ANNUAL ISLAMIC BANKING CONFERENCE | Year:2015 | دوره:26 |Papers Count:9

EVIDENCE HAS BEEN MOUNTING THAT THE INTEREST-BASED DEBT FINANCING REGIME IS UNDER INCREASING DISTRESS. EVIDENCE ALSO SUGGESTS THAT THE FINANCIAL CRISES, WHATEVER TITLE THEY CARRIED - EXCHANGE RATE CRISIS OR BANKING CRISIS– HAVE BEEN DEBT RELATED CRISES IN ESSENCE. AT PRESENT, DATA SUGGEST THAT THE DEBT-TO-GDP RATIO OF THE RICHEST MEMBERS OF THE G-20 IS EXPECTED TO REACH 120% MARK BY 2014. THERE IS ALSO EVIDENCE THAT OUT OF SECURITIES WORTH US$ 200 TRILLION IN THE GLOBAL ECONOMY, NO LESS THAN THREE-FOURTH REPRESENT INTEREST-BASED DEBT. IT IS DIFFICULT TO SEE HOW THIS MASSIVE DEBT VOLUME CAN BE VALIDATED BY THE UNDERLYING PRODUCTIVE CAPACITY OF THE GLOBAL ECONOMY. THIS PICTURE BECOMES MORE ALARMING CONSIDERING THE ANEMIC STATE OF GLOBAL ECONOMIC GROWTH. THERE IS GREAT UNCERTAINTY WITH REGARD TO INTEREST RATES.ALTHOUGH POLICY-DRIVEN INTEREST RATES ARE NEAR-ZERO LEVEL, THERE IS NO ASSURANCE THAT THEY WILL NOT RISE AS THE RISK AND INFLATION PREMIA BECOME SIGNIFICANT. HENCE, A MORE SERIOUS FINANCIAL CRISIS MAY BE IN THE OFFING AND A GENERAL COLLAPSE OF ASSET PRICES MAY OCCUR. THIS PAPER ARGUES THAT THE SURVIVAL OF THE INTEREST-BASED DEBT REGIME IS BECOMING LESS TENABLE, AS IS THE PROCESS OF FINANCIALIZATION THAT HAS ACCOMPANIED THE GROWTH OF GLOBAL FINANCE OVER THE LAST FOUR DECADES. THE ABOVE HAS RESULTED IN AN UNPRECEDENTED INCREASE IN ECONOMIC RISKS; GENERATING (ADVERSE) NON-LINEARITIES IN SYSTEM‘S BEHAVIOR. SUCH A BEHAVIOR IS NOTHING BUT A DEMONSTRATION OF THE VERSE, “ALLAH OBLITERATES RIBA … “ OF THE QURAN. AS A RESULT, THE SEARCH IS ON FOR A PARADIGM SHIFT TOWARDS A LESS VOLATILE AND MORE RESILIENT FINANCING REGIME. THE PAPER PROPOSES RISK SHARING BASED ISLAMIC FINANCING AS SUITABLE ALTERNATIVE AND ALSO DEMONSTRATES EMPIRICALLY ITS BETTER GROWTH AND STABILITY CHARACTERISTICS BY USING ADVANCED DYNAMIC HETEROGENEOUS PANEL TECHNIQUES.

1- INTRODUCTION ISLAMIC BANKING EXPERIENCE IN THE ISLAMIC COUNTRIES: DUBAI ISLAMIC BANK WAS THE FIRST COMMERCIAL BANK THAT CONDUCTED ITS AFFAIRS ALONG ISLAMIC LINES. IT WAS ESTABLISHED BY HIS EXCELLENCY SAEED BIN AHMAD AL LOOTAH IN 1975. IN THE SAME YEAR, THE ISLAMIC DEVELOPMENT BANK WAS ESTABLISHED IN JEDDAH BY A DECISION MADE BY THE CONFERENCE OF FINANCE MINISTERS OF MUSLIM COUNTRIES IN 1973. HOWEVER, THE FIRST IMPORTANT INTERNATIONAL ACADEMIC ACTIVITY WAS MARKED BY THE FIRST ISLAMIC ECONOMICS CONFERENCE WHICH TOOK PLACE INMAKKAH AL MUKARRAMAH IN 1976.THIS CONFERENCE HAS ALSO LED TO THE ESTABLISHMENT OF THE ISLAMIC ECONOMICS RESEARCH CENTRE BY KING ABDUL AZIZ UNIVERSITY IN JEDDAH IN 1978 AS WELL AS THE SPROUTING OF MANY OTHER ACADEMIC INSTITUTIONS AROUND THE WORLD.

MALAYSIA’S OVERARCHING ECONOMIC OBJECTIVE IS TO ACHIEVE DEVELOPED COUNTRY STATUS BY THE YEAR 2020. ON THE BACK OF SLUGGISH GLOBAL ECONOMIC CONDITION AND TIGHT FISCAL SPACE, THE ECONOMY WILL NEED TO GROW BY A STABLE AND RAPID RATE OVER THE NEXT FEW YEARS. CURRENTLY, MACROECONOMIC POLICIES IN MALAYSIA FOLLOW THE CONVENTIONAL MODEL BASED ON THE RISKTRANSFER PARADIGM. OVER THE NEXT DECADE, THE POTENTIAL FOR RISK SHARING AS AN ALTERNATIVE TO RISK TRANSFER IS EXPECTED TO GROW RAPIDLY. AS POINTED OUT BY A NUMBER OF SCHOLARS AND RESEARCHERS, ECONOMIES CAN BE MADE MORE RESILIENT TO SHOCKS BY ADOPTING FINANCING METHODS THAT LIMIT RISK TRANSFER (INTEREST RATE BASED DEBT CONTRACTS) AND ALLOW GREATER RISK SHARING AMONG THE MARKET PARTICIPANTS ON A BROAD SCALE. RISK SHARING IS ALSO THE ESSENCE OF ISLAMIC FINANCE. THE QUESTION ARISES AS TO THE DESIGN AND IMPLEMENTATION OF MACROECONOMIC POLICIES IN A RISK SHARING SYSTEM. THIS CONCEPT PAPER WILL MODEL THE MALAYSIAN ECONOMY BASED ON MACROECONOMIC POLICIES THAT APPLIES THE FUNDAMENTAL PRINCIPLE OF ISLAMIC FINANCE, I.E., RISK SHARING. FIRSTLY, A MONETARY POLICY THAT IS TARGETED DIRECTLY AT ASSET MARKET ACTIVITIES AND PRIVATE SECTOR PORTFOLIO ADJUSTMENTS.SECONDLY, IT SUGGESTS MOBILIZATION OF FUNDS FOR FINANCING FISCAL OPERATIONS BASED ON RISK SHARING THROUGH SALE OF GOVERNMENT LOW-DENOMINATION EQUITY PARTICIPATION PAPERS DIRECTLY TO THE PUBLIC TRADABLE IN SECONDARY MARKETS. THE LATTER PROPOSAL IS SUPPLEMENTED WITH A REFORM OF THE TAX STRUCTURE. THE PAPER WILL DEMONSTRATE ITS BENEFITS IN SPURRING GROWTH, PROMOTING DISTRIBUTIVE JUSTICE, RENDERING THE ECONOMY MORE STABLE, STRENGTHENING THE POTENCY OF MONETARY POLICY, ENHANCING FISCAL GOVERNANCE AND IMPROVING FINANCIAL INCLUSION.

TILL LATE 1980S MOST CENTRAL ASIANS WERE STILL DEEPLY SECULAR IN OUTLOOK, A LEGACY OF 70 YEARS OF COMMUNIST RULE. SINCE THE BREAKUP OF THE SOVIET UNION, EACH OF THE CENTRAL ASIAN REPUBLICS JOINED THE LARGEST ISLAMIC BANKING INSTITUTE IDB: KYRGYZSTAN (1993); TURKMENISTAN (1994); KAZAKHSTAN (1995); TAJIKISTAN (1996); AND UZBEKISTAN (2003). BY 1997, THE IDB ESTABLISHED A REGIONAL OFFICE IN ALMATY, KAZAKHSTAN, TO FOSTER ITS EFFORTS TO ENHANCE THE SOCIO-ECONOMIC DEVELOPMENT OF THE REGION. THE REGIONAL OFFICE IN ALMATY HAS EFFECTIVELY BECOME THE HUB FOR IDB GROUP OPERATIONS IN THE WHOLE AREA. THE REGIONAL DECISION MAKERS, INVESTORS AND PRIVATE BANKERS ARE GRADUALLY OPENING UP TO ISLAMIC FINANCIAL PRODUCTS.RESPONDING POSITIVELY TO THE GROWING CUSTOMER DEMAND, LOCAL GOVERNMENTS LIKE KAZAKHSTAN, KYRGYZSTAN AND UZBEKISTAN HAVE MADE SOME SIGNIFICANT AMENDMENTS IN THEIR RESPECTIVE STATE CONSTITUTIONS. SUCH AMENDMENTS WERE MEANT TO PROVIDE A LEGAL PLATFORM FOR THE INDUSTRY WHERE IT COULD FACILITATE ITSSHARI’AH BASED FINANCIAL INSTRUMENTS AND COULD ALSO GENERATE A HEALTHY MARKET SHARE. THE PRESENT PAPER WOULD BE AN ATTEMPT TO EXAMINE THE PRESENT NATURE AND STATUS OF ISLAMIC BANKING AND FINANCE INDUSTRY IN THE FIVE EMERGING ECONOMIES OF POST-SOVIET CENTRAL ASIA.

THIS RESEARCH HAS BEEN CONDUCTED WITH AN AIM TO INVESTIGATE THE DYNAMIC RELATIONSHIP BETWEEN THE FTSE BURSA MALAYSIA EMAS SHARIAH INDEX, AS A BROAD BENCHMARK FOR THE PERFORMANCE OF SHARIAHCOMPLIANT SECURITIES IN MALAYSIA, AND A COLLECTION OF INTERNAL FACTORS INCLUDING CONSUMER PRICE INDEX, INDUSTRIAL PRODUCTION INDEX, ISLAMIC INTERBANK RATE, BROAD MONEY SUPPLY, AND FOREIGN EXCHANGE RATE. THE ANALYSIS APPLIED MONTHLY DATA FROM MARCH 2007 TO MAY 2014 WITH A TOTAL OF 87 OBSERVATIONS PER VARIABLE. THIS STUDY USED VECTOR AUTOREGRESSIVE (VAR) APPROACH AND JOHANSEN COINTEGRATION TEST, VECTOR ERROR CORRECTION MODEL (VECM) AND ITS SUBSEQUENT TEST OF GRANGER CAUSALITY AND THE SHORT-RUN RELATIONSHIPS AMONG THE VARIABLES WERE INVESTIGATED. IT WAS EVENTUALLY FOUND OUT THAT EMAS SHARIAH INDEX HAS SIGNIFICANT LONGRUN RELATIONSHIPS WITH ALL THE STUDIED VARIABLES EXCEPT ISLAMIC INTERBANK RATE, INDUSTRIAL PRODUCTION INDEX, AND EXCHANGE RATE.

IN THE LAST FIVE DECADES, ADVANCES IN INFORMATION TECHNOLOGY AND IN FINANCIAL INNOVATIONS HAVE MADE POSSIBLE THE EMERGENCE OF AN IMMENSE CAPACITY FOR BANKS TO SWITCH REGIMES FROM RISK TRANSFER TO RISK SHIFTING.THE DEVASTATING POWER OF THIS CAPACITY WAS AMPLY PRONOUNCED IN THE FINANCIAL CRISIS OF 2007/2008. THE FALLOUT OF WHICH HAS INTENSIFIED CALLS FOR A RE-EXAMINATION OF CURRENT BANKING MODEL AND ITS UNDERLYING INCENTIVES‟ STRUCTURE. RISK SHIFTING IS, AXIOMATICALLY, ABSENT IN AN IDEAL ISLAMIC FINANCIAL SYSTEM. THE ISLAMIC BANKING MODEL, THUS, PROVIDES UNIQUE PARADIGM WITH RISK SHARING AT ITS CORE. HOWEVER, THE PRESENT FORMATION OF ISLAMIC BANKING HAS GROWN OUT OF CONVENTIONAL BANKING AND USES MANY OF ITS TECHNIQUES AND INSTRUMENTS. THE MAIN OBJECTIVE OF THIS PAPER IS TO EMPIRICALLY INVESTIGATE THE RISK SHIFTING BEHAVIOUR IN ISLAMIC BANKS IN DUAL BANKING SYSTEMS OF OIC MEMBER STATES. THE TWO-STEP DYNAMIC DIFFERENCE GMM IS APPLIED TO CATER FOR THE NATURE OF ISLAMIC BANKING DATA, WHICH IS CHARACTERIZED BY A LARGER DYNAMIC PANEL AND A SMALLER TIMEFRAME. FINDINGS TEND TO INDICATE THAT ISLAMIC BANKING HAS A LIMITING EFFECT ON RISK SHIFTING. THE EFFECT HOWEVER IS NOT SUFFICIENT TO FULLY NULLIFY THE OVERALL RISK-SHIFTING INCENTIVES. THE EVIDENCE SUPPORTS STRENGTHENING RISK SHARING AND REFORMING ISLAMIC BANKING CONFIGURATION AS THE WAY FORWARD FOR SUSTAINABLE FINANCE.

ISLAMIC BANKING HAS THUS FAR MIMICKED CONVENTIONAL BANKING WITH THE RESULT THAT THE SAME PROBLEMS AND OUTCOMES HAVE SURFACED, EVEN THOUGH IT IS OPERATING WITHIN AN INTEREST FREE FRAMEWORK. THIS APPARENT “CONVERGENCE” HAS LED TO DISAFFECTION BOTH AMONG CONSUMERS OF ISLAMIC BANKING SERVICES AND POLICY MAKERS. THIS PAPER PROPOSES A RISK SHARING MODEL FOR ISLAMIC BANKS THAT CAN POTENTIALLY PULL ISLAMIC BANKING AWAY FROM THIS PATH DEPENDENCY. UNDER THE PROPOSAL AN ISLAMIC BANK’S ASSETS WOULD BE SECURITIZED BY THE ISSUANCE OF SUKUK TYPE INSTRUMENTS THAT HAVE THE SAME UNDERLYING CONTRACT AND AVERAGE “DURATION” AS CUSTOMER FINANCING. SMALL ASSETS MAY HAVE TO BE POOLED INTO TRANCHES OF SIMILAR MATURITY BEFORE BEING SECURITIZED. MEDIUM AND LARGER ASSETS WOULD HAVE PAPERS ISSUED DIRECTLY AGAINST THEM. THUS, INSTEAD OF DEPOSITORS, AN ISLAMIC BANK WOULD HAVE THOUSANDS OF SUKUK HOLDERS, ALL OF WHOM SHARE THE PROFITS AND LOSSES ARISING FROM THEIR RESPECTIVE TAGGED ASSET. OTHER THAN WADIAH BASED SAFE CUSTODY ACCOUNTS AND CURRENT ACCOUNTS AGAINST WHICH THE BANK HOLDS CASH, ALL OTHER DEPOSITORS WOULD BE “SOLD” SUKUK FOR THE AMOUNT, DURATION AND RISK LEVEL THAT THEY PREFER. THE MODEL HAS SEVERAL ADVANTAGES SUCH AS, MINIMIZING SYSTEMIC RISK THROUGH RISK DISSIPATION AND REDUCING THE LIQUIDITY MISMATCH INHERENT TO BANKING. THE SECURITIZED PAPERS PROVIDE NEW LIQUIDITY INSTRUMENTS AND CAN ENHANCE LIQUIDITY WITHIN THE ISLAMIC FINANCE SECTOR. WHERE THE MACRO ECONOMY IS CONCERNED, THE PROPOSAL ENHANCES SYSTEM STABILITY BY REDUCING RISK CONCENTRATION WITHIN THE BANKING SYSTEM, SUBSTANTIALLY WIDEMING FINANCIAL INCLUSION BY WAY OF SMALL DENOMINATION SUKUK AND MINIMIZES THE CONTINGENT LIABILITIES OF GOVERNMENTS BY AVOIDING THE USE OF DEPOSIT INSURANCE.

THE WBG INVOLVED IN ISLAMIC FINANCIAL SERVICES AS CLIENT REQUESTED, AND IN ORDER TO COMPLEMENT CONVENTIONAL ONE, SUPPORT ECONOMIC DEVELOPMENT AND POVERTY ALLEVIATION, EXPAND ACCESS TO FINANCE, ENHANCE FINANCIAL STABILITY AND BENEFITING FROM GROWING ISLAMIC FINANCIAL ASSETS. AREAS OF WBG INVOLVEMENT WERE CAPACITY BUILDING IN GOVERNANCE AND RISK MANAGEMENT ACCOUNTING ISSUES, REGULATIONS AND PRODUCT DEVELOPMENT, AND FOR FINANCIAL INCLUSION, AND IMPROVING LEGAL AND INSTITUTIONAL FRAMEWORK OF ISLAMIC FINANCIAL INSTITUTIONS AS WELL. THE WBG ALSO STRUCTURED ISLAMIC FINANCE PRODUCTS FOR FINANCING PROJECTS FOR MUSLIM COMMUNITIES AND PROVIDED GUARANTEES FOR SUPPORTING ISLAMIC FINANCE TRANSACTIONS. THE WBG IS ALSO INVOLVED IN ISSUING SUKUK FOR RAISING FUNDS FOR DEVELOPMENT PROGRAMS. THE WBG INVOLVEMENT WAS PRODUCTIVE AND PROMOTED ISLAMIC FINANCIAL SERVICES AS A COMPLEMENTARY TO THE CONVENTIONAL ONE.

THIS RESEARCH ATTEMPTS TO SHOW THAT RISK SHARING, AS DEFINED UNDER ISLAMIC FINANCE, MAKES FINANCIAL SYSTEMS ANTIFRAGILE. ANTIFRAGILITY SPECIFIES CONDITIONS UNDER WHICH SYSTEMS BECOME RESILIENT TO SHOCKS CAUSED BY BLACK SWANS. ACCORDING TO THIS CONCEPT, THE LONG-TERM SURVIVABILITY OF ANY SYSTEM CENTERS EXCLUSIVELY ON ITS ANTIFRAGILE NATURE, THAT IS, ITS ABILITY TO ABSORB AND ACTUALLY BENEFIT FROM BLACK SWAN-TYPE SHOCKS. THIS RESEARCH AIMS TO QUALITATIVELY INVESTIGATE RISK SHARING ISLAMIC FINANCE AGAINST THE CRITERIA OF ANTIFRAGILITY. THE METHODOLOGY USED IS ALITERATURE -BASED SECONDARY STUDY. IT RELIES PRIMARILY ON EXTENDING THE EXISTING LITERATURE IN THE AREA OF ANTIFRAGILITY INTO THE DOMAIN OF RISK SHARING ISLAMIC FINANCE. THE QUALITATIVE COMPARISONS ARE ACCOMPLISHED VIA A JUXTAPOSITION OF THE IDEAS OF TALEB [1] AND MIRAKHOR ET AL [2]. THE RESULTS OF THIS RESEARCH SHOW A SEAMLESS OVERLAP OF THE IDEAS OF RISK SHARING AND ANTIFRAGILITY, THEREBY SHOWING RISK SHARING ISLAMIC FINANCE TO BE MORE RESILIENT THAN DEBT-BASED CONVENTIONAL FINANCE TO BLACK SWANS. THIS CREATES A POTENTIAL AVENUE FOR RISK SHARING ISLAMIC FINANCE TO MOVE INTO THE MAINSTREAM OF FINANCE.