Habib Ahmed

Crowding‐Out and Crowding‐In Effects of the Components of Government Expenditure

This article examines the effects of disaggregated government expenditure on investment using fixed‐ and random‐effect methods. Using the government budget constraint, the analysis explores the effects of tax‐ and debt‐financed expenditure for the full sample, and for subsamples of developed and developing countries. In general, tax‐financed government expenditure crowds out more investment than debt‐financed expenditure. Expenditure on social security and welfare reduces investment in all samples while expenditure on transport and communication induces private investment in developing countries.

Risk Management in Islamic Banking

Introduction Risk entails both vulnerability of asset values and opportunities of income growth. Successful firms take advantage of these opportunities (Damodaran, 2005). An important element of management of risk is to understand the risk–return trade-off of different assets and investors. Investors can expect a higher rate of return only by increasing their exposure to risks. As the objective of financial institutions is to create value for the shareholders by acquiring assets in multiples of shareholder-owned funds, managing the resulting risks faced by the equity becomes an important function of these institutions. As Islamic banking is relatively new, the risks inherent in the instruments used are not well comprehended. Islamic banks can be expected to face two types of risks: risks that are similar to those faced by traditional financial intermediaries and risks that are unique owing to their compliance with the shari’a. Furthermore, Islamic banks are constrained in using some of the risk mitigation instruments that their conventional counterparts use as these are not allowed under Islamic commercial law. This chapter discusses some of the unique risks that arise owing to compliance with the shari’a and the special nature of risk mitigation enforced on Islamic financial institutions by the shari’a mandate. The chapter is organized as follows. First we examine the nature of risks in Islamic banks. After defining and identifying different risks, we report on the status of risk management processes in Islamic banks. Then specific issues related to risk measurement and mitigation in Islamic banks are discussed. The last section draws some conclusions.

Incentive-compatible profit-sharing contracts: a theoretical treatment

Islamic Banking and Finance discusses Islamic financial theory and practice, and focuses on the opportunities offered by Islamic finance as an alternative method of financial intermediation. Key features of profit-sharing (as opposed to debt-based) contracts are highlighted, and the ways in which they can facilitate improved efficiency and stability of a financial system are explored.

Islamic Banking and Shari’ah Compliance: A Product Development Perspective

The key difference between Islamic banks and their conventional counterparts is that the former abides by the principles of Islamic law (Shari’ah). However, some Islamic banking products are criticized for not fulfilling the Shari’ah requirements as these closely mimic conventional products. The article discusses how traditional Islamic contracts are used to structure Islamic modes of financing during contemporary times. To understand the choice of financing modes used by Islamic banks, the product development process is examined and the role of Shari’ah related bodies in these institutions (Shari’ah unit/department and Shari’ah supervisory board/committee) in this process is outlined. The article contends that the choice of modes of financing used by Islamic financial institutions depend on external and internal factors. In some cases Islamic banks choose controversial modes of financing as these are the only ones that are feasible under the legal and regulatory regimes they operate under. In other cases the choice of inferior modes may result from competing internal organizational considerations whereby economic factors overshadow Shari’ah requirements. The article highlights the role of Shari’ah related bodies within a bank in ensuring Shari’ah compliance of products.

On the Sustainable Development Goals and the Role of Islamic Finance

The Sustainable Development Goals, the global development agenda for 2015 through 2030, will require unprecedented mobilization of resources to support their implementation. Their predecessor, the Millennium Development Goals, focused on a limited number of concrete, global human development targets that can be monitored by statistically robust indicators. The Millennium Development Goals set the stage for global support of ambitious development goals behind which the world must rally. The Sustainable Development Goals bring forward the unfinished business of the Millennium Development Goals and go even further. Because of the transformative and sustainable nature of the new development agenda, all possible resources must be mobilized if the world is to succeed in meeting its targets. Thus, the potential for Islamic finance to play a role in supporting the Sustainable Development Goals is explored in this paper. Given the principles of Islamic finance that support socially inclusive and development promoting activities, the Islamic financial sector has the potential to contribute to the achievement of the Sustainable Development Goals. The paper examines the role of Islamic financial institutions, capital markets, and the social sector in promoting strong growth, enhanced financial inclusion, and intermediation, reducing risks and vulnerability of the poor and more broadly contributing to financial stability and development.

Why is Growth of Islamic Microfinance Lower than its Conventional Counterparts in Indonesia

The aim of this paper is to examine the demand factors for microfinance services in Indonesia consisting of the understandings, perceptions and preferences of 581 micro finance institutions (MFIs) clients of four MFIs— two Islamic (BMT and BPRS) and two conventional (BRI and BPR). The results show that MFIs clients’ preferences are driven by economic (low interest rates, low collateral and size of loan) and non-economic factors (such as quality of services variables; easiness, speed, nearness, payment method and loan officers’ profile). The results also indicate that BRI, a conventional MFI, is ranked the most competitive according to these factors, followed by BPRS (Islamic rural banks), BPR (conventional rural banks) and BMT (Baitul Maal wa Tamwil). The survey also identifies the gaps in which Islamic MFIs should fulfill in enhancing their roles to reduce unemployment and poverty.

Assessing Socio-Economic Development based on Maqāṣid al-Sharīʿah Principles: Normative Frameworks, Methods and Implementation in Indonesia

Despite calls to expand and implement the concept of Maqāṣid al-Sharīʿah, it has been rarely utilized in economics and development studies. This paper fills this gap and proposes a framework to assess socio-economic development of Muslim societies based on the maqāṣid principles. It is argued that human wellbeing/poverty is a central theme in the historical deliberations of maqāṣid and should be the same when using it to frame policies to resolve development challenges in current Muslim world. Drawing insights from the discourses on happiness, quality of life and multidimensional poverty based on the capability approach pioneered by Amartya Sen, the paper reviews a number of operational indicators and multidimensional poverty indices. It then proposes a simple, linear and decomposable multidimensional Maqāṣid alSharīʿah based poverty index encompassing five dimensions of wellbeing/poverty consistent with the maqāṣid perspective. The index is subsequently applied to evaluate the welfare changes amongst the recipients of zakāh in Indonesia by using data collected through a survey conducted covering 685 households living in Jakarta, Indonesia. While the study found that zakāh institutions have the expected positive contribution in reducing poverty amongst the poor, it also provides a workable example of how Maqāṣid al-Sharīʿah principles can be implemented in assessing impacts of socio-economic policies in Muslim societies.

The level of development and the determinants of productivity growth: a cross-country analysis

This article examines the effects of technology on productivity growth by disaggregating total output into sectoral components, exploring the roles of investment and technology on productivity growth for countries in different income groups. It finds that for low-income countries, investment is the most important determinant of productivity growth. While investment plays an important role in determining productivity growth in middle-income countries, additional effects resulting from technological change also emerge. Investment ceases to have a significant effect on productivity growth in high-income countries.

Effects of monetary variables on real output: sensitivity analysis

This paper uses Leamers sensitivity test in a VAR framework and examines the robustness of the relationship between different monetary and output variables. Output variables at the aggregated level include GDP, consumption, and gross private investment. Disaggregated variables comprise components of consumption (durables, non-durables and services) and investment (business inventories, fixed residential, and fixed nonresidential). All aggregated variables are robustly Granger caused by M2, the federal funds rate and the federal funds 3-months treasury rate spread. At the disaggregated level, only consumption of durables is Granger caused by these variables. Consumption of services, business inventories, and non-residential fixed investment are only Granger caused by money supply variables, while consumption of non-durable goods and residential investment are Granger caused by interest rates and/or interest rate spreads only.

Inclusive Islamic financial planning: a conceptual framework

Purpose - To develop a conceptual framework of inclusive Islamic Financial Planning (IFP) by combining the traditional Islamic institutions of zakat and awqaf with contemporary notions of financial planning, financial inclusion and financial literacy that caters to the short-term and long-term financial goals of the poor. Design/methodology/approach - Being a conceptual article, an inclusive Islamic Financial Planning framework is described, analyzed and developed by integrating modern notions of financial inclusion, financial planning and financial literacy with the concepts of zakat and awqaf. Findings - Using the notion of a hierarchy of needs and a financial planning model, an inclusive IFP framework that can be used by the poor is outlined. The complementary role of the non-poor households who provide funds for zakat and awqaf is also identified. Research limitations/implications - The applicability of an inclusive IFP would require Islamic financial instruments and products, institutional development and existence of a social planner who can integrate zakat, awqaf and financial planning to serve the financial needs of the poor. Originality/value - Discussion of financial planning in financial inclusion literature is scant. The paper explores and offers a novel approach of poverty mitigation by utilizing the full spectrum of Islamic financial planning that considers the financial needs and allows for the creation of a personalized financial plan for low-income households.