Special issue on Islamic finance

Citation

Hassan, K. (2012), "Special issue on Islamic finance", Accounting Research Journal, Vol. 25 No. 3. https://doi.org/10.1108/arj.2012.40325caa.001

Special issue on Islamic finance

Article Type: Guest editorial From: Accounting Research Journal, Volume 25, Issue 3

Islamic finance has significantly progressed since its beginnings in the early 1970s; during this time it has asserted its status within the Islamic community and the global economy. The most recent financial crisis showed us that not only could Islamic finance weather a crisis of this scale, it could help prevent a crisis from occurring. One main cause of the recent financial crisis is recognized as relaxed lending standards of financial institutions. A result of greed, the need for higher returns, and the absence of government regulations, this easy credit environment created a financial bubble. When the bubble burst, the response of the US government was to come to the rescue of the failing banks, thus reinforcing the banks’ sense of immunity from losses; as a result, it bought over $1 trillion of toxic bank assets.

The impact of the crisis on the Islamic finance industry was insignificant because they do not use structured products or sophisticated financial instruments. Their managers are charged to integrate Islamic teaching in all aspects of their business decisions. In the future, Islamic banks need to find other funding sources besides retail deposits, and continue to develop new products for hedging, derivatives, liquidity and risk-management.

The fact that Islamic finance weathered the current financial crisis so well presents it with a unique opportunity to demonstrate its importance to the global economy. While the global banking system has seen many failures and bankruptcies, Islamic finance has thrived. Many non-Islamic countries from the West, such as Germany, France and Japan, have recognized this contribution of Islamic finance to the global economy. In fact, they have sought funds from Islamic markets when faced when liquidity shortages in their own countries.

Industrialized countries are trying to stimulate their economies with current interest rates floating around a zero. While the conventional financial system of interest is unlikely to be replaced, there is no reason that the Islamic banking system cannot be offered in parallel based on its ethical principles and other unique characteristics.

There is no promise that Islamic finance will weather a future financial crisis unless as it develops it remains faithful to the core principles of Islamic finance. Islamic finance needs to commit itself to being Shariah-based (the substance) rather than Shariah-compliant (the form). The development of Islamic finance theories into working policies and products is a long-term commitment that will require bank, educational and political collaboration. Both the public and private sectors of the member states of the Organization of Islamic Conference (OIC) will need to work together to define the role of Islamic finance in the global economy. The future of Islamic finance is encouraging and will continue to transform with the efforts of people and Shariah-based financial engineering.

The first paper examines the social objectives of Islamic finance and whether it contributes to social development in the Muslim world. The authors examine “social maslahah,” which is how much corporations contribute beyond their social responsibility. They define the difference between corporate social responsibility and social responsibility and then discuss why Islamic banks are failing to provide social maslahah. They suggest both external and internal factors and present a set of measures for banks to use to enhance their social maslahah.

The second paper looks at the difference capital structure has on risk-taking efficiency between Islamic and conventional banks. Results from both regression and stochastic cost frontier analysis in the period 2001 to 2011 show that Islamic banks have less risky asset structures. Specifically, they have higher liquidity and lower amounts of non-performing loans compared to conventional banks. This results in delayed positive effects on profitability, with no impact on efficiency. On the other hand, more capitalized conventional banks shift from traditional lending to investment in other profit-generating assets which increases profitability and efficiency, although raising non-performing assets. The study has important implications to regulators when deciding the capital needed to manage the risk of the Islamic bank.

The third paper investigates whether Islamic investors lose portfolio efficiency because of a limited asset universe which follows social and ethical contraints (given by Shariah law). Using non-parametrical measurements of efficiency, they find evidence that Islamic funds are highly efficient and that they outperform their international counterparts. Their results are robust to different estimation of DEA models and time periods, the specification of the asset universe and the inclusion of the financial crisis period in the analysis.

The fourth paper evaluates the risk profiles of Islamic banks in GCC countries. They use a sample of 42 Islamic banks from 2002 to 2008 and divide them into two categories, those that invest in profit-loss-sharing activities and those that invest in nonprofit-loss-sharing finance. Their findings show that profit-loss-sharing financing activities are associated with higher risk and a higher insolvency risk.

Kabir HassanGuest Editor