How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts

Abalkhail, Mohammad; Presley, John R.

doi:10.4337/9781843765318.00013

Cited by 8 publications

(6 citation statements)

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“…As suggested by Oldfield and Santamero (1997), if liabilities have a shorter tenor than assets, the liquidity risk arises from the maturity mismatches. We have previously noted that the maturity transformation constitutes the important element of Islamic financial intermediation (Abalkhail and Presley, 2002). The recent study of Adewale and Archer (2019) highlighted that “a large portion” of Islamic bank deposits (including unrestricted PSIA) have short maturities.…”

Section: Resultsmentioning

confidence: 99%

Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries

Jedidia¹

2020

JIABR

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Purpose The purpose of this paper is to empirically assess the impact of the principle of profit- and loss-sharing (PLS) on the exposure to liquidity risk of Islamic banks in Gulf Corporation Council (GCC) countries. The Islamic bank activity is distinguished by a PLS principle, which is likely to involve specificities in the bank liquidity issue. Design/methodology/approach This paper investigates the determinants of Islamic bank liquidity over the period 2005–2016 using a panel of 23 Islamic banks in GCC. The system of generalized method of moment estimators is applied. Findings The findings reveal that while profit-sharing investment accounts (PSIAs) are inversely proportional to Islamic bank liquidity, the PLS investment does not seem to act as a determinant of the bank liquidity. The fact that PSIAs are globally short-run accounts, but finance long-run projects leads to a substantial maturity mismatches, which limits the availability of liquidity buffer and exacerbates the bank’s exposure to liquidity risk. Moreover, capital adequacy ratio has significant and positive association with bank liquidity, as a strong capital ratio helps to strengthen the liquidity control. However, return on assets has a negative significant impact on bank liquidity. For instance, if the bank holds more cash, it deprives itself from placing funds and earning returns, which causes its profitability to decline. Practical implications This paper gives further insights to better improve the liquidity risk management in a context of scarcity of Shariah-compliant instruments. Islamic bank needs to determine the PLS purpose and goals to be consistent with the “bank’s financing policy” and convince its depositors to use their deposits for medium and long-run investments. Originality/value Unlike previous empirical research, this investigation tries to better grasp the Islamic bank liquidity issue by focusing on the PLS impact on liquidity risk. It aims to fill in the gap in the empirical literature on this topic.

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Section: Resultsmentioning

confidence: 99%

Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries

Jedidia¹

2020

JIABR

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“…ar ıb) that administers the fund on behalf of a fund provider (principal/rabb al-m al) can help to lessen distortion and assist in taking decisions. Some of the methods that may be undertaken to prevent asymmetric information are: adoption of compatible incentive contracts, application of both sector and financial screening and supervising processes, implementation of Islamic social learning activities and adoption of Islamic codes of behaviour (Abalkhail and Presley, 2002). The above-mentioned observations suggest that the operations of IBs raise questions regarding the agency theory.…”

Section: Development Of Governance Criteriamentioning

confidence: 99%

Sharīʿah governance and agency dynamics of Islamic banking operations in the Kingdom of Saudi Arabia

Hassan

Sohail

Munshi

2021

IJIF

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PurposeThis study aims to investigate and point out the variations of agency theory in the context of Sharīʿah governance in Islamic banking operations in the Kingdom of Saudi Arabia (KSA).Design/methodology/approachThe study followed the approach of quantitative Corporate Governance Index (CGI) by computing the Gov-index (Gompers et al., 2003) and the Gov-score (Brown and Caylor, 2004; Saffieddine, 2009) to examine corporate governance (CG) issues using primary as well as secondary data. The primary data was generated from three full-fledged Islamic banks (IBs) and nine traditional banks with Islamic banking wings, all operating in the KSA. The approach was to provide an insight into the agency structure in the context of Islamic banking, which may lead to a trade-off between the conformity of Sharīʿah (Islamic law) rules and processes followed in safeguarding the rights of investors.FindingsThe majority of the Islamic banking services that are surveyed in this study acknowledge the significance of Sharīʿah governance and have implemented the fundamental methods, in conformity with this system. Certain flaws in Sharīʿah governance principles pertaining to audit, control and transparency are reported.Practical implicationsThe research outcomes will be invaluable to IBs aiming to improve existing SG practices. It also has implications for IB managers to design strategies while complying with regulations and to protect the interests of all investors without breaching the ethics of Sharīʿah.Originality/valueThis paper adds original value to the body of knowledge on agency relationship by analysing the dynamics of agency theory in the unique and complex context of Sharīʿah governance of IBs or those offering Islamic products in the KSA. The results can be used as a valuable feedback for improvement of Sharīʿah governance in the banking system in the KSA and the Gulf region at large.

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“…As the conclusion, the applications of multi-contracts on the IFIs are now recognized by all countries because of the significant impact on economic growth and at the same time because of its capability to enhance the efficiency of the said institutions. However, experience shows (Abalkhail and Presley, 2000;Habib, 2002) that there are some inherent problems (asymmetric information, moral hazard and adverse selection) that might hinder the application of the PLS (Ismail, 2010).…”

Section: Conventionalmentioning

confidence: 99%

Conventional bank and Islamic banking as institutions: similarities and differences

Ibrahim

Ismail

2015

Humanomics

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Purpose – The aim of this paper is to discuss the similarities and differences of both conventional and Islamic financial institutions from various institutional perspectives. Design/methodology/approach – This conceptual paper describes the insights held by the financial institution theory which is discussed from the perspectives of the economics of the financial institution, legal environment, the political aspect of an institution, the philosophical underpinning, the components of institution and also the ethical role of institution. Then, this paper will proceed to justify the similarities and differences that have been observed between both institutions. Findings – Discussions in this paper will reveal that specifically specific similarity is prevalent on the nature of the supervisory role. The differences between both institutions from the aspects of business organization, economic roles and law of origin have also been found. Research limitations/implications – The similarities and differences that are established on both institutions will affect the structure of the financial contract and the design of financial systems. Originality/value – The paper will contribute a new knowledge specifically on the design of the Islamic financial contract based on Shariah law at the initial phase.

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How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts

Cited by 8 publications

References 0 publications

Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries

Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries

Sharīʿah governance and agency dynamics of Islamic banking operations in the Kingdom of Saudi Arabia

Conventional bank and Islamic banking as institutions: similarities and differences

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