Abstract

Keywords

JEL classification

1. Introduction

2. Topic modeling approach

3. Topics in Islamic economics

4. Topics in Islamic finance

5. Topics in Islamic governance and morality

6. Discussion and conclusions

CRediT roles

References

Abstract

We provide a comprehensive structuring of research on Islamic economics and finance into the core topics of the area, for the period 1979 to 2018. This is carried out through a probabilistic topic modeling approach that allows statistical learning of the connection between research articles as well as their shared topics. This approach, which blends machine learning and natural language processing, helps provide a comprehensive structure to the literature. Our topic modeling analysis is conducted on approximately 1500 articles, and suggests the Islamic economics and finance literature can be well-described by 11 topics. These topics cover economic, finance, and morality issues. Our research can be applied to provide a clear structure for ongoing research agendas in Islamic economics and finance as well as a framework for understanding research development in this area. We also note the differences between Islamic and conventional approaches to economics and finance research in order to highlight the inherent new contributions of this maturing area of research.

1. Introduction

Research in Islamic economics and finance has advanced considerably since the middle of the last decade. This reflects the practical growth of the area, with now about $1.7 trillion assets under management (EY, 2016). In terms of research our study identifies about 1500 research articles1 in this domain published since 1979, with most being published in the last decade. This rapid growth in research presents challenges in terms of understanding the direction in which the research is expanding as well as for identifying coherent topics within the area. Our study therefore structures the corpus of articles in order to provide a clear understanding of the development of research in Islamic economics and finance. This serves to act as both a review of the Islamic economics and finance literature in addition to providing insights into the research questions of important sub-fields of the area.

By Islamic economics and finance, we refer to economic and finance practices that are informed by Islamic or Shari’ah laws and principles. This notably involves not charging interest (riba) but rather favoring the sharing of profits and losses (mudarabah and musharaka), as well as forbidding investing in particular types of businesses. There is also an emphasis on real investment rather than speculation by gambling (maisir), and generally excessive risk and uncertainty (gharar) is deemed incompatible with Islamic principles. An additional feature of Islamic economics and finance is that the major implementation of these principles is in developing countries as most Muslim-majority countries, where Islamic finance tends to be most practiced, are developing economies. This means there are associated issues related to this economic factor – for example, the research should ideally help with economic development and assisting populations to rise out of poverty.

A number of Islamic finance products are well known, such as sukuk (Islamic financial certificates developed as an alternative to conventional bonds) and Islamic mutual funds. However, the aims of Islamic economics and finance scholars, practitioners, and policy makers, go well beyond developing a set of compatible financial products. We see this particularly in Islamic economics, which ultimately could be argued to be aiming to re-imagine the entire economic field in line with Islamic principles. This has created significant spread in the literature, with associated difficulties in understanding the directions of the various sub-topics. It is towards this structural issue that we address this study.

1- Introduction

2- Literature review

3- Variable selection and data

4- Empirical approach

5- Empirical analysis

6- Conclusion

References

Abstract

Does market power condition the effect of bank regulations and supervision on bank risk taking? We focus on three regulatory tools: capital requirements, the restriction of activities, and official supervisory powers. Employing 10 years of unbalanced panel data on 123 Islamic and conventional banks operating in the Middle East and Asia, we arrive at the following conclusions. First, banking market power strengthens the negative impact of capital regulation on bank risk taking. Second, our empirical results suggest that the negative effect of activity restrictions on stability is diminished when banks have greater market power. Finally, we do not find strong evidence that the negative effect of supervisory power on banks’ risk taking is conditioned by their competitive behavior. In further analysis, we differentiate between Islamic and conventional banks regarding their competition, as well as their risk behavior. The results differ according to the banking business model. These findings could be useful for bank regulators in light of the accomplishment of Islamic banks’ regulatory framework. Indeed, the adoption of Basel III represents a significant regulatory challenge, given that it does not take into account the specificities of Islamic banks.

Introduction

The global financial crisis (GFC) of 2007–2009 highlighted just how fragile the banking system had become. Previous regulations failed to instill financial and systemic soundness and stability (Admati, 2014). Regrettably, not much has changed in the way of vigorous banking regulation. The question herein is why does banking regulation not work? Banking regulation aims mainly to mitigate systemic risk resulting from bank failure (Deli and Hasan, 2016) and, hence, protect depositors’ interests and maintain the financial health of the overall economy. Indeed, although regulators periodically set different levels of regulatory capital adequacy, the massive bank failures during the GFC and ensuing sovereign debt crisis revived the debate about regulatory norm effectiveness. An adequate bank regulation framework requires great appreciation of the bank behavior in the face of risk. It is a widespread view that such a framework involves a trade-off between capital regulation and bank risk taking. In this context, Altunbas et al. (2007) and Lee and Hsieh (2013) argued that this relation should be explored through two opposing hypotheses, namely, the moral hazard hypothesis and the regulatory hypothesis.

 Introduction

The relationship between monetary policy and the real economy is identified through the influence of monetary transmission channels on macroeconomic variables especially economic growth, inflation and investment. The rule is simple, the more monetary policy affects the economy, the more effective it is. In other words, the effectiveness of monetary authorities’ decisions supposes the existence of a relationship between a set of monetary policy instruments, especially the policy rate, and macroeconomic performances through different transmission channels. Main channels through which monetary policy could impact economic activities are interest rate; money supply; bank credit; exchange rate; asset price and expectation channel (Bernanke and Gertler, 1995; Taylor, 1995, Mishkin, 1996Taylor, 1995, Mishkin, 1996). Recent studies have focused on some topics related to transmission channels like the effect of the financial crisis, unconventional monetary policy and capital inflows in emerging economies (Mishkin, 2009; Borio and Zhu, 2012; Cevik and Teksoz, 2012; Chandra and Unsal, 2012; Kohlscheen and Miyajima, 2015). Besides, after the development of Islamic finance in the 2000th, largely through the rapid expansion of Islamic banks, the effectiveness of monetary transmission mechanism (MTM) was challenged for the countries where Islamic banks are present. In these countries, in which a dual monetary system is emerging, a growing number of empirical studies examined the monetary transmission through Islamic bank channels (Zaheer et al., 2013; Ergeç and Arslan, 2013, Majid and Hasin, 2014; Akhatova et al., 2016; Zulkhibri and Sukmana, 2017). In reference to Sharia rules, Islamic banks institutions are free interest rate and fundamentally different from conventional banks. The differences mostly well-known through the principles of Sharia are based mainly on profit and loss sharing (PLS) principle and asset backing principle. Applying both principles on banking intermediation make assets financing and their pricing close to real economy. Nonetheless, given that debt financing contract, being the main Islamic banking asset, is quite similar to conventional credit, the conduct of monetary policy through interest rate instrument is also expected to influence Islamic banks financing. In fact, in most countries where Islamic banks operate, monetary policy uses interest rate instrument of monetary market regulation as a benchmark of credit financing rate. Besides, in dual financial system, the presence of strongly competitive conventional banks, the inexistence of benchmark pricing of Islamic bank products and the underdevelopment of Islamic money markets,1 make Islamic banks behaviour, in term of debt financing, heavily influenced by monetary policy shocks and conventional bank activity. On the other side, given this incompatible environment with their ethical background, the presence of Islamic banks is likely to limit the ability of monetary policy to influence their financing debt volume making Islamic banking channel less effective despite its dependence on interest rate. In fact, Islamic banks, mainly through the use of profit sharing investment accounts (PSIA), seek to maintain debt financing level outside the influence of conventional monetary policy and to mitigate the undesirable effect of interest rate changes. The Sharia compliance of PSIA as loss absorbent product based on PLS principle with different maturities and currencies explains its importance to play multiples roles.

 Introduction

One of the most pressing challenges facing Islamic banks in Indonesia is how to increase market share, which remains low at just 4.64 per cent with total assets of US$22.4 billion (Financial Services Authority, 2015). In addition, because of structural factors, slow growth of market share is also attributable to operational issues such as limited office networks, lack of availability of competent human resources, less innovative products and high operational costs, as well as limited promotion and public education regarding Islamic banking (Ismal, 2013a, 2013b). These issues have led to low competitiveness in the national banking industry From a market-based perspective, there are two sources of competitive advantage that could be used by Islamic banks, namely, differentiation and low cost (Porter, 1998). Islamic banks can implement the differentiation strategy by offering unique operations according to Islamic principles, such as financing based on profit–loss sharing as a distinguishing factor from conventional banks (Ascarya and Yumanita, 2005). Islamic banks could also implement a low-cost strategy to ensure competitive prices that attract customers, the majority of whom are rational (Ismal, 2011). According to the contingency perspective, strategy success is determined by coalignment between the strategy and its contingency variables, both internal and environmental factors. Coalignment between strategic orientation and its contingency variables is known as strategic coalignment (Ventakraman, 1990). The level of strategic coalignment could explain why companies in the same industry and adopting the same strategies may perform differently. Based on low competitiveness and suboptimal strategy implementation at Islamic banks in Indonesia, this research will primarily solve these problems by analyzing strategic coalignment, which is expected to improve Islamic bank performance. This study uses the concept of business unit strategy developed by Porter (1998), who classified the strategy into low cost and differentiation. The internal contingency variables in this research include management accounting practices and management control systems, both of which have consistently proven to be contingency variables of the strategy when examining their impact on performance (Mia and Chenhall, 1994; Davila and Foster, 2005; Jermias and Gani, 2004; Auzair and Langfield-Smith, 2005; Cadez and Guilding, 2008; Tsamenyi et al., 2011; Gani and Jermias, 2012). The mission of Islamic banks, specifically to improve welfare in the world and the hereafter (falah), has implications on the indicators used to measure performance. Therefore, when assessing the performance of Islamic banks, this study uses the maqasid shariah concept that reflects comprehensive performance measurement in accordance with the purpose of human interaction under Islamic law. The impact of strategic coalignment on performance will be stronger when Islamic banks have adequate resources, such as modern infrastructure, competent human resources, sophisticated technology and innovative breakthroughs. The availability of resources, however, will depend on the corporate life cycle (Barney, 2001). Hasan et al. (2015) explained that the resources and capabilities of companies at the mature stage are greater and more diverse than companies at earlier stages. As a relatively new industry, Islamic banks have limited resources, networks, economies of scale and market share. Likewise, public awareness of Islamic banks remains low. Therefore, this study also analyzes whether the corporate life cycle of Islamic banks will affect the impact of strategic coalignment on performance.

Purpose – This paper aims to examine the compliance of disclosure with the financial accounting standards of the Accounting and Auditing Organisation for Islamic Financial Institutions’ (AAOIFI) related to Islamic financing products by Islamic banks in Bahrain and Qatar. Design/methodology/approach – The study measures compliance using disclosure indexes. The disclosure indexes include the three financial accounting standards of Murabaha, Mudaraba and Musharaka. The data are collected from the annual reports of 24 Islamic banks in Bahrain and Qatar over a period of 2012-2015. Findings – The paper found that Islamic banks in Bahrain and Qatar comply with AAOIFI financial accounting standards related to Murabaha, Mudaraba and Musharaka. However, there was a level of noncompliance in both countries. In addition, it found that the extent of compliance had increased over the 2012- 2015 period. Also, the Murabaha standard had the highest mean of compliance. Moreover, the results showed that the Islamic banks in Qatar tend to have more compliance of overall Murabaha and Mudaraba disclosures compared to the Islamic banks in Bahrain. Research limitations/implications – The findings are preliminary and highlight that the issue is of high interest to Islamic banks and AAOIFI. Hence, it requires a detailed follow-up to form a complete picture that would assist AAOIFI and regulators gear their policies toward better quality disclosure by Islamic financial institutions. Even though the findings are encouraging, future research is recommended to enforce compliance with the AAOIFI financial accounting standards. Originality/value – This is a pioneer empirical study that focuses on the level and trend of compliance with AAOIFI financial accounting standards related to the Islamic financing products of Murabaha, Mudaraba and Musharaka standards, especially in Qatar. Additionally, it is the first study comparing between the only two Gulf Cooperation Council (GCC) countries, i.e. Bahrain and Qatar, that mandatory apply the AAOIFI standards.

Introduction

The Islamic financial system differs from the conventional banking system due to its application of Islamic Shari’ah rules (i.e. Islamic law). The teachings of Islam prohibit products that charge riba (i.e. interest or usury) which conventional banks apply as a cost of advancing credit. In contrast, Islamic finance is based on the idea of profit-risk sharing. Under this model, the Islamic bank undertakes to share profits derived from an investment by a customer as well as potential losses arising from the venture. Islamic banking is continuing its tremendous expansion across the globe with assets reaching up to $1.3tn. After the establishment of the first Islamic bank in Dubai in 1975, Islamic banking increased rapidly and with more than 300 banks spread across more than 70 countries. A large portion of these Islamic banks is located in countries comprising the Gulf Cooperation Council (GCC). The increased expansion has led to the need to establish a regulatory framework to oversee their operations and handle the task of preparing useful standards. To this end, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established in 1991 to prepare accounting, auditing, governance, ethics and Shari’ah standards for Islamic Financial Institutions (IFI). However, little research has investigated the compliance with such standards. The AAOIFI is an Islamic international autonomous not-for-profit body established based on the Agreement of Association which was signed by Islamic financial institutions on 26 February 1990 in Algiers and was registered on 11 March 1991 in the Kingdom of Bahrain (AAOIFI, 2017). AAOIFI’s sole objective is to develop and disseminate accounting and auditing guidelines relevant to IFIs. AAOIFI prepares, promulgates and interprets reviews and amends accounting and auditing standards for IFIs (AAOIFI, 2017). AAOIFI’s organisational structures consist of General Secretariat, Board of trustees, Executive Committee, General Assembly, Shari’ah Board and Accounting and Auditing Standards Board. The organisation has so far published 96 standards and statements including one Financial Accounting Statement (i.e. Conceptual Framework for Financial Reporting by Islamic Financial Institutions) and 27 financial accounting standards (FAS), five auditing standards, 54 Shari’ah standards, seven governance standards and two code of ethics standards (AAOIFI, 2013). The AAOIFI accounting standards are mandatory in Bahrain, Qatar, Oman, Sudan and Syria (AAOIFI, 2017). Moreover, the AAOIFI accounting standards are either used as a basis of national accounting standards in Indonesia and Pakistan or adopted voluntarily in some countries such as Brunei, Egypt, France, Kuwait, Lebanon, Malaysia, Saudi Arabia, South Africa, United Arab Emirates and the UK (AAOIFI, 2017). AAOIFI auditing, governance and ethics standards are adopted by IFIs voluntarily (AAOIFI, 2017). AAOIFI is supported by 202 institutional members from 45 countries (AAOIFI, 2013).

Abstract

A number of recent studies compare the performance of Islamic and conventional banks with the use of individual financial ratios or efficiency frontier techniques. The present study extends this strand of the literature, by comparing Islamic banks, conventional banks, and banks with an Islamic window with the use of a bank overall financial strength index. This index is developed with a multicriteria methodology that allows us to aggregate various criteria capturing bank capital strength, asset quality, earnings, liquidity, and management quality in controlling expenses. We find that banks differ significantly in terms of individual financial ratios; however, the difference of the overall financial strength between Islamic and conventional banks is not statistically significant. This finding is confirmed with both univariate comparisons and in multivariate regression estimations. When we look at the bank financial strength within regions, we find that conventional banks outperform both the Islamic banks and the banks with Islamic window in the case of Asia and the Gulf Cooperation Council; however, Islamic banks perform better in the MENA and Senegal region. Second stage regressions also reveal that the bank overall financial strength index is influenced by various country-specific attributes. These include control of corruption, government effectiveness, and operation in one of the seven countries that are expected to drive the next big wave in Islamic finance.

Introduction

The market share of Islamic banking is still small in the global financial sector; however, it is growing fast in many countries, especially in the Middle East and Asian regions (International Monetary Fund, 2015). In theory, there are many differences between Islamic and conventional banks. Nonetheless, these two types of institutions compete in the same banking arena, and some claim that the Islamic ones showed stronger resilience, on average, during the global financial crisis (e.g. Hasan and Dridi, 2010). Therefore, it is not surprising that Islamic banks have attracted considerable attention by academics, policy makers, and other market practitioners.

Within this context, a growing number of studies investigates the differences in the performance between the two types of banks. For example, many studies compare the efficiency of Islamic and conventional banks. There are two issues associated with these studies. First, their findings are mixed. For instance, Srairi (2010) conclude that Islamic banks are, on average, less cost and profit efficient than conventional banks. Bader et al. (2008) conclude that there are no significant differences. Johnes et al. (2014) find that Islamic banks are typically on a par with conventional ones in terms of gross efficiency, significantly higher on net efficiency and significantly lower on type efficiency. Second, an important drawback is that while these indicators capture adequately the efficiency of banks in terms of transforming their inputs into outputs, they usually fail to take into account other aspects like risk and liquidity.

Abstract
This introductory article of the special issue “Islamic Banking and Finance II” highlights various studies on fast-growing Islamic finance industry. It focuses specifically on Islamic banking and Islamic capital market research. To date, scholarly research on Islamic finance is mainly confined to empirical verification of its performance on the argument that the Islamic finance is distinct from conventional finance. While more works need to be done to soundly and concretely justify the viability of Islamic finance, future works should aim at placing the Islamic foundations of the industry in proper theoretical settings beyond the statement that it is different. In addition, theoretically and empirically, demonstration of its bearings on economic well-beings and policies such as economic stability, financial inclusion, economic development, and stabilization policies is needed.

The impacts of the recent global crisis are gradually disappearing while stagnant economies are still far from revival. Acknowledging that disruptions in real economies are devastating, the academic debate about identifying bank specific characteristics that help economic recovery has re–emerged. The literature suggests certain bank characteristics, e.g. bank capital, asset quality, bank ownership etc., that explain different lending patterns within a banking system. Whilst several macroprudential measures, including procyclical capital requirements, are set to enhance bank capital and asset quality during economic downturns (Garc´ıa-Suaza et al., 2012; Repullo and Saurina, 2011; Stolz and Wedow, 2011), the impact of bank ownership still keeps its efficacy in stabilizing bank lending. It is widely known that many countries opted to nationalize their needy banks as an initial response to the recent global crisis (Beccalli and Frantz, 2016; At-Sahalia et al., 2012). Even in high– income advanced countries, state–owned banks had a clear mandate to stabilize loan market over business cycles (see World Bank, 2012, for a comprehensive overview). In line with this debate, a slim literature examines the role of Islamic banking in alleviating the effects of the recent global crisis, as Islamic banks are naturally considered to have a similar mandate (see e.g. Beck et al., 2013; Farooq and Zaheer, 2015; Hasan and Dridi, 2011; Soedarmono et al., 2017). One of the fundamental differences between Islamic and conventional banking relies on their objectives. A widespread belief suggests that Islamic banking has an ultimate objective of promoting social wealth and justice (Tlemsani and Matthews, 2002; Aribi and Arun, 2015; Mansour et al., 2015). Islamic banks also claim that their banking decisions rest on considerations beyond profit maximization. To attain certain social objectives, Islamic banking proposes certain tools. Islamic banks, for instance, praise equity financing rather than debt financing to preserve distributive justice, poverty alleviation, and social equity (see e.g. Venardos, 2012), even though the expected returns from equity financing is lower than alternative financing methods (Kuran, 1995). Although the designation of Islamic banking prioritizes social objectives, empirical evidence on the success of Islamic banks’ fulfilling these objectives is rather scant. The lack of adequate empirical evidence motivate us to investigate whether Islamic banks mitigate the repercussions of business cycles by lending1 against the cycles.

The recent financial crisis started in the sub-prime mortgage sector in the United States in the fall of 2008 to propagate and trigger a financial crash that shook the international stock markets, and led to the collapse of the pillars of the global finance and then to a recession that aوٴected the entire planet. Нis crisis caused further damage and casualties throughout the world to the extent that it became one of the major financial crises in history, which raised the curiosity of many analysts and economists. It is in fact an opportunity to review the current foundations of the international financial system characterized by an excess of financialization which distinguishes the real from the financial economy and encourages indebtedness and speculative driіs, which weakens the system and exposes it to more crises in the future. In Europe, an amount of 275 billion Euros at the marginal rate of 4.08% was injected in August 2007 by the European Central Bank (ECB) in order to help banks avoid successive liquidity problems that investors were subject to and also to avoid the paralysis of the credit market. Нe amount of loans given by banks was remarkably reduced. Нis step was reached aіer a phase characterized by the increase of the degree of the loans oوٴered along with the increase of the number of default debtors. Because of the subprime crisis, the eighth British bank, Northern Rock, a specialist in mortgages, fell into a situation of illiquidity. For this reason, the bank of England intervened to help it by playing the role of the lender of last resort (RDP). Нe main source of the lack of liquidity within this institution is the mistrust of the second-tier banks that refused to lend liquidity, fear of its possible exposure to the subprime mortgage market. Нis “Subprime Credit” emphasized Islamic finance and presented it as a means of regulating the world economy, especially aіer the many weaknesses that finance has experienced. In this fragile macroeconomic context, the sentiment of the financial markets fluctuated according to the actions of the authorities.