The growth of Islamic finance and banking : innovation, governance and risk mitigation 9780367205881, 0367205882

Citation preview

The Growth of Islamic Finance and Banking

This book covers the recent literature concerning Islamic banking and ­finance (IBF), focuses on the history of IBF since its inception and introduces the latest innovative concepts and practices in the field. The authors cover important topics such as the role of ownership, Shari’ah compliance and governance structures in raising debt capital using IBF practices, including Fatwa issues and the use of benchmarking practices. The book also addresses topics like archival data, the influence of leverage on ownership structure and sukuk structures, as well as misconceptions, threats, challenges and opportunities in IBF. Finally, the book deals with prominent issues such as business score-carding, Takāful (Islamic Insurance), IBF implications for block-chain-based fintech and finance hub concepts in Islamic microfinance models. This edited volume is an important contribution to the IBF literature as it provides a much-needed in-depth look into industry practices through the perspective of corporate finance and governance. With its interdisciplinary approach covering legal and financial issues along with a wide variety of notable contributors, this book will be a valuable reference guide to both teachers and students of Islamic banking and economics. Hussain Mohi-ud-Din Qadri is an Associate Professor at the School of Economics and Finance, Minhaj University, Lahore, Pakistan. M. Ishaq Bhatti is an Associate Professor and the Founding Director of the Islamic Banking and Finance Programme at Latrobe University, Australia.

Islamic Business and Finance Series Series Editor: M. Ishaq Bhatti

There is an increasing need for western politicians, financiers, bankers, and indeed the western business community in general to have access to high quality and authoritative texts on Islamic financial and business practices. Drawing on expertise from across the Islamic world, this new series will provide carefully chosen and focused monographs and collections, each authored/edited by an expert in their respective field all over the world. The series will be pitched at a level to appeal to middle and senior management in both the western and the Islamic business communities. For the manager with a western background the series will provide detailed and up-to-date briefings on important topics; for the academics, postgraduates, business communities, manager with western and an Islamic background the series will provide a guide to best practice in business in Islamic communities around the world, including Muslim minorities in the west and majorities in the rest of the world. Islamic Social Finance Entrepreneurship, Cooperation and the Sharing Economy Edited by Valentino Cattelan Rethinking Islamic Finance Markets, Regulations and Islamic Law Ayesha Bhatti and Saad Azmat Social Justice and Islamic Economics Theory, Issues and Practice Edited by Toseef Azid and Lutfi Sunar The Growth of Islamic Finance and Banking Innovation, Governance and Risk Mitigation Edited by Hussain Mohi-ud-Din Qadri and M. Ishaq Bhatti For more information about this series, please visit www.routledge.com/ Islamic-Business-and-Finance-Series/book-series/ISLAMICFINANCE

The Growth of Islamic Finance and Banking Innovation, Governance and Risk Mitigation Edited by Hussain Mohi-ud-Din Qadri and M. Ishaq Bhatti

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 selection and editorial matter, Hussain Mohi-ud-Din Qadri and M. Ishaq Bhatti; individual chapters, the contributors The right of Hussain Mohi-ud-Din Qadri and M. Ishaq Bhatti to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record has been requested for this book ISBN: 978-0-367-20588-1 (hbk) ISBN: 978-0-429-26243-2 (ebk) Typeset in Times New Roman by codeMantra

Contents

List of figures List of tables List of contributors Preface Acknowledgements The growth of the Islamic finance and banking industry: an introductory note

ix xi xv xix xxi

1

H US SA I N MOH I - U D - DI N QA DR I A N D M. I SH AQ BH AT T I

1 Standardization in the Islamic banking & financial system: the methodology of inclusion (Taqlid al-Madh’hab)

6

SH AY K H - U L - I SL A M M U H A M M A D TA H I R- U L - QA DR I

2 Recent development in Islamic finance and financial products

32

M. I SH AQ BH AT T I , NA SE E M A L R A H A H L E H A N D H US SA I N MOH I - U D - DI N QA DR I

3 On the role of ownership and governance structure in raising capital: a sukuk example

50

MOH SI N K H AWA JA , M. I SH AQ BH AT T I A N D   DA R R E N H E N RY

4 Takāful (Islamic insurance) on the blockchain

77

H A Z I K MOH A M E D

5 IT-based Finance Hub: a new horizon towards transparent Zakat distribution model U M A R DR A Z , TA R IQ A L I , SA NA YA SI N , A H M A D SH A F A N D R A I H A TA L L AT

87

vi Contents 6 The way towards standardizing Islamic economic, financial, and banking fatawa

101

M A S U DU L A L A M C HOU DH U RY

7 The fallacy of conventional benchmarks in Islamic banking and finance: defining, defending and discussing with evidence from archival data

109

I M A M U DDI N M U H A M M A D SH UJAT SA L E E M A N D A BDU R  R A H M A N A L E E M I

8 Influence of leverage on ownership structure-performance relationship: a panel data approach of Islamic and conventional banks of Pakistan

121

U M M A R A FAT I M A A N D SU N DA S S OH A I L

9 Dynamic correlation and volatility linkage between stocks and sukuk

136

M A S OU M E H SH A H SAVA R I

10 Provision of riba by religious faith: A comparative analysis

152

M USF E R A H M E H FO OZ

11 Layers of misconceptions about IB: are Islamic banks threats, challenges and opportunities for investors

167

M A L I K SH A H Z A D SH A BBI R A N D AWA I S U R R E H M A N

12 Overview of progress in Islamic commercial and social finance in Pakistan

187

SA L M A N A H M E D SH A I K H , MOH D A DI B I SM A I L , A BDU L  GH A FA R I SM A I L , SH A H I DA SH A H I M I A N D M U H A M M A D H A K I M I MOH D. SH A F I A I

13 Translation of economic verses by Shaykh-ul-Islam Muhammad Tahir-ul-Qadri in the light of translation studies: comparison with other translators

206

SH A I R A L I K H A N

14 Drawing inferences from Ali ibn Abi Talib’s Teachings on social and collective responsibility for a fair and just economy

219

NA JA M A BBA S

15 Pricing anomaly: tale of two similar credit-rated bonds with different yields MOH A M E D A R I F F, A L I R E Z A Z A R E I A N D M. I SH AQ BH AT T I

233

Contents  vii 16 Resolving Islamic finance disputes through arbitration in the Middle East

254

M A R I A BH AT T I

17 Formation of tangible capital from intangible capital and venture philanthropy: an innovation in Islamic finance

262

T O SE E F A Z I D, O SA M A H A L R AWA SH DE H , A N D M U H A M M A D OM E R C H AU DH RY

18 Theoretical, practical vis-à-vis legal development in Islamic banking: a case of Pakistan

281

H US SA I N MOH I - U D - DI N QA DR I

19 Islamic safety nets for the poor: Pakistan’s experience

314

NA SI M SH A H SH I R A Z I

Concluding remarks on the growth of the IBF industry

331

H US SA I N MOH I - U D - DI N QA DR I A N D M. I SH AQ BH AT T I

Index

333

List of figures

2.1 3.1

3.2

5.1 5.2 5.3 6.1 8.1 9.1 9.2 9.3 9.4 9.5 12.1 12.2 12.3 13.1

Classification of risks in IBFs 44 A visual display of the trade-off between the desire of ownership control and risk aversion, namely equity, bonds, loans, and sukuk. Equity is the least risky security for an issuer but dilutes ownership control while loans are the most risky but do not lead to ownership dilution 51 The histogram shows on the x-axis the number of issues made by the sample firms and on the y-axis the frequency density of the number of firms that issued a security in any quarter during 2000–2015. The highest density is for zero issues implying that the majority of firms did not raise capital during the sample period. The number of firms that made a single issue during the sample period is second to highest after non-issuers 61 IT-based Finance Hub 88 Flowchart of finance hub 90 Proof of correctness through VDM-SL tool box 98 Methodological independence between tawhid as law and ‘Shari’ah-compliance’ 106 The conceptual frame of the relationship between leverage, ownership structure and performance 125 Time series of stock index in 2015/03–2017/03 144 Time series of sukuk index in 2015/03–2017/03 145 Return on the total stock index of 50 active companies of Tehran Stock Exchange in 2015/03–2017/03 145 Return on the price index of sukuk listed in Iran Fara Bourse in 2015/03–2017/03 145 Dynamic correlation between stocks and sukuk 147 KSE-100 index daily values (adjusted closing) for 1998–2018 189 KSE-100 and KMI-30 index for 2009–2018 190 Zakāt receipts (in million Rs.) 198 Translational strategies and translated words for 90 Quranic words 216

x  List of figures 15.1 Zero risk common bond vs. sukuk bond yields 242 15.2 AAA common bond vs. AAA sukuk bond yields for identical issuers 243 16.1 Global Islamic banking assets top 10 countries (2014) 255 16.2 Asset growth comparison: Islamic banks versus conventional banks 2008–2014 256 18.1 Market share of assets, deposits and financing and investment of Islamic banking sector (%) 288 18.2 Total assets, deposits and financing and investments of Islamic banking sector (PKR Billion) 288 18.3 Financing mix (% share) 289 18.4 Financing mix (% share) 289 18.5 Financing mix (% share) 290 18.6 Financing mix (% share) 290 18.7 Islamic banking branch network in Pakistan (June, 2017) 293 18.8 Islamic banking branches of conventional banks (June, 2017) 293 18.9 Subbranches of IBI’s in Pakistan (June, 2017) 294 18.10 Year-wise domestic sukuk summary 301 18.11 Entity-wise and year-wise breakup of sukuk (cumulative as of end year in per cent) 301 18.12 International sukuk issued by the government of Pakistan 301 18.13 Sukuk issuance trend 302 18.14 S ̣ukuk issuances by jurisdiction and share (2017) 302 18.15 Sovereign sukuk issuance by jurisdiction (2017) 303 18.16 Corporate sukuk issuance trend 304 18.17 Corporate sukuk issuance by jurisdiction (2017) 304 18.18 Growth in assets under management and number of Islamic funds 305 18.19 Islamic fund assets by domicile (2017) 306 18.20 Islamic fund assets by geographical focus (2017) 307 19.1 GINI index 319

List of tables

2.1 Islamic Banking at an Historical Glance 35 2.2 Modern History Islamic Banking and Finance from 1962 to 2016 36 3.1 Descriptive Statistics of Control, Ownership, Governance, and Information Asymmetry Variables. The Quarterly Data Ranges from Year 2000 to 2015 for Our Sample Firms from Countries of Dual Issuers of Bonds and Sukuk. These Countries are Malaysia, Indonesia, Singapore, and Pakistan. Definitions of the Variables are Given in Appendix A 62 3.2 Descriptive Statistics of Firms Segregated by Their Issuance Trend. Issuers of More than One Security during a Quarter Are Placed in the High Risk Issuer Category. The Quarterly Data Ranges from Year 2000 to 2015 for Our Sample Countries: Malaysia, Indonesia, Singapore, and Pakistan with Issuers of Equity, Bonds, Sukuk and Loans. The Definitions of Variables are Given in Appendix A 64 3.3 Matrix of Correlation Coefficients 66 3.4 HOP Model. Equations (1) and (4) Describe How the Variables in Column 1 Determine the Firm’s Decision to Raise Capital in Column 2, and Choice of Security in Column 3. The Dependent Variable CHOICE is an Ordered Variable Ranging from 1 to 4 to Indicate the Level of Risk-Sharing Based on the Chosen Security. Quarterly Data Ranges from 2000 to 2015. Standard Errors in Parentheses Where *** p