Ishaq Bhatti

Islamic Banks Credit Risk: A Panel Study☆

Abstract The purpose of this paper is to investigate the determinants of credit risk in the case of Malaysia Islamic banks. Using a yearly bank level data from 1995 to 2013, this paper utilizes the fixed effect model to provide empirical evidences on Islamic banks credit risk in Malaysia. The empirical results demonstrate that a few bank-specific variables do significantly influence credit risk of Malaysia Islamic banks. The findings show that financing quality and capital ratio demonstrate consistent results regardless of specification and estimation models. The inclusion of ownership status also suggests that there is a significant difference between the local and foreign ownership Islamic banks in this regard. The finding added important evidence to the existing literature on credit risk specifically Islamic banks credit risk.

Social Norms and Economic Performance: An Example of Business Loans by Islamic Banks

In this paper we consider how social norms affect economic performance, using example of an Islamic bank providing a business loan to an entrepreneur. We show that the ability to rely on social norms mitigates the moral hazard problem, but introduces rigidities that prevent optimal response to adverse economic consequences, thereby improving performance during the booms, but handicapping it during the recessions. In the case of an Islamic bank, another consequence of this rigidity is a greater reluctance to invest in daring new ideas, which may be highly profitable but include a significant risk of failure. Although we use Islamic banks as our main example, the conclusions have broader validity and are not limited to religious social norms.

Test on yields of equivalently-rated bonds

Purpose This paper aims to report practice-relevant anomalous investment yield behavior of two types of bonds – Type A, the mainstream bond, and Type B, which is Sukuk – both having similar cash-flow-relevant characteristics. Design/methodology/approach Bond valuation theory suggests that yields to investors of similarly rated bonds ought to be same. The authors collected time-series data on A and B bonds, all being coupon-paying bonds with similar rating and similar tenor as two matched samples traded in a bond exchange. To ensure the results are extended to different bond sectors, the data set was separated into treasury bonds as risk-free and corporate bonds as risky ones. The data set was further sub-divided into short-, medium- and long-tenor bonds. As the data straddle the Global Financial Crisis period, the authors use appropriate econometric method to control the possible effect from the crisis. Findings The average and median yields on Type A bond are significantly different from those of Type B. The test results show significant and systematic differences: treasury bonds of Type A returns yield lower than treasury bonds of Type B; the yields of corporate mainstream bonds (A) are higher than the yields of Sukuk (B). The authors observe these findings constitute a puzzle, being anomalous to theory. Originality/value This paper is original in that it is documenting significant differences in pricing of equivalent bonds. This has both theory and practice implications for fixed-income security market practices. The evidence is very strong to suggest that the identical types of bonds may have missing variable that contributes to the difference. Therefore, further research to identify the missing variable is necessary.

Risks Exposure in Islamic Banks: A Case Study of Bank Islam Malaysia Berhad (BIMB)

The growth and changes in the global financial markets pose various risks to the financial pectoral over the world. Risk cannot be avoided as it is part and parcel of its operations. Banking institutions are likewise exposed to risks. As conventional banks have to face three major risks; i) credit risk, ii) market risk, iii) operational risk, similarly Islamic banks also face the same. The perception that Islamic banks are risk free is not correct and can be an understatement. This paper explores the risk involved in Islamic banks and risk management practices by the Islamic banks. The focus of this paper is on risk and return in Bank Islam Malaysia Berhad (BIMB). The study examines the risk level in BIMB by using two approach; Financial Statement Analysis and Stock Analysis. Apart from that, this study also predicts the Islamic banks amount of financing for each concept in Malaysia for year 2010. The findings of this paper will assist Islamic banks as it will give a clear understanding about various types of risk in general and more particularly credit risk and market risk.

The Role of Ownership and Governance Structure in Raising Capital: An International Study

This paper investigates whether the ownership and the governance structure of firms affects the decision to raise funds, and subsequently the choice of the capital instrument. We hypothesize that the choice of capital instrument depends on the relative riskiness of the source of funds ranging from equity to debt finance including bonds, sukuk or bank loans. Using a sample from 2000-2015 of 1,565 firms from countries including Malaysia, Indonesia, Singapore and Pakistan, we find the evidence that ownership concentration is associated with higher control motives and restricts equity financing to avoid ownership dilution. CEO-Chair duality also coincides with fewer instances of raising external funds and relative risk sharing. On the other hand, lower information asymmetry, observed by analyst coverage and firm size, generally accompanies more issuances of debt-like products, such as bank loans and bonds. Finally, some of the prominent financial ratios such as market-to-book value, leverage and macroeconomic factors significantly drive firms in their decision to raise funds and share risk.

Hierarchical forecasts of agronomy-based data

SYNOPTIC ABSTRACT In this article we explore the hierarchical nature of time series of various agriculture crops in Pakistan at the subdistrict level and produce short-term forecasts for these time series. The data and forecasts are organized in a hierarchy based on disaggregating the data according to the division and subdistrict levels (geographical regions). Following Athanasopoulos, Ahmed, and Hyndman, we consider five approaches to hierarchical forecasting; two variations of the top-down approach; the bottom-up method; top-down approach where top-level forecasts are disaggregated according to the forecasted proportions of the lower level series; and the new optimal combination approach introduced by Hyndman, Ahmed, Athanasopoulos, and Shang. The forecasts are obtained from these five approaches using two well-known methods; Exponential Smoothing (ES) and an autoregressive integrated moving average (ARIMA). The forecasts are then compared across the two methods and across the various approaches by using various out-of-sample forecast evaluations. The forecast performance evaluation shows that in most cases either the top-down or the bottom-up approach performs best while the optimal combination method approach is the second best for the major crops production hierarchies we consider. By applying these methods, we produce detailed forecasts of the production of major crops in Pakistan for all levels of hierarchies and draw some useful conclusions for policy makers.

The Implication of Integration and Diversification on 'Oil and Gas' Industries Among ASEAN Countries

This paper examines the investment opportunities in oil and gas industries in six selected ASEAN countries. The study employs the VAR as well as the bivariate VARMA-MGARCH-ABEKK model on 15 years’ daily time series data. The empirical results report that some investors can obtain a cross-country intra-industry diversification benefit in Malaysia, the Philippines, Singapore and Vietnam, especially for those who have the US oil and gas assets in their portfolios. Investors who are holding Asian oil and gas assets could also invest in these four countries. However, they should bear in mind that negative shocks from the Asian industries would increase return volatilities in the industries of Malaysia, Singapore and Vietnam. The industries of Indonesia and Thailand are insensitive with cross-country intra-industry diversification. This study provides new insights for investors to improve their investment portfolio while investing in oil and gas markets of ASEAN countries.

The Revelation Principle

The strategic interactions among the designer of a mechanism and its participants can be modeled as a multi-stage game. The designer moves first by selecting a mechanism. The participants observe the mechanism, and move thereafter. For ease of exposition, we restrict our present attention to a two-stage game, in which the participants play a simultaneous-move (i.e., one-shot) game in the second stage. After the designer announces their choice of mechanism, the agents face a game of incomplete information.1 Formally, such a 1 Consist with our earlier comment, we restrict our present attention to one-shot games of incomplete information. That said, we aim to apply our methodology to extensive-form games of incomplete information. game is denoted by Γ = [Ω, [n], {Ai}i∈n, {Ti}i∈n, g, {ui}i∈n], where [n] is the set of players (or agents), of size n; Ai is the set of actions available to player i ∈ [n], with A = ∏ i=1 Ai as the joint action space; and Ti is the set of types (private information) available to player i ∈ [n], with T = ∏ i=1 Ti as the joint type space. Additionally, a joint distribution F over types is assumed to be common knowledge, known to both the players and the designer. We define a strategy of a player i as a function si : Ti → Ai, and use st to denote the vector (s1(t1), . . . , sn(tn)). The function g : A → Ω maps a joint action profile into a space Ω of possible outcomes; that is, g(s(t)) is the outcome when player i of type ti plays strategy si and the remaining players of type t−i play strategy s−i. Finally, 2 For example, the outcome function of an auction maps a profile of bids to a pair comprised of an allocation and a payment rule. player i’s utility ui : Ω × T→ R depends on both the outcome of the game and (in general) all players’ types. Given a game Γ, its solution is a joint strategy profile s∗ that the players are predicted to play under certain assumptions. For example, dominant-strategy equilibria when they exist, and otherwise the Bayes-Nash equilibrium solution concept, are often applied to solve a game. We define both concepts in our current formalism, presently.

Tail Contagion: Were Vietnam and China Stock Markets Out of the US Mortgage Crisis?

The paper applies non-parametric methods of Chi-plots and Kendall (K)-plots and three different copula functions to empirically examine the tail dependence between the U.S. stock market and stock markets in Vietnam and China in order to test contagion effect after the U.S. subprime mortgage crisis. The results indicate the presence of left tail dependence before and after the crisis suggesting no change in dependence structure but stronger left tail dependence between the U.S. and Vietnam stock markets. Thus, the US and Vietnam stock markets are more prone to crashing than booming together. Between the U.S. and Shanghai stock markets, the results provide evidence of a left tail dependence before the crisis, but no evidence of tail dependence after the crisis indicating that the dependence structure between U.S. and Shanghai stock markets changed after the crisis. On the contrary, the findings show that the Shenzhen stock market is independent of the U.S. market in both before and after crisis periods which imply that an extreme event in the U.S. market is less likely to influence the Shenzhen stock market. This suggests that there is significant potential for risk diversification by investing in the Shenzhen market by U. S. investors after the financial crisis. The results have not been documented in the existing literature and provide a new insight into risk diversification between the stock markets.