Muhammad Hakimi Mohd Shafiai

Role of Islamic Banking in Financial Inclusion: Prospects and Performance

According to Global Financial Development Report 2014, the proportion of adult population holding bank accounts in 25 out of 48 Organization of Islamic Cooperation (OIC) member countries surveyed stands below 20 %. Part of the reason is Muslims’ voluntary exclusion of interest-based financial services. On average, 28 % adults in the OIC countries hold a bank account at a formal financial institution. On the other hand, only 7.7 % of the poorest 40 % people in the OIC countries borrow from financial institutions. Furthermore, in the OIC countries, like Guinea-Bissau, Gabon, Chad, Sudan, Syria, Mozambique, Gambia, and Iraq, microfinance outreach are not even catering to the 1 % of the poor people in these countries. In 26 out of 36 OIC countries where sufficient data are available, we find that not even 10 % of the poor people are under the microfinance radar. Thus, this presents a challenge as well as an opportunity for Islamic banks to increase their outreach toward fostering inclusive finance in the OIC countries.

Risk Management of Islamic Microfinance (IMF) Product by Financial Institutions in Malaysia

Abstract Maintaining microfinance institutions’ (MFIs) sustainability is extremely significant owing to the fact that it aims at alleviating poverty and improving the living standard of the poor at the same time. Hence, a sustainable Micro Finance Institution (MFI) is necessary in order to achieve the objective thereby realizing a just economic growth. Nevertheless, there are issues and challenges being faced by the institutions that could give impact towards their sustainability. Among others are moral hazards and adverse selection problems among participants that would ultimately give potential risks to the institutions. Hence, maintaining its sustainability by way of risk management is significant in ensuring financial inclusion of the poor and materializing the objective of poverty alleviation. This quantitative study was conducted to examine the practice of risk management in the specific context of Islamic microfinance (IMF) product offered by several Islamic financial institutions in Malaysia. Primary data were collected through the distribution of questionnaires to the selected officers of the bank. Findings of the study indicated that the institutions had taken the necessary steps in managing the risks.

Shariah Risk: Its Origin, Definition, and Application in Islamic Finance

“Risk” is widely used to explain an event pertaining to the probability of an outcome to occur. This paper provides the review of risk from its origin, where the concept of risk has been a concern for humanity since days of old, without the usage of its proper terminology. The study relies solely on related literature and highlights the application of risk in Islamic finance. Reviews of previous studies normally have its own terminology in research methodology. This section covers the issues of how risk is defined by researchers in various disciplines and therefore, how it is specifically related to Islamic finance through a generic and unique name, that is, Shariah risk. The major issue highlighted is where the sources are, which led to a deviation from the path that creates harmful effects. There are other sources for the risk that still need to be clarified further, but this study revealed the sources that lead to the changes of circumstances which result in having risks, based on the Quranic evidences in Islamic perspective. Hence, this paper aims to fill the gap of the current literature by showing the need to conduct further research on the derivation of Shariah risk and its potential in determining capital requirements in Islamic financial institutions.

Intertemporal consumption behaviour in OIC countries

This study aims to examine the consumption behaviour in Organization of Islamic Cooperation countries.,Using time series and panel data, this study estimates rational expectations permanent income hypothesis model and the intertemporal elasticity of substitution, and examines the response in consumption to expected and unexpected changes in income.,The evidence supports the phenomenon of loss aversion. The response of consumption to unexpected income changes is statistically significant in only one-third of the countries in the sample. Conversely, the response of consumption to expected income changes is statistically as well as economically significant in one-fourth of the countries in the sample. The intertemporal elasticity of substitution is also statistically insignificant in majority of OIC countries in the sample.,The evidence in support of loss aversion in preferences could help in explaining the low penetration of equity-based risk sharing instruments in Islamic finance.,The excess sensitivity of consumption to income suggests that redistribution efforts to enhance incomes of poor households could help in enhancing their consumption levels.,The study takes a comprehensive sample across time and space for OIC countries as compared to previous studies and also adjusts the budget constraint for Zakat.

ISLAMIC MICROFINANCE FOR RURAL FARMERS: A PROPOSED CONTRACTUAL FRAMEWORK FOR AMANAH IKHTIAR MALAYSIA (Kewangan Mikro Islam dalam Kalangan Petani Luar Bandar: Rangka Kerja Cadangan kepada Amanah Ikhtiar Malaysia)

ABSTRACT Rural poverty is considered as a major challenge for the current economies. In Malaysia, the rural farmers faces problems in the cultivation process due to unavailability of financial support. The support of Department of Agriculture is only limited to first stage of agriculture project, leaving the farmers in problems for the second stage. Hence in this study we have provided a solution to the issues confronted by the famers through the involvement of Amanah Ikhtiar Malaysia. The aim is to involve Amanah Ikhtiar Malaysia to provide support to the rural famers based on the profit and loss sharing scheme unlike the current mode of financing. Before proposing a contractual framework, a qualitative and narrative form of literature review method is used to explore the issues. It is suggested that al-Muzāra‘ah contract is more suitable to provide assistance to the rural famers with the supervision from Department of Agriculture. This study would help not only Amanah Ikhtiar Malaysia but also other microfinance institutions in developing a partnership based contract that would be specifically designed for the poor rural farmers. ABSTRAK Kemiskinan luar bandar merupakan salah satu cabaran utama dalam ekonomi masa kini. Dalam konteks Malaysia, petani luar bandar sering menghadapi masalah dalam proses menuai hasil disebabkan masalah kekurangan dana. Bantuan dana yang diberikan oleh Jabatan Pertanian hanya diberi dalam proses awal projek pertanian dan petani sering menghadapi masalah dalam proses seterusnya. Oleh itu, kajian ini bertujuan untuk menyediakan cadangan penyelesaian daripada isu kewangan ini khususnya melibatkan Amanah Ikhtiar Malaysia (AIM). Cadangan Penglibatan AIM dalam memberi bantuan kewangan kepada para petani adalah berdasarkan prinsip perkongsian untung dan rugi. Sebelum mencadangkan rangka kerja kontrak, kajian literatur berbentuk kualitatif dan naratif digunakan untuk meneroka isu-isu. Kertas ini mencadangkan kontrak al-Muzāra‘ah sebagai kontrak utama dalam rangka kerja ini dengan penyeliaan dan kawalan dari Jabatan Pertanian. Kajian ini bukan hanya dapat memberi cadangan kepada AIM, namun kepada institusi kewangan mikro dalam membentuk kerjasama dengan petani luar bandar sekaligus menangani masalah kemiskinan.

Application of waqf for social and development finance

Purpose This paper aims to discuss the application of waqf (endowment) in the social finance sector for funding social and development projects and services. Design/methodology/approach The study is qualitative. It reviews literature and provides descriptive data to present its main idea. Findings Most Muslim-majority countries are generally income-poor, and the governments are generally weak in their tax collection, effective governance and capacity for development spending. Private sector financial institutions are scarce and mostly cater to the people who can meet the income-based lending criteria. Thus, the institution of waqf can fill the gap as a social finance institution by providing intermediation services for effectively utilising perpetual social savings. Flexibility in the rules of waqf enables it to serve beneficiaries directly or through financial institutions and to provide a wide range of social services. Research limitations/implications This conceptual research highlights the need and potential of waqf without discussing the regulatory and operational details of how to effectively institutionalize it in different regions. Practical implications The institution of waqf can harness the potential of selfless charitable giving in an effective way for better economic impact in the targeted social segments of society. Originality value The paper suggests the establishment of waqf-based training and vocational centres which will increase opportunities of self-employment and contribute in upward social mobility of beneficiaries.

Towards an integrative framework for understanding Muslim consumption behaviour

Purpose - This paper aims to integrate Islamic and mainstream economics framework towards a more realistic understanding of Muslim consumption behaviour. Design/methodology/approach - The model incorporates some of the Islamic institutions like period-wise deduction of Zakat from endowments. It also includes bequests which could be significant given the Islamic injunctions on inheritance distribution and the significance placed on the institution of family. Furthermore, the model integrates the assumption that consumption opportunity set will axiomatically filter out the prohibited consumption goods from the consumption set in both contemporaneous and inter-temporal consumption. Findings - Zakat ensures contemporaneous redistribution from endowment surplus households (those having Zakatable endowments above Nisab) to endowment-deficient households (those having Zakatable endowments below Nisab). The lifetime resources are scaled down for endowment surplus households because of the payment of Zakat in both periods and leaving bequests in old-age period, while the lifetime resources are scaled up for endowment deficient households because of the receipt of Zakat in both periods and receiving the bequests in youth. Originality/value - The authors show how some of the Islamic principles and institutions can be integrated in the mainstream economics framework, especially in research studies where the objective is to understand and describe reality rather than persuasion and idealization.

Exploring Efficiency, Co-integration, Causality and Volatility Clustering in Unrestricted and Islamic Portfolios

Unlike unrestricted portfolios, Islamic portfolios have a narrow opportunity set for investment. They also face trading restrictions due to the prohibition of futures, short selling, options and day trading which can potentially create significant limits to arbitrage. In this study, we explore weak-form market efficiency in comparable unrestricted and Islamic portfolios. The study also investigates the existence of Autoregressive Conditional Heteroscedasticity (ARCH) effects in the returns series of unrestricted and Islamic portfolios in developed and emerging markets. Finally, we also investigate the existence of bi-directional causality between portfolios. From the runs test, we find that the returns of most indices are random, except for a few. Finally, we also find strong evidence for co-integration and causality in both directions between Islamic and unrestricted market portfolios.