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The International Journal of Banking and Finance (IJBF) Vol. 7 No.1 Feb/ March 2010

Profit Sharing Ratios in Mudaraba Contracts Revisited
Zubair Hasan
INCEIF: The Global University of Islamic Finance, Malaysia
Abstract Ɩ Full Text
This paper examines three interlinked issues: First, what is the current state of profit sharing in Islamic banking, that is, is the division of profit between the banks and the depositors satisfactory? Second, can the profit sharing in a two-tier mudaraba contract give the same rate of return to depositors as the bank receives from the investment of their deposits in business? Finally, can the central bank use in some ways the profit sharing ratio along with the rate of interest as an instrument for credit control in a dual banking system? The answer to the fi rst two questions is in the negative. To the third, a tentative response is yes. The paper also suggests a policy tool the central banks can presumably use for controlling credit, more so in view of the recurring financial crises like the one emanating from the US that the world is facing today. The tool may in addition help improve the link between the banks and depositors by adopting an iniquitous distribution of profits.
Keywords: Islamic banking, Two-tier mudaraba, Profit sharing ratio, Division of profit Credit control.
JEL Classification: G12.

Stock Market Contagion in the Early Stages of the Global Financial Crisis: The Experience of the GCC Countries
Imad Moosa
Monash University, Australia and Kuwait
Abstract Ɩ Full Text
This study examined stock market contagion from the United States to the markets of the GCC countries during the period 2007-08. These countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) were also experiencing accelerating debt levels, overheated real estate markets, and drying up of liquidity. The main hypothesis under investigation is that the collapse of the GCC stock markets did not result purely from contagion, in the sense that these markets did not follow closely the US market during that period. It is argued that local factors were more influential in triggering the collapse and that those markets would have collapsed with or without the global financial crisis. The empirical results show rather limited evidence for the effect of U.S. stock prices on GCC stock prices and a much more important role for oil prices. However, neither of these variables alone can explain the behaviour of GCC stock prices during the period under investigation because of the role played by the domestic factors that caused bubbles and crashes.
Keywords: Contagion, GCC markets, Oil Prices and Stock Prices, Market Bubble
JEL Classifications: G15, G11, F30.

Do Exchange Rates Affect the Stock Performance of Australian Banks?
Jing Chi, David Tripe and Martin Young
Massey University, New Zealand
Abstract Ɩ Full Text
It is expected that banks with significant foreign business should be impacted by relative changes in the currency values of the foreign countries where they do business. Using data from January 1997 to March 2007, this study explored this relationship for the four major Australian banks. Contrary to expectations, no significant relationships between Australian bank stock returns and foreign exchange rates were found, raising questions as to the efficiency of stock markets in recognising banks’ foreign exchange exposures arising from their offshore assets and business.
Keywords: Exchange rates, Offshore assets, Stock returns, Australia, Bank international expansion.
JEL classification: G12, G21.

The Input Requirements of Conventional and Shariahcompliant Banking
Mariani Abdul Majid
Universiti Kebangsaan Malaysia
Abstract Ɩ Full Text
Islamic banking activities are limited within the scope of shari’ah which is within the scope of socially responsible and ethical banking activities, different from that based on interest-based banking. This paper attempts to measure the input data required by shari’ah-compliant banking in comparison with conventional banking to estimate their relative efficiencies and economies of and returns to scale. Cost and output distance functions were estimated for a sample of banks in 10 countries which operate both types of banking. The results showed that shari’ah-compliant banking has higher input requirements relative to interest based banking, but exhibit superior average efficiency only in Malaysia but inferior average efficiency in cross-country analysis. There is little evidence of differences in economies/returns to scale between shari’ah and conventional banks.
Keywords: Islamic Banking, Stochastic Frontier Analysis, Efficiency, Frontier Analysis, Conventional Banks.
JEL Classification: G21, G28.

Testing the Performance of Asset Pricing Models in Different Economic and Interest Rate Regimes Using Individual Stock Returns
Ann Marie Hibbert and Edward R. Lawrence
West Virginia University Morgantown and Florida
International University, United States
Abstract Ɩ Full Text
Using return data for all stocks continuously traded on the NYSE over the period July 1963 to December 2006, we tested the performance of the two-moment Capital Asset Pricing Model (CAPM) and the Fama French three-factor model in explaining individual stock returns. We found the performance of Fama French three-factor model to be marginally better than the CAPM. We further test the models for the significance and stability of parameters in the bull/bear periods and the Federal increasing/decreasing interest rate periods and found the performance of the two models comparable.
Keywords: CAPM, Three-factor model, Asset pricing, Bear-bull periods, Interest rate regimes
JEL category: G12, G30.

Exchange Rate Volatility and Purchasing Power Parity: Does Euro Make Any Difference?
Meher Manzur and Felix Chan
Curtin University of Technology, Australia
Abstract Ɩ Full Text
This paper provides a new test of the purchasing power parity (PPP) and its relevance for the Euro. Principal component analysis (PCA) is employed to construct a pooled measure of inflation for 12 Euro-currency countries. This measure is used to test the PPP for Euro against three major currencies, namely, those of the Japan, UK and USA. The test results are then used to measure the speed of adjustment of the deviations from parity using rolling and recursive regressions procedures. Finally, the forecasting accuracy of the PPP-based Euro exchange rates is compared with those given by the random walk model, and the synthetic Euro series provided by the European Central Bank. In general, the results are supportive of PPP.
Keywords: Purchasing power parity, Principal component analysis, Pooled inflation, Random walk.
JEL Classification: F31, G15.

Islamic Micro-Finance Programme and its Impact on Rural Poverty Alleviation
M. Miazur Rahman
Islami Bank Bangladesh Ltd (IBBL), Bangladesh
Abstract Ɩ Full Text
Bangladesh launched a shari’ah based micro-finance programme in 1995 under the Rural Development Scheme to uplift the overall socioeconomic standards of rural poor. It covered 0.52 million group members, 94% of whom are females. This paper presents findings on this experiment using 1,020 responses in a sample survey. Result showed that a significant of clients have improved their religious observations such as prayers and fasting. Results of the econometric models showed that household income, productivity of crops and livestock, expenditure and employment increased significantly due to the influence of changed behaviour and availability of micro-finance. Clients stated that the micro-investment had provided better organisation of their economic activities. Finally, the Islamic micro-investment programme appears to spur more ethical and economically desirable behaviour leading to poverty alleviation.
Keywords: Micro-fi nance and impact, Islamic finance, Rural development financing, Bangladesh, Behavioral changes.
JEL classification: G21.

Institutional and Macroeconomic Determinants of Stock Market Development in Mena Region: New Results From a Panel Data Analysis
Mondher Cherif and Kaouthar Gazdar
Rheims University Euromed Marscille CEMM
and Rheims University
Abstract Ɩ Full Text
This paper provides new evidence on the influence of macroeconomic environment and institutional quality on stock market development, using data from 14 MENA countries over the period of 1990-2007. Using both panel data and instrumental variable techniques, we found that income level, saving rate, stock market liquidity, and interest rate influence stock market development with the expected theoretical signs. Our results also showed that the banking and the stock market sectors are complementary instead of being substitutes. We found that the institutional environment as captured by a composite policy risk index does not appear to be a driving force for the stock market capitalization in the region. Our last results are robust to different specifications and empirical techniques.
Keywords: Ethnic heterogeneity, Institutions, Instrumental variable technique, MENA countries, Political risk, Panel data.
JEL Classifications: G20, G28, O55.

A Note: Debt Selling and Their Impact on Islamic Bank Value
Abdul Ghafar Ismail and Karmila Hanim Kamil
Universiti Kebangsaan Malaysia
Abstract Ɩ Full Text
This paper shows how a risk management mechanism through selling debt can affect the value of Islamic banks. Islamic banks are able to maximize their value from the sale of murabahah on housing debt in order to manage their risk arising from fluctuations in interest rates. A tractable theoretical model is developed to maximize the Islamic banks’ values from the sale of housing debt financing in order to hedge against fluctuations in interest rates. Our findings showed that Islamic banks could improve their earnings and rectify the problem in aligning their assets and liabilities through the benefits of debt selling. A rise in the market interest rates leads to an increase in the base financing rate and the mark-up rate in Islamic banks, since market interest rates serve as benchmarks in determining profits or mark-ups. If the Islamic banks engage in debt selling to decrease their risk exposure, their earnings or value may be amplified since they have the opportunity to undertake other positive NPV projects from the payoffs on the murabahah debt selling.
Keywords: Bank risk management; Financing; Investment
JEL classification: G21, G31, G32.

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