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Vol. 10, Number 2, June 2013

Islamic finance: An Attractive New Way of Financial Intermediation
Munawar Iqbal
King Abdulaziz University, Saudi Arabia
Abstract Ɩ Full Text
Financial intermediation is a value-enhancing service. Banks are among the most important financial institutions in a modern economy for that service. Conventional banks use rates of interest (charged to clients and paid to depositors) on both the assets and the liabilities sides. Since interest is prohibited in Islam, Islamic financial experts have developed a number of financial instruments that avoid any involvement in interest. They take the form of either risk-and-reward sharing or trading in commodities/assets to price assets. In this paper we describe the basic features of the most important among these financial instruments. Even though Islamic banks emerged in response to market needs of Muslim clients, they are not religious institutions. Like other banks, these are profit seeking institutions, simply following a different model of financial intermediation. While it is the preferred way of banking for one fifth of humanity, it offers a wider choice of financial products to all by generating a number of benefits for the society. The successful operation of Islamic financial institutions has proven that this new model of financial intermediation is not only viable, but in many aspects, it is rather superior to the conventional model. The appealing features of the Islamic model have attracted world-wide attention. Islamic financial industry which started as a niche market in early 1970s in the Middle East has made a place for it in more than fifty countries around the globe and has grown into a multi-trillion dollars industry. This paper attempts to explain the basic features of this fascinating model.
Keywords: Financial intermediation, islamic finance, islamic financial products
JEL Classification: G2

Mush̄ārakah and Mudārabah Instruments: Assessing their Characteristics
Naeem Chowdhury
Senior Fellow, Bangladesh Institute of Development Studies
Abstract Ɩ Full Text
Until very recently, equity financing is more in line with the spirit of Islam as compared with debt financing. As such, mushārakah and mudārabah are the preferred modes for Islamic investors. It is therefore a matter of a concern that even after four decades after Islamic finance captured the attention of investors around the globe, these two purest genres account only for a small percentage of Islamic financial industry. The paper examines more searchingly for the reasons why mushārakah and mudārabah occupy such insignificant place among Islamic financial products. This paper offers an analytical insight.
Keywords: Islamic finance, mushārakah, mudārabah, rothchild-stiglitz framework, heterogeneity
JEL Classification: P5
Is Islamic Banking Capable of Meeting Corporate Social Responsibility?
Sarath Delpachitra
Flinders University, Australia
Abstract Ɩ Full Text
This paper provides an overview of the Islamic banking system and its product ranges, and examines their ability to meet Corporate Social Responsibility obligations while maintaining efficiency and managing risk. The growing literature on Islamic banking products, including their derivatives indicates that Islamic banking is popular worldwide and has global attention. Similarly, the diversity of banking options is growing in Middle Eastern countries with some banks offering separate windows for conventional and Islamic banking options to customers. Due to the unique nature of Islamic banking, which is constrained not only by the standard operating regulations of the respective countries, but also by Islamic law, the Sharīah, there are significant differences in the philosophy behind its finance transactions, the nature of transactions, goals and the obligations between the two types of institutions. Whether these differences lead to changes in risk preferences, lending decision-making processes, and the ultimate efficiency of operations are some of the key empirical questions yet to be fully answered. The paper introduces a theory based on classical utility theory, and then extends it to show its relevance to Islamic banking. In particular this paper shows that Islamic banking may not only improve operating performance, but also increase profitability for all parties concerned.
Keywords: Islamic banking; corporate social responsibility; Sharī’ah
JEL Classification: G34

Contractual Structures and Payoff Patterns of Sukūk Securities
Meysam Safari
SEGi University, Malaysia
Abstract Ɩ Full Text
This paper is about the six different Sukūk securities, which originated in 1990s, and are now traded in some 11 markets as the new debt-like securities classed under Islamic finance. The outstanding value of these contracts is estimated to be US $850 billion. This paper proposes a classification for Sukūk contracts as pure debt, equity-based, and asset-backed based on the intrinsic nature and purpose of fund-raising. This classification has more practical use compared to existing classification. Futher, the contract peculiarities of the six instruments (mudārabah, mushārakah, murābahah, ijārah, salam and istisnāh) are carefully specified for the first time. To start a discussion on how the economic behaviour may be modeled for theory building, the potential cash flow pattern of each type of Sukūk contracts is specified. The paper aims to contribute to advanced studies by specifying the basic behavioural characteristics.
Keywords: Bond-like socially responsible funding, sukūk certificates, people, planet before profits, islamic finance, special purpose company, asset-backed debt contract
JEL Classification: G12, Z12

Credit Risk of Islamic Banks in GCC Countries
Hamid A. H. Al-Wesabi and Nor Hayati Ahmad
Universiti Utara Malaysia
Abstract Ɩ Full Text
This paper is about factors affecting credit risk of Islamic banks in the Gulf Cooperation Council countries using website data covering 25 Islamic banks over 2006 to 2010. This study uses non-performing loans as a proxy for credit risk, which is the dependent variable with three macro-economic, and six firm-specific independent variables. We find income is significantly negatively related to credit risk, which is consistent with findings in other countries about credit risk. Some firm-specific variables such as leverage, liquidity are also relevant variables for credit risk, which results are also consistent with bank behaviour reported in other studies. Credit risk is also broadly affected by both macro and firm-specific factors as found in other regions. Inflation and interest rates do not appear to be relevant. These results would suggest non-performing loan is broadly correlated with factors identified in other studies of banks.
Keywords: Credit risk, risk management, Islamic banks, gulf countries, non-performing loans
JEL Classification: G32

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