 484; https://doi.org/10.3390/jrfm14100484 - 13 Oct 2021

Cited by 1 | Viewed by 2319

Abstract

This paper aims to contribute to the existing literature in portfolio management and strategy by investigating the performance, diversification, and hedging benefits arising from integrating Sharia-compliant stocks into a conventional portfolio. Thus, this paper tests the performance of a Combined Portfolio, resulting from the combination of conventional Islamic instruments, covering different macroeconomic scenarios in the last decade (2010–2020). The strategic asset allocation was designed following the Global Macro Anima (GMA) strategy, solving a risk-parity optimisation problem using a specifically developed MATLAB™ algorithm. The findings will contribute to answering the question related to the possibility of including alternative instruments to increase diversification with hedging benefits by building asset allocations that perform well across different macroeconomic scenarios. Full article

(This article belongs to the Special Issue Islamic Finance)

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12 pages, 285 KiB

Open AccessArticle

A Contract Theory Approach to Islamic Financial Securities with an Application to Diminishing Mushārakah

by Lukman Hanif Arbi

J. Risk Financial Manag. 2021, 14(1), 17; https://doi.org/10.3390/jrfm14010017 - 1 Jan 2021

Cited by 1 | Viewed by 2951

Abstract

This paper demonstrates how the contract theory framework can and should complement standard financial mathematics for analysing Islamic financial securities (IFSs). It is motivated by the perception that most valuations of IFSs are rather simplistic and are as simple as risk and reward, leading to very simplistic investment strategies, especially by buyers. In fact, there are more dimensions to IFSs and IF in general which can only be properly analysed with more advanced approaches, such as contractual issues which are well-recognised and discussed in the fields of Islamic commercial law and contract theory but not always considered in valuation models. Contract theory can bring together financial mathematics and contractual issues, providing a more sophisticated framework for analysing IFSs. This paper aims to demonstrate this by providing a brief outline of the contract theory approach, followed by a simple demonstration of its use in the analysis of diminishing mushārakah (DM) contracts. The resulting model led to three main conclusions regarding DM contracts: That (i) finance seekers have no ready incentive to spend on asset maintenance, (ii) finance seekers will only spend on asset maintenance if their marginal benefit from the asset’s appreciation is greater than the financier’s share of the asset, and (iii) if the magnitude of asset appreciation and depreciation is equal, an increase in either will also increase the optimal level of spending on asset maintenance. Full article

(This article belongs to the Special Issue Islamic Finance)

24 pages, 723 KiB

Open AccessArticle

Discrete Time Ruin Probability for Takaful (Islamic Insurance) with Investment and Qard-Hasan (Benevolent Loan) Activities

by Dila Puspita, Adam Kolkiewicz and Ken Seng Tan

J. Risk Financial Manag. 2020, 13(9), 211; https://doi.org/10.3390/jrfm13090211 - 15 Sep 2020

Cited by 4 | Viewed by 4891

Abstract

The main objectives of this paper are to construct a new risk model for modelling the Hybrid-Takaful (Islamic Insurance) and to develop a computational procedure for calculating the associated ruin probability. Ruin probability is an important study in actuarial science to measure the level of solvency adequacy of an insurance product. The Hybrid-Takaful business model applies a Wakalah (agent based) contract for underwriting activities and Mudharabah (profit sharing) contract for investment activities. We consider the existence of qard-hasan facility provided by the operator (shareholder) as a benevolent loan for the participants’ fund in case of a deficit. This facility is a no-interest loan that will be repaid if the business generates profit in the future. For better investment management, we propose a separate investment account of the participants’ fund. We implement several numerical examples to analyze the impact of some key variables on the Takaful business model. We also find that our proposed Takaful model has a better performance than the conventional counterpart in terms of the probability of ruin. Full article

(This article belongs to the Special Issue Islamic Finance)

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27 pages, 10998 KiB

Open AccessArticle

Time-Frequency Based Dynamics of Decoupling or Integration between Islamic and Conventional Equity Markets

by Muhammad Anas, Ghulam Mujtaba, Sadaf Nayyar and Saira Ashfaq

J. Risk Financial Manag. 2020, 13(7), 156; https://doi.org/10.3390/jrfm13070156 - 17 Jul 2020

Cited by 12 | Viewed by 3505

Abstract

This paper investigates the decoupling and integration between the region-wise (Asia, Europe, Africa and the Americas) developed and emerging market’s equity pairs of Islamic and conventional stock returns with the focus on multi-horizons. In doing so, daily wavelet and ADCC-based stock returns correlations are estimated to capture the dynamics of time-frequency and the time-domain based correlations, respectively. The findings of this study indicate that at the short-term horizon, the all selected emerging and developed Islamic and conventional equity markets across all regions depict a high positive correlation, suggesting a rejection of the decoupling hypothesis. However, it is accepted for some of the developed markets of the Pacific region (Hong Kong and New Zealand), Europe (Ireland, Denmark and Spain) and emerging markets of Asia (China), Europe (Czech Republic) and Americas (Argentina and Peru) at a medium-term horizon. Moreover, in an examination of the comparative behaviors of the wavelet and ADCC-based Islamic-conventional correlations, the observed transitional behavior has been exemplified as the difference between the time-frequency and time-domain analysis. This study provides fruitful insights for investors who opt for cross-asset allocation and seek maximum portfolio diversification benefits. Full article

(This article belongs to the Special Issue Islamic Finance)

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23 pages, 3418 KiB

Open AccessArticle

Impacts of Endogenous Sunk-Cost Investment on the Islamic Banking Industry: A Historical Analysis

by Siddharth Jain and Partha Gangopadhyay

J. Risk Financial Manag. 2020, 13(6), 108; https://doi.org/10.3390/jrfm13060108 - 29 May 2020

Cited by 2 | Viewed by 2738

Abstract

Endogenous sunk-cost investments are optional fixed investment or capita, that a firm can choose to impact either upon its price-cost margin or its market share for capturing larger market spoils. Oft-cited examples are investments in vertical product (quality) differentiation, advertising outlays, and R&D type expenses for improving production processes. The importance of sunk-cost capital has been highlighted in the recent literature since these investments significantly influence the degree of competition in an industry mainly through forestalling entry and thereby limiting future competition in the industry. Sunk-cost investments play an important role in the debate on the competition-(in)stability perspectives for the banking industry. This paper is motivated by an important distinction, hitherto unrecognized, that some endogenous sunk-cost investments impact on the relative efficiencies of firms and thereby on its market spoils or profits, while others will only impact on its market share and thereby on profits. An example of this distinction is as follows: while quality improvement in a product or production processes will create efficiencies and, therefore, additional profits, while advertising expenses are used to snatch market shares from rivals. The unintended consequence of the first type of endogenous-sunk cost investment is to boost efficiencies and thereby shape the nature of competition in a market. The second type will have little effect on efficiencies. In this paper, by exploiting the above distinction and using a dataset created from the annual reports of nine major Islamic banks in Jordon during 1993–2010, we will apply the efficiency models and the autoregressive distributed lag (ARDL) methodology to test if information technology (IT) capital is strategically used by Islamic banks as an endogenous sunk-cost investment to boost their relative efficiencies. For the first time—to the best of our knowledge—we find that IT capital is strategically used by seven out of the nine Islamic banks. We then consider the implication of the strategic use of IT capital by Islamic banks for the nature of competition in the Islamic bank industry of Jordon. By so doing, we also argue that IT capital, through its effects on the nature of competition, will lend stability to the Islamic banking industry of Jordan. Full article

(This article belongs to the Special Issue Islamic Finance)

22 pages, 339 KiB

Open AccessArticle

The Determinants of Credit Risk: An Evidence from ASEAN and GCC Islamic Banks

by Faridah Najuna Misman and M. Ishaq Bhatti

J. Risk Financial Manag. 2020, 13(5), 89; https://doi.org/10.3390/jrfm13050089 - 6 May 2020

Cited by 29 | Viewed by 8667

Abstract

In less than a decade, the Islamic Banking (IB) industry has become an essential part of the global financial system. During the last ten years, the IB industry has witnessed changes in economic conditions and proved to be resilient during the periods of financial crisis. This paper aims to examine the important issues related to credit risk in selected Islamic banks in nine countries from Association of South East Asian Nations (ASEAN) and Gulf Cooperation Council (GCC) regions. It employs the generalized least squares panel data regression, to estimate the ratio of non-performance financing to total financing as dependent variables and bank specific variables (BSV) to determine the credit risk. It uses 12 years of unbalanced panel data from 40 different Islamic banks. The overall findings show that financing quality has a significant positive effect on credit risk. It is observed that the larger IBs owned more assets with lower credit risk compared to smaller banks. The bank’s age is also an important factor influencing the credit risk level. Moreover, regulatory capital significantly reduces the credit risk exposure adherence to the minimum regulatory capital requirements which help IBs to manage their credit risk exposures. It was also observed that IBs were not affected by the global financial crisis due to less credit risk compared to the conventional banks. Full article

(This article belongs to the Special Issue Islamic Finance)

16 pages, 443 KiB

Open AccessArticle

The Need for Shari’ah-Compliant Awqāf Banks

by Hanan Gabil, Benaouda Bensaid, Tahar Tayachi and Faleel Jamaldeen

J. Risk Financial Manag. 2020, 13(4), 76; https://doi.org/10.3390/jrfm13040076 - 17 Apr 2020

Cited by 2 | Viewed by 3787

Abstract

Bridging global economic inequalities calls for effective financial alternatives such as awqāf banks to better attend to the needs of the poor and underprivileged. This is expected to address the root causes of poverty and ensuing economic gaps, improving much of the living standards whether pertaining to education, health, shelter, employment or basic social services while reducing the state’s economic and financial burden. We envision awqāf banks as institutions which are established through cash awqāf and which operate multiple awqāf funds alongside an assortment of financial instruments. The main use of their awqāf funds are the issue of low-cost credit to the poor, economically disadvantaged and underprivileged, instead of focusing solely on generating and maximizing shareholder profits. This is to support the economy through of steady and sustainable growth, effectively raising the lower bar on per capita income and lifting multitudes out of poverty and need. This paper explores how low-cost credit can be provided to the poor or lower income demographics through awqāf banks, while addressing relevant issues such as Shari’ah compliance, services rendering, investment and awqāf distribution. This paper also examines current studies on awqāf in relation to finance and banking, the basic functions, and characteristics of the Shari’ah-compliant awqāf bank, as well as evaluations of awqāf banks. Current studies show that there is a legitimate need for Shari’ah-compliant awqāf banks which not only providing services for its beneficiaries but also manage investments and awqāf funds that contribute to overall national development and economic growth. This study would be of high relevance to experts, practitioners, financial managers, regulators, and policy makers in the fields of awqāf, banking and finance. Full article

(This article belongs to the Special Issue Islamic Finance)

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21 pages, 8368 KiB

Open AccessArticle

Evaluating the Performance of Islamic Banks Using a Modified Monti-Klein Model

by Novriana Sumarti, Indah G. Andirasdini, Nidya I. Ghaida and Utriweni Mukhaiyar

J. Risk Financial Manag. 2020, 13(3), 43; https://doi.org/10.3390/jrfm13030043 - 2 Mar 2020

Cited by 2 | Viewed by 4155

Abstract

The development of Islamic banking continues to increase in many Muslim (majority) countries. Substituting interest with profit shares in the assets of a given Islamic bank as one of the bases of operation has many interesting implications, one of which is the need for more involved risk and return measures. In this paper, we take a balance sheet analysis-based approach to formulating profit in order to assess the performance of an Islamic bank. Then the implementation of this approach is demonstrated using data provided by Indonesia’s financial services authority, known as the OJK. We develop formulae for the calculation of profit share between funding and financing funds as well as the appropriate rates of return. The resulting figures are then used to construct statistical models for short-term forecasting of the volumes of funding fund from the depositors and financing fund for business people who need funds for their investment projects. The approach we develop is innovative for Islamic banks and would be a welcome addition to their performance assessment toolkit. One of the results of our model indicates an increasing pattern on the equivalent rates of returns for funding and financing funds every year, which is caused by the fact that the reported income from the financing fund seems to have been accumulated from the beginning until the end of year in the Islamic bank. Full article

(This article belongs to the Special Issue Islamic Finance)

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13 pages, 239 KiB

Open AccessArticle

Exploring Compliance of AAOIFI Shariah Standard on Ijarah Financing: Analysis on the Practices of Islamic Banks in Malaysia

by Shujaat Saleem and Fadillah Mansor

J. Risk Financial Manag. 2020, 13(2), 29; https://doi.org/10.3390/jrfm13020029 - 5 Feb 2020

Cited by 5 | Viewed by 6852

Abstract

This paper aims to explore whether the practices of Ijarah financing by Islamic banks in Malaysia are in line with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No: (9) on Ijarah financing. Semi- structured interviews based on open-ended questionnaires were conducted, recorded verbatim, and transcribed for content analysis. Our study revealed flaws in the contemporary practice of Ijarah financing and indicated that it was slightly out of line with the AAOIFI Shariah standard. The study will not only help the Islamic banking industry of Malaysia to reduce, if not eliminate the gap between the practices of Bank Negara Malaysia (BNM) and AAOIFI Shariah standards pertaining to Ijarah financing but also create novel literature due to the fact that, no study has been undertaken to date, which analyzes the practices of Ijarah financing by Malaysian Islamic banks in the light of the AAOIFI Shariah standards. Full article

(This article belongs to the Special Issue Islamic Finance)

19 pages, 449 KiB

Open AccessArticle

Marketing Islamic Financial Services: A Review, Critique, and Agenda for Future Research

by Intekhab Alam and Pouya Seifzadeh

J. Risk Financial Manag. 2020, 13(1), 12; https://doi.org/10.3390/jrfm13010012 - 4 Jan 2020

Cited by 12 | Viewed by 9236

Abstract

Islamic finance has experienced rapid growth globally, surpassing the USD 2 trillion mark in 2017. As a result, the literature related to Islamic finance and banking is rather rich. Despite the richness of the literature, our knowledge of the marketing issues related to Islamic finance is modest and somewhat ambiguous. Therefore, we review several decades of research about the Islamic finance in various parts of the world. We identify and discuss three main research themes that draw on different conceptualization and theoretical lenses. After synthesizing their respective findings, we propose several avenues for future research that integrate these three research themes with the goal of developing a more nuanced understanding of Islamic finance and its marketing. While we believe that our review will mainly serve as a crucial reinvigoration and launch point for future research on Islamic finance marketing, it is also of great practical benefit for policymakers of various countries and especially managers of financial service firms interested in marketing Islamic banking and financial services to their customers. Full article

(This article belongs to the Special Issue Islamic Finance)

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9 pages, 346 KiB

Open AccessArticle

Managing Shariah Non-Compliance Risk via Islamic Dispute Resolution

by Maria Bhatti

J. Risk Financial Manag. 2020, 13(1), 2; https://doi.org/10.3390/jrfm13010002 - 18 Dec 2019

Cited by 15 | Viewed by 15894

Abstract

This article discusses Shariah non-compliance risk as a form of operational risk intending to ensure that operations in the Islamic and banking finance industry comply with Shariah procedures. In the field of Islamic finance, Shariah non-compliance risk refers to the possibility that Islamic finance transactions may be challenged based on Shariah non-compliance. This article uses a comparative and normative approach as well as a legal analysis of the case of Beximco. The article proposes the management of Shariah non-compliance risk by augmenting the effectiveness of Shariah governance systems with Islamic banking and finance arbitration; arbitration should be an enforced part of Islamic finance institutional arrangements—as it always has been classically—to provide flexibility for dispute resolution. To this end, the article examines contemporary implementations of Shariah arbitration rules to assess how Shariah non-compliance risk can be better managed via Islamic dispute resolution procedures. Full article

(This article belongs to the Special Issue Islamic Finance)

14 pages, 2754 KiB

Open AccessArticle

A Nontechnical Guide on Optimal Incentives for Islamic Insurance Operators

by Hayat Khan

J. Risk Financial Manag. 2019, 12(3), 127; https://doi.org/10.3390/jrfm12030127 - 25 Jul 2019

Cited by 5 | Viewed by 5959

Abstract

The takaful industry is searching for an optimal model for Islamic insurance operation, which has turned out to be a challenging task. This paper translates the abstract scientific knowledge accumulated in the optimal contracting literature into a simple, nontechnical, analytical framework to analyze alternative business models which could be used by regulators to align the best interest of shareholders and policyholders in the takaful industry. This paper shows that the wakalah–surplus-sharing hybrid serves as the optimal structure for takaful operation; in the presence of Akerlof’s (1982) gift-exchange, the wakalah fee reduces the adverse selection problem; and the wakalah fee could be used to protect infant takaful operators. Full article

(This article belongs to the Special Issue Islamic Finance)

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