Wafik Grais

Regulating Islamic Financial Institutions: The Nature of the Regulated

More than 200 Islamic financial institutions (IFIs) operate in 48 countries. Their combined assets exceed

Macroeconomic modeling based on social-accounting principles

200 billion, with an annual growth rate between 12 percent and 15 percent. The regulatory regime governing IFIs varies significantly across countries. A number of international organizations have been established with the mandate to set standards that would strengthen and harmonize prudential regulations as they apply to IFIs. The authors contribute to the discussion on the nature of prudential standards to be developed. They clarify the risks that IFIs are exposed to and the type of regulations that are needed to systematically manage them. They consider that the industry is still in a development process whose eventual outcome is the convergence of the practice of Islamic financial intermediation with its conceptual foundations. The authors contrast the risks and regulations needed in the case of Islamic financial intermediation operating according to core principles and current practice. They outline implications for approaches to capital adequacy, licensing requirements, and reliance on market discipline. They then propose an organization of the industry that would allow it to develop in compliance with its principles and prudent risk management, and facilitate its regulation.

The Changing Financial Landscape: Opportunities and Challenges for The Middle East and North Africa

Abstract Using the example of a small comparative static model of Thailand for 1980, this article sets out an approach to macroeconomic model building that is based on two versions of a social-accounting matrix (SAM)—one version contains data for a base year, whereas the cell entries of the other are algebraic expressions for the determination of the corresponding transaction values. Thus the model is developed in transaction-value (TV) form, and this is one distinguishing feature of the approach. Other features derive from different aspects of the relationship between the two SAMs. We argue that the approach has distinct advantages for model description, calibration, and solution and that these are important if models are to be used for policy purposes that place a premium on intelligibility and replicability within the context of a flexible modeling capability.

Macroeconomic adjustment in Thailand: Demand management and supply conditions

Economists have come to acknowledge that finance matters for development more, and in more ways than had been recognized for a long time. Changes in the financial services industry are providing immense possibilities for economic development. Grais and Kantur present a framework to help understand the changes occurring in the financial landscape. They also attempt to lay out the opportunities and the challenges the Middle East and Northern Africa region faces in light of these changes. The framework views financial development as a two-way, continuous, and dynamic interaction between, on the one hand, three driving forces shaping the industry and, on the other hand, four stylized dimensions of financial services. These driving forces jointly modify the financial landscape and are at the same time influenced by the effects of these changes. The three driving forces are financial liberalization, technological changes, and market innovation in response to demands for financial services. The four dimensions of financial services that are altered by the forces at play are disintermediation, institutionalization, modernization, and globalization. The authors provide a strategic perspective on the opportunities and challenges the profound changes in the financial industry bring to the Middle East and North Africa region, its policymakers, and market participants.

Coping with a decline in world energy prices: Macroeconomic and income distribution effects in Thailand

This 1983 article, Macroeconomic Adjustment in Thailand: Demand Management and Supply Conditions, was reprinted with permission from the Journal of Policy Modeling. Within the framework of a fix-price, four-sector (agriculture, industry, energy, and services) macroeconomic model for Thailand, comparative statics are used to assess alternative ways of macroeconomic adjustment. The methods discussed are fiscal policy interventions, manipulations of the exchange rate, and productivity improvements. Fiscal policies include changing the relative prices between domestically produced, imported, and exported goods, and increased protection via higher import tariffs or subsidization of exports. Productivity improvements through structural changes include changes in the conditions of agricultural production, the use of energy, the productivity of primary factors of production, and the conditions governing import behavior. The article derives the implications of these adjustment methods in terms of income generation, external deficit, and inflation. It is shown that only productivity improvements have positive effects on all indicators. Fiscal interventions lead to an improvement in the external deficit, but at the cost of income generation. The outcome of devaluation is largely dependent on the behavior of factor prices.

Energy supply shocks: Macroeconomic consequences for Ukraine

After the two first oil price shocks, economists, policy makers, and the public got used to increases in energy prices and they expected them to continue. In 1982, when the oil prices dropped, all expectations needed to be revised and adjustments to the new conditions needed to be considered. This paper analyzes growth, macroeconomic, employment, and income distribution implications of a decline in oil prices. Using the Second Infrastructure Asset Management Project (SIAM2), alternative policies with respect to domestic energy prices is simulated. The outcome of the analysis is that growth is not much affected by changes in energy prices. The macroeconomic resource balance however, and especially the current account deficit, is sensitive. Dropping the domestic prices of energy with the world prices will help more employment in the formal sector. Real incomes per capita of all categories of households benefit in various degrees from a drop in domestic prices. However, if one is concerned about foreign debt accumulation and if sustained and accelerating growth is desired, it will be preferable not to drop the domestic price with the world prices.

THE TRANSACTION VALUE APPROACH: A SYSTEMATIC METHOD OF DEFINING ECONOMYWIDE MODELS BASED ON SOCIAL ACCOUNTING MATRICES

Abstract In exploring the short-term macroeconomic effects of energy supply shocks in Ukraine, this paper relies on the simplifying assumption that enterprises face economic regulation but not ownership uncertainty or a soft budget constraint that would adversely affect their behavior. In a sense, it assumes that Ukraines economy is already at the second stage of reform, when ownership, contract-enforcement, and hard budget constraint questions are less of an issue. Under these assumptions and if real wages are protected, the analysis yields clear messages. Protecting the domestic economy by not passing through external price increases may cushion the decline in production and social welfare, but at a heavy cost to savings and investment; not only does it postpone adjustment and the emergence of a competitive economy, but it also deprives the economy of investible resources. Passing through external price increases while maintaining a fixed-price regime may improve the mobilization of resources but at a heavy cost to output and welfare, because it induces a heavy contraction in activity. Liberalizing prices in the nonenergy sectors in conjunction with passing through external price increases allows these sectors to generate the larger resource transfers required by a deteriorating terms of trade, in turn pulling up output; the economy can settle at a higher level of activity and welfare than in the presence of fixed prices. The conclusion is that Ukraine must clarify ownership and contract-enforcement issues as well as harden the budget constraints of enterprises as rapidly as possible, liberalize nonenergy prices at a minimum, and begin adjusting domestic energy prices to reflect the opportunity cost of these resources. Since the fall of 1994, Ukraine has proceeded to liberalize its price and trade regime, which should bring the economy a long way to recovery as outlined in this paper.

Diversity in the regulation of Islamic Financial Institutions

The Social Accounting Matrix (SAM), a convenient way of giving a comprehensive and consistent picture of an economy, is used as the data base for many models. The paper describes the Transaction Value (TV) Approach, a systematic way of defining, estimating, and solving economywide multisectoral equilibrium models based on a SAM. SAM-based models define for each period a SAM with the same accounting structure as the base SAM. The behavioral equations of a SAM-based model are derived from independent descriptions of the economic agents, and the model is tied together by the accounting identities of the SAM. The TV approach has four advantages: the models are guaranteed to be consistent, it is easy to experiment with alternative formulations, most parameters can be estimated from the base SAM, and the underlying solution algorithm is guaranteed to converge under very general assumptions.Abstract The Social Accounting Matrix (SAM), a convenient way of giving a comprehensive and consistent picture of an economy, is used as the data base for many models. The paper describes the Transaction Value (TV) Approach, a systematic way of defining, estimating, and solving economywide multisectoral equilibrium models based on a SAM. SAM-based models define for each period a SAM with the same accounting structure as the base SAM. The behavioral equations of a SAM-based model are derived from independent descriptions of the economic agents, and the model is tied together by the accounting identities of the SAM. The TV approach has four advantages: the models are guaranteed to be consistent, it is easy to experiment with alternative formulations, most parameters can be estimated from the base SAM, and the underlying solution algorithm is guaranteed to converge under very general assumptions.