Impact of Foreign Exchange Exposure and Shariah-compliant Status on Malaysian Firms’ Hedging Practice

Abstract

This study investigates the impact of foreign exchange (forex) exposure and Shariah-compliant status on firms' decision to practise hedging. It employs panel multiple and multinomial logistic regression on 702 firm-year observations from 117 non-financial listed firms over the period from 2010 to 2015. The sample consists of 70% Shariah-compliant firms, representative of the 74%-85% Shariah-compliant firms listed on Bursa Malaysia during the study period. From the multinomial logistic regression, this study finds total and net foreign currency exposures are significant in predicting hedging for firms that practice one and two hedging instruments. Moreover, the results also reveal that Shariah-compliant status always significantly and directly influence firms that hedge, except for firms that use four hedging instruments. This study contributes to the literature by introducing direct measurements of foreign currency exposure which prove to be significant indicators of forex exposure. Accurate measurement of forex exposure is crucial as it has implications on the firms' ability to predict its cash flows, commit to future projects, and subsequently, increase its value. Since firms do not disclose whether the instruments used are conventional or Shariah-compliant, this study assumes that all instruments are conventional and therefore, being Shariah-compliant hinder the firms from practising hedging. However, the results reveal those firms that hedge are indeed Shariah-compliant. This finding should raise a great concern among the Islamic capital market regulators to require stricter rules and greater transparency among Shariah-compliant firms.

Non-linear relationship between foreign currency derivatives and firm value: evidence on Sharīʿah compliant firms

“…This study utilizes Malaysian data as Malaysia is the leading country in Islamic finance and having the most advanced Islamic capital market (Ledhem and Mekidiche, 2020). Nevertheless, hedging practices among its SCFs are still not well explored and very much lag behind against firms in the developed countries (Wahab et al , 2020). Furthermore, the awareness of derivatives among firms is still low and most managers do not understand the function and the importance of derivatives as a hedging instrument (Ameer et al (2011)) and Islamic hedging is still limited due to the lack of awareness on Islamic hedging and poor documentation of Islamic hedging in annual reports of firms (Mohamad et al , 2014).…”

“…Besides, they have argued that conventional derivatives should not be used in Islamic finance for hedging due to the conventional finance practicing derivatives for speculation. Beside, Wahab et al (2020) employed logistic regression and found that FCDs are significant in predicting hedging among the SCFs in Malaysia.…”

Amalan Lindung Nilai dan Nilai Syarikat di Malaysia: Kesan Penyederhanaan Risiko FX dan Status Patuh Shariah

“…Pengujian terhadap interaksi antara lindung nilai dengan risiko FX (lindung nilai x risiko FX) akan memastikan derivatif FX yang digunakan adalah untuk tujuan menguruskan risiko FX. Berikutan perlaksanaan FRS 7 dan 139, kajian ini dapat menggunakan aliran tunai asing (FCF) sebagai ukuran risiko FX seperti beberapa kajian terkini (Lily et al 2017;Wahab et al 2019Wahab et al , 2020Wahyudi et al 2019).…”

“…Dengan wujudnya alternatif derivatif FX Islam ini, syarikat di Malaysia sepatutnya lebih berhatihati dalam memilih instrumen demi mengekalkan status patuh Shariah mereka. Namun berdasarkan dapatan analisis Wahab et al (2020), kebarangkalian syarikat patuh Shariah di Malaysia menggunakan instrumen derivatif FX konvensional adalah lebih tinggi berbanding syarikat yang tidak patuh Shariah. Oleh itu, terdapat kebarangkalian majoriti syarikat patuh Shariah di Malaysia mengamalkan instrumen lindung nilai konvensional, konsisten dengan dapatan dan Shaari (2018).…”

Impact of Derivatives User on Firms’ Performance of Shari’ah Compliant Firms

“…Arif, Muda, Alam and Mohamad (2019) reported one of the key concerns that could threaten Islamic risk management tools in the financial market is the attitude of managers in relying on the current structure of conventional instruments. Additionally, hedging practices among Shari'ah-compliant Malaysian firms are underexplored and lag behind firms in developed countries (Wahab et al, 2020). Mohamad et al (2014) reported that although firms are categorised as Shari'ah-compliant firms, their risk management in dealing with market uncertainties remains at the infancy stage with limited use of hedging instruments.…”