Faisal Alqahtani

IPO underpricing in the insurance industry and the effect of Sharia compliance: Evidence from Saudi Arabian market

Purpose n n n n nThe purpose of this paper is to explore the existence of underpricing in the cooperative insurance sector in the Saudi Arabian market and to examine whether Sharia compliance requirements have an impact on the level of underpricing. n n n n nDesign/methodology/approach n n n n nUnderpricing and the effect of Sharia compliance are analysed using a comprehensive sample of 33 insurance companies with data collected between 2007 and 2013, after taking into account market movements, as well as some factors well-known in the literature. n n n n nFindings n n n n nThe authors find that underpricing not only exists but also is among the highest in the world (455 per cent), which contradicts the literature on initial public offerings (IPOs)’ pricing in highly regulated sectors. In light of one of the other findings of the authors, namely, the small number of insurance underwriters, the authors attribute these very high levels of underpricing in part to the monopsony power of insurance underwriters in Saudi Arabia. Regarding the Sharia compliance effect, they find that it does not significantly reduce the underpricing of insurance offerings. The authors interpret this as the fact that Sharia status might not be taken into account by underwriters when they price the offerings of insurance companies, due to a major drawback in the implementing regulations of cooperative insurance which have been highly criticised by practitioners. n n n n nResearch limitations/implications n n n n nFuture research should try to include more factors that might explain the underpricing and its determinants. Two important recommendations flowing from this study for regulatory and supervisory institutions are the need to improve disclosure and transparency conditions and to work towards reducing the monopsony power enjoyed by the underwriters. As for Sharia effect, the Saudi central bank should resolve the issue of Sharia compliance by adopting one of the Sharia-friendly models suggested by Islamic finance scholars, such as wakala or mudaraba. n n n n nOriginality/value n n n n nTo the best of authors’ knowledge, this paper is among the first to offer empirical evidence of the impact of Sharia compliance on the initial return of the IPOs of cooperative insurance firms.

Underpricing of IPOs in Saudi Arabia and Sharia compliance

Purpose – The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs) and whether the sharia-compliance would have a significant impact on the initial returns.Design/methodology/approach – A comprehensive sample of 72 IPOs in Saudi Arabia between 2004 and September 2010 is used to analyse the initial return after adjusting it to the market movement as well as controlling for some common factors.Findings – We find that underpricing not only occurs but is also among the highest levels in the world. While traditional factors affecting initial return include age, market timing and firm size, we find that Sharia compliance significantly reduces underpricing in Saudi Arabia. This may imply that Sharia compliance helps to reduce the uncertainty and consequences of the limited information inherent in initial public offerings.Research limitations/implications – Further research is needed to see if the effect of Sharia compliance status on the short-run performance of IPOs extends to other Islamic countries or is a country-specific characteristic. More firms need to be examined to identify the market characteristics that drive the returns.Originality – This paper is among the first to provide an empirical evidence of the impact of Sharia compliance on the initial return pattern in IPO market.

The impact of the global financial crisis on Islamic banking

The global financial crisis (GFC) has provided an opportunity to test a number of well-known hypotheses about the relative advantages of conventional banks and those following Islamic principles. In particular, it has been hypothesized that Islamic banks should be more stable in that they do not use some of the more exotic products that were the subject of major losses in the United States. Furthermore, since they practise risk sharing through joint stakes in projects rather than simply charging interest on debt finance, it has been suggested that they ought to be less prone to failure in a downturn because the value of their liabilities will be reduced at the same time as asset values fall. Hence, the pressure on capital to cover losses should be smaller than in the commercial banks. However, the argument is not one way because at the same time Islamic banks are forgoing the opportunity to use a number of well-known derivative products that help manage risk. The net effect is therefore more debatable. Our chapter examines four phases in the global financial crisis. In the analysis, we find that experience is not well aligned with the theoretical expectations, in part because Islamic banks have tried to emulate the effect of conventional instruments and designed shariah-compliant products that have similar effects, hence reducing the potential degree to which the two sets of banks are different.