Islamic Finance : Research Directions for Young Researchers

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Proposal of research direction for researchers in the field of Islamic Finance.

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  • 1. 1st Workshop on Integrated Reporting"On the frontiers of finance : Islamic finance islamique, sustainable finance, integrated reporting"Sfax, 8th November 2014Islamic Finance : Future Research Directions for Young ResearchersMahmoud Sami NabiTunisia Polytechnic SchoolIRTI & ERF

2. Islamic Financial Services Industry Continuous growth2The Islamic financial services industry (IFSI) has grown in size and geographic coverage. More than 600 Islamic Financial Institutions operating in more than 75 jurisdictions.Islamic Finance Assets GrowthSource: KFH Research (2012) 3. Islamic Financial Services Industry Continuous growth3Banking Assets 81%Sukuk Outstanding 13%Islamic Funds Assets 5%Takaful Assets 1%Islamic banks and Islamic banking windows: central pillar with 40.3% og CAGR over 2004-2011 and total assets estimated to USD 1.1 tln.Sukuk : issuances growing at CAGR of 42.3% over 2004-2011 passing from USD 7.2 bln to USD 85.1 bln. Global aggregate sukuk 1996-2012 USD 396.4 bln.Cooperative Insurance (Takaful): small segment but its total gross contributions have grown by a CAGR of 23.1% over 2004-2011 with an estimate of USD 15.2 bln in 2012.Islamic funds (680) : assets under the management of passed from USD 29.2 bln in 2004 to USD 64 bln in Oct. 2012 .Breakdown of Islamic Assets by type (2011e)Sources: KFH, 2012 ; Thomson Reuters, Zawya, 2012. 4. Doing research to ensure that Islamic finance will developwith its distinguish features4Risk sharingEthical (charity, solidarity)Connection to the real economySustainabilityFinancial inclusion, Social cohesionInnovation, entrepreneurship and PSDInvestment and TradeHealth, Education, Transport, HousingTransport, HousingFood security, Renewable energy, Green economy, 5. 5Role of the Islamic International InstitutionsThe 10-year framework and strategieshttp://www.ifsb.org/docs/10_yr_framework.pdfA document published by IDB and IFSB in 2007 to mainly provide a platform for countries in formulating their national and regional master plans to promote Islamic financial services industry. Mid-Term Review of 10Y Framework & Strategies:Identify the progress, gaps and also to examine the need to have a reorientation of priorities and initiatives 6. 6Source: Islamic Banking and Finance Information System (IBFIS) - IRTIHow to avoid deviation from the distinguish principles and replication of the conventional finance spirit ?Example : Islamic Banks in practice 7. 7One of the explanations of the low use by Islamic banks of the Profit and Loss Sharing modes of finance relatively to mark- up modes is the difficulty to deal with the agency problems (moral hazard and adverse selection) (Siddiqui, 2006).According to Ul Haque and Mirakhor (1987, p161) bankers ascribe the problem of moral hazard or asymmetric information to be an important explanation for individual preference for short-term liquidity.Example : Islamic Banks in practice 8. 8The empirical studies revealed that the current practices of IBs deviate from their theoretical model.Zainol and Kassim (2010) and Cevik and Charap (2011): CB deposit rates Granger cause returns on PLS accounts in Malaysia and Turkey. Chong and Liu (2009): in Malaysia showing the retail Islamic deposit rates mimic the behavior of conventional interest rates.Beck, Demirg-Kunt and Merrouche (2013) "Islamic vs. conventional banking: Business model, efficiency and stability", Journal of Banking and Finance carried an empirical investigation on a broad cross-country sample and reached the following:few significant differences in business orientation.IBs less cost-effective, have higher intermediation ratio, higher asset quality and better capitalized.large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes.Example : Islamic Banks in practice 9. 9 Hasan and Dridi (2010) The effects of the global crisis on Islamic and conventional banks: A comparative study, IMF WP 10/201 analyse the effects of the crisis on profitability, credit growth, asset growth and external ratings of 120 Islamic and conventional banks in 8 countries. IBs showed stronger resilience in the early stages of the crisis. However, as the crisis moved to the real economy in 2009, IBs profitability has steeply declined relatively to the CBs.IBs contributed to financial and economic stability during the crisis, given that their credit and asset growth was at least twice as high as that of CBs.Resilience to the global crisisExample : Islamic Banks in practice 10. 10Bourkhis and Nabi (2013) "Islamic and conventional banks' soundness during the 20072008 financial crisis," Review of Financial Economics. analyse the effects of the crisis on a set of financial soundness indicators (FSIs) related to banks earnings and profitability, capitalization, asset quality, efficiency, liquidity and financial stability using a matched sample of 34 IBs and 34 CBs from the 16 countries covered on the period 19982009.IBs outperformed CBs in regards to the return on average assets (ROAA) during and after the financial crisis.Considering the impact of the financial crisis on the banking soundness (measured by the Z-score and capital to asset ratio) : no significant difference between IBs and CBs. However, there is some evidence that IBs were in average more sound (in regards of the Z-score).Resilience to the global crisisExample : Islamic Banks in practice 11. 11What are the characteristics of the demand for Islamic Finance Services ?Case of Tunisia 12. 12Case of Turkey 13. 13Case of MoroccoSource: IFAAS Survey 2012 14. 14What lessons can be learnt from the Islamic finance experiences of other countries?Learn from the Malaysian experienceOver the last decade, Malaysia has implemented important reforms in the Islamic finance industry to favor its developmentLaldin (2013): The Malaysian Islamic financial sector is seen as one of the most progressive and attractive in the world given the numerous incentives planned and further liberation in the coming years.Source: Mohamad Akram Laldin (2013) "Proposed Suitable Islamic Financial Instruments for Central Asia Countries", Presentation during the Annual Meeting of IDB, May 2013 - Dushanbe - Tajikistan 15. 15Learn from the Indonesian experience 16. 16 17. Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Islamic Development Bank (IDB) Prize Lecture on Islamic finance financial stability, economic growth and development, Jeddah, 27 November 2013 :The recalibration of finance should aim to serve the needs of the real economy and more importantly the broader society.This would generate positive externalities that would in the medium term lead to more sustainable financial systems, and in turn contribute positively to growth and development.17How can Islamic Finance promote inclusive economic development? 18. How to develop the IFSD inline with the economic development priorities ?18Enhancing access to finance to SMEs and poor populationSupporting entrepreneurshipSupporting Private Public Partnership (Education, Health, Infrastructure, Transport, etc.)Supporting R&D and innovation in line with the development problemsEnhancing intra-trade and regional integrationUnemployment (Youth)PovertyHousingHealth, Education, R&D, TransportAccess to Water and food securityvibrant business environment + Adequate ecosystem for the IFSD 19. What is the best business model for IBs ?What is the role of education and awareness about Islamic Finance principles in the development of the sector ?How to enhance financial inclusion ?How to develop efficient and sustainable Islamic Microfinance institutions ? Do we need Islamic Investment funds ? Do we need Islamic Venture Capital ?How to use Sukuk in raising financial resources for development issues ? What kind of innovative Islamic financial products we need ?How to conduct monetary policy in a dual banking system?How to regulate a dual banking (Insurance) system while ensuring fair competition and stability between the different types of actors ?19Further questions 20. Contribute by your research to ensure a sustainable development of Islamic financecoupled with inclusive growth1)Inspire from existing research and ideas, 2) Be market oriented (connection with financial institutions, regulators, clients) 3) Innovate within the compliance sphere (cooperation)20 21. 21Recent articles KAU: Islamic Econ., Vol. 27 No. 1. (2014):"A Study of Islamic and Conventional Banks in Malaysia","Sharah Investment Screening Criteria: A Critical Review,Trust Fund: A Product Combining Waqf, akh and adaqah for Socio-Economic Agenda, Determinants of Revenue Efficiency in the Malaysian Islamic Banking Sector 22. 22Recent articles Kabir & Hassan et (2014):Capital adequacy and lending and deposit behaviors of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 58-75."Islamic bank incentives and discretionary loan loss provisions," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 152-174."The assets and liabilities gap management of conventional and Islamic banks in the organization of Islamic cooperation (OIC) countries," Applied Financial Economics, Taylor & Francis Journals, vol. 24(5), pages 333-346, March. 23. 23Empirical finding: superior efficiency of Islamic banks suggesting that Islamic banking could be beneficial for Africa.Recent articles 24. 24Recent articles Etudes en Economie Islamique 25. 25Recent articles Etudes en Economie Islamique 26. 26Recent articles Etudes en Economie Islamique 27. Thank you msaminabi@gmail.com27