Buerhan Saiti

Testing the Conventional and Islamic Financial Market Contagion: Evidence from Wavelet Analysis

Abstract This study is a first attempt at testing the extent of contagion for conventional and Shari’ah-compliant stock indices. We examine the period surrounding the U.S. subprime crisis of 2007–9 and the Lehman Brothers collapse of 2008 to determine the relative extent of contagion. We find no clear evidence of contagion during the subprime crisis however, during the Lehman collapse most conventional indices showed contagion. Interestingly, the Shari’ah-compliant indices mostly do not show evidence of contagion. Collectively, our results have important implications for fund managers in terms of asset allocation risk and policymakers seeking an optimal policy response to crises.

Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators

ABSTRACT This study is the first attempt to investigate the relationship between the level of risky assets and capital level in a mixed Malaysian banking system covering 83 months starting December 2006. The results of dynamic ordinary least squares indicate positive relationship between capital ratio (CAR) and risk-weighted asset ratio (RWA) in the long run. Furthermore, the causality analysis based on panel vector error correction model (VECM) and two-step dynamic system generalized method of moments indicates unidirectional causality from CAR to RWA. Our results further suggest that higher capital growth and capital buffer provide an extra cushion for the Malaysian banks to pursue relatively riskier financial activities, and the nature of risk-taking behavior of Islamic banks follows that of the conventional banks.

An analysis of financial speculation: from the Maqasid Al-Shari’ah perspective

Purpose This paper aims to discuss the topic of financial speculation with special reference to forex and offers an analysis from the Maqasid Al-Shari’ah perspective, whereby authors propose to limit the outreach of speculative instruments in the financial markets. Design/methodology/approach The authors will make use of a simple textual analysis of existing materials and documents. To come up with conclusions, relevant to this study and to make them credible enough, the authors will undertake to review the existing literature in the next part of the paper and will later present his analysis of findings in light of financial crises and the objectives of Shari’ah. Findings The Maqasid Al-Shari’ah approach used in the analysis suggests that speculative financial instruments do not constitute a necessity, and their harmful practice must be limited to protect the religion, life, lineage, intellect and property. Originality/value Financial speculation in general and foreign exchange in particular must be regulated. Their current practices of financial system pose significant challenges for entire economies as well as individuals. Muslims should also avoid speculative financial instruments, such as forex, because they are a clear threat to individual and state wealth and prosperity. In addition, they threaten traditional businesses and social norms in Muslim societies.

The effects of monetary policy on the Islamic financial services industry

Purpose The purpose of this paper is to investigate the effects of monetary policy on the Islamic financial service industry by studying the findings of the existed literature. Design/methodology/approach Because of the unavailability of the empirical models in the existing study, the authors used past studies review and proposed a new theoretical model. Findings Majority of these studies have documented the negative effects with the exception of a few. The transmission of the monetary policy has been taken place through interest rate risk, asset-liability mismatch, as well as deposit and financing instability. Furthermore, the examined studies have confirmed the viability of the Islamic monetary policy. Originality/value The proposed model may offer some insights to policy makers if it is examined empirically.

A three-way analysis of the relationship between the USD value and the prices of oil and gold: A wavelet analysis

This study examines the relationships among oil prices, gold prices, and the USD real exchange rate. It adopts the wavelet approach as a nonlinear causality technique to decompose the data into various scales over time. Higher-order coherence and partial coherence were used to identify the lead-lag effect and mutual coherence function among the variables. The results show that changes in the USD exchange rate influence the prices of oil and gold negatively in the short- and medium-term. While in the long-term, the oil price has a negative impact on the value of the USD. Oil and gold are significantly linked and correlated because their prices are determined in USD. The findings of this paper have significant implications, particularly for risk management.

Unveiling the diversification benefits of Islamic equities and commodities: evidence from multivariate-GARCH and continuous wavelet analysis

Purpose The purpose of this paper is to examine the extent to which the Indonesian Shariah compliant investors can benefit from the portfolio diversification with the Islamic indices of its trading partners and selected commodities such as gold, crude oil, and cocoa. Design/methodology/approach The authors use daily time series data covering both Islamic and commodity indices starting from June 4, 2007 until December 30, 2016 by the application of multivariate-generalized autoregressive conditional heteroscedastic and continuous wavelet analysis. Findings The findings tend to indicate that investors with exposure in Shariah compliant indices of Indonesia and wanting to gain more diversification benefits should invest either in the USA or India Islamic equity. Instead, the greater benefits will be obtained by Shariah compliant investors if they invest in the USA Islamic indices during long-term investment horizons. If investors want to invest in medium investment horizons, investing in India Islamic equity is a viable option. The findings further suggest that gold has a role of diversification benefits as a “safe haven” instrument for investors. It is advisable for the investors that have exposure in commodities (gold, crude oil, and cocoa) and want to invest in Indonesian Islamic equity, they should hold the portfolio for not more than 16 days to gain diversification benefits. Originality/value The results of this study are expected to have crucial implications for the Indonesia Shariah compliant investors and portfolio managers because it will help them to understand portfolio diversification benefits with different stock holding periods or investment horizons.

Capital structure of Islamic banks: a critical review of theoretical and empirical research

Purpose - This paper aims to critically evaluate theoretical and empirical research into capital structure practices in Islamic banks (IBs) from four perspectives, namely, theoretical aspect and its nature, determinants of capital structure in IBs, links between capital structure and risk management and nexus between capital structure and performance of IBs. Design/methodology/approach - The authors will review and examine past studies on IBs’ capital structure from both theoretical and empirical research. Findings - The paper concludes that most of the literature on IB capital structure is largely theoretical than empirical. The existing studies on IB capital structure have various limitations, which suggest a need for detailed empirical work. Detailed empirical research in the field of capital structure will support bank managers and policymakers in making decisions about improving capital structure. Originality/value - This research will make several noteworthy contributions to address literature gaps for IB capital structure. Furthermore, this paper will identify areas for future research into capital structure practices and IB financing decisions. Lastly, this paper will equip regulators with guidelines for establishing sound capital requirements for IB.

Contracts, Structures, and Computation Mechanisms of Islamic Bank Retail Financing Products: A Critical Assessment

This chapter discusses Islamic bank retail financing, its instruments, and operations. The discussion demonstrates that it is essential to have a banking system based on Shariah principles that fulfill the needs of Muslim consumers. The chapter examines the various personal financing products, their underlying Islamic contracts, and their computational mechanisms with appropriate examples. It also critically evaluates the products of Islamic bank retail financing. The availability of various personal financing instruments in Islamic banks allows Muslim consumers to achieve their financing needs. Moving forward, a greater variety of instruments that invite fewer Shariah issues must be offered in the market to ensure a more vibrant Islamic banking system.

Money in Islamic banking system

The idea of revisiting currency and the gold dinar from an Islamic standpoint is an interesting topic of discussion in the context of the current monetary system. This chapter examines the historical aspects and supremacy of a gold currency and the weakness of fiat money using a maslahah-mafsadah approach. It considers some possible alternative forms of gold as money and then discusses some obstacles and barriers in the hope of finding a model of gold as money to implement in the current economic system. A deductive method is used to explore the implementation of a gold currency based on historical study and library research. The findings reveal that money is not limited to gold and silver. However, by deriving new law from original law process, the law (hukm) of gold or silver as money is permissible.

Islamic Financial Planning Towards Sustainable Eco-Growth

Financial planning is undeniably important from an Islamic perspective; Muslims must be rich not only spiritually but also materially. This chapter discusses the importance, components, and processes of Islamic financial planning and the means of achieving the goals set out in a financial plan. Three major instruments, such as wasiyah(bequest), waqf (endowment), and hibah (gift), are recommended as financial products used by financial institutions and professional organizations that can help Muslims meet their individual needs when it comes to managing and enhancing their financial plans.