Monetary Operations and Islamic Banking in the GCC: Challenges and Options

Basu, Ritu; Prasad, Ananthakrishnan; Rodríguez, Samuel

doi:10.2139/ssrn.3014023

Cited by 3 publications

(3 citation statements)

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“…As Islamic banks perform maturity transformation functions, they are liquidity creation distributors . In this context, Basu et al (2015) state that investment deposits in Islamic banks usually have maturities of 12 months, while Musharaka and Mudaraba are long-term investments. According to Beck et al (2010), academics and policymakers “alike point to the advantages of Sharia-compliant financial products, as the mismatch of short-term, on-sight demandable deposit contracts with long-term uncertain loan contracts is mitigated with equity and risk-sharing elements.” In the crisis period, the maturity match increases for both Islamic and conventional banks, while its magnitude is higher for Islamic banks compared to conventional ones (Nosheen, 2019).…”

Section: Islamic Bank Money Creationmentioning

confidence: 99%

Does PLS in Islamic banking limit excessive money creation?

Jedidia

Hamza

2023

JIABR

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Purpose Bank lending is the major source of monetary expansion. Bank-led money creation is a key issue in both conventional and Islamic financial systems. The purpose of this paper is to examine the issues related to Islamic banking money creation. In this conceptual paper, the authors investigate the involvement of profit and loss sharing (PLS) in money creation and especially how can PLS limit money creation “out of nothing.” In this regard, the authors examine the potential of the PLS principle in tackling the excessive money creation phenomenon. Design/methodology/approach This study uses a normative approach regarding Islamic bank money creation that fits Sharia directives. In fact, this study discusses “what ought to be,” that is, the values and norms of PLS money creation that impede excessive money creation. Findings Overall, Islamic banks create money differently compared to conventional ones. Especially, by avoiding a purely financial intermediary, money creation under the PLS principle sustains a strong relationship with the real economy and leads to a lower money multiplier. Therefore, PLS mechanisms allow financing through real assets and not credit assets “out of nothing.” This could prevent excessive money creation from causing harmful effects on indebtedness and financial instability. Practical implications PLS offers a valuable resolution for banking system money creation through the optimization of Islamic bank financing by facilitating the separation of the monetary function from the credit one. This reform thought reinforces the stability value of money allowing it to fully perform its functions with reference to the directives of Sharia. This especially allows the integrity and purchasing power of money, the reduction of the gap between the evolution of both real and financial economies and, consequently, the indebtedness and crisis. It is recommended to promote PLS financing by reforming institutional and regulatory constraints. Originality/value This study addresses the contemporary issue of money creation by Islamic banks through the PLS approach. The conceptual framework of this paper highlights the reformist role of PLS in limiting money creation through Mudarabah approach within fractional reserve banking.

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Section: Islamic Bank Money Creationmentioning

confidence: 99%

Does PLS in Islamic banking limit excessive money creation?

Jedidia

Hamza

2023

JIABR

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“…As oil is the primary source of revenue for all GCC countries, any exchange rate fluctuation could drastically reduce income of those countries if the currencies were not pegged with the U.S. dollar. However, this currency pegging restricts the independence of monetary policy in GCC countries, forcing macroeconomic management to rely mostly on fiscal policy and prudential regulations (Basu et al, 2015).…”

Section: Gcc Banking Sectormentioning

confidence: 99%

Banking research in the GCC region and agenda for future research – A bibliometric examination

Shome,

Elbardan,

Yazdifar

2023

JAAR

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PurposeThis paper provides a comprehensive review of the influential and intellectual aspects of the literature on the Gulf Cooperation Council (GCC) region's banking activities.Design/methodology/approachThis study undertakes a bibliometric meta-analysis review of the GCC region banking literature, covering 199 articles published between 2004 and 2022, extracted from the Web of Science (WoS) database, followed by a content analysis of highly cited papers.FindingsThis paper identifies the influential aspects of the GCC region banking literature in terms of journals, articles, authors, universities and countries. The paper also identifies and discusses five major research clusters: (1) bank efficiency; (2) corporate governance (CG) and disclosure; (3) performance and risk-taking; (4) systemic risk, bank stability and risk spillovers and (5) intellectual capital (IC). Finally, it identifies gaps in the literature and highlights some important research issues that provide directions for future research.Research limitations/implicationsThis paper is limited to the articles indexed in the WoS database and written in English. Though the WoS database encompasses a wide range of multidisciplinary journals, there is a chance that some relevant articles are not included in the WoS database or written in another language.Practical implicationsThis study provides regulators, practitioners and academics with valuable insight and an in-depth understanding of the banking system of the GCC region.Originality/valueTo the best of the authors' knowledge, this is the first review paper on GCC region banking literature. This study provides regulators, practitioners and academics with valuable insight and an in-depth understanding of the banking system of the GCC region.

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“…In addition, a large strand of literature also highlighted the challenges faced by banking authorities in conducting their monetary policy in presence of both Islamic and conventional banks. The problem of monetary policy transmission through interest rates (cost of capital) channel or the bank lending channel was indeed largely debated (Cevik and Teksoz, 2012; Basu et al , 2015; Hamza and Saadaoui, 2018). When Islamic and conventional banks show different cyclical behaviour, this will further complicate the conduct of monetary policy when Central banks are also dealing with macroprudential issues.…”

Section: Conclusion and Policy Implicationsmentioning

confidence: 99%

Lending cyclicality in dual banking system: empirical evidence from GCC countries

Saadaoui

Hamza

2020

JIABR

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Purpose The purpose of this paper is to check if there is a procyclical lending behaviour in dual banking systems of the Golf Cooperation Council (GCC) countries. The study also tries to control for the role of Islamic banks in amplifying or mitigating the procyclicality of dual banking systems. Design/methodology/approach Estimation of a dynamic panel model using annual observations on a sample of 81 banks based in the GCC countries between 2005 and 2018. The study uses two business cycle indicators as dependent variables, namely, output gap and oil price gap. Findings The system generalilzed method of moments (GMM) estimator and robustness checks confirm the procyclical lending pattern of dual banking systems in the GCC. Estimation outputs also indicate that this procyclicality is more pronounced during economic slowdowns. However, it is found that Islamic banks’ lending is less procyclical, giving support for the stability view of Islamic banking systems. The authors think that the implementation and conduct of macroprudential policies are very challenging for banking authorities when Islamic banks and conventional banks operate under the same regulatory framework. Research limitations/implications The research paper may suffer from some limitations. Indeed, exploring panel data instead of country-case data may lead to a problem of heterogeneity that may underpin the credibility of the econometrical estimations. To deal with this problem by introducing a set of bank-specific and time-specific dummies. Furthermore, small N samples (N = number of individuals) may affect the reliability of the tests for the validity of instruments and autocorrelation used under the GMM estimator, leading to inefficient results. Consequently, the number of selected banks is extended as much as possible (81 banks), becoming important comparing to the time dimension of the panel. Practical implications Policymakers and regulators are incited to embed the perspectives of Islamic finance regarding lending cyclicality in dual banking systems, which promote the efficiency of resource allocation to the financing of assets and by consequence enabling financial stability. The stability view of the Islamic banking system could prompt policymakers and regulators to encourage the implementation and development of Islamic banks. Originality/value The present paper tries to overcome the lack of empirical studies on the procyclicality of dual banking. The study contributes to this novel literature in two ways. First, it focuses exclusively on GCC banking systems. In fact, compared to other emerging markets, business cycles characterizing GCC are specific because of the role played by the oil and gas revenues in the economic growth and financial system is crucial. Second, this paper brings into evidence the procyclicality of GCC banking systems also when the oil price is taken as a business cycle indicator.

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Monetary Operations and Islamic Banking in the GCC: Challenges and Options

Cited by 3 publications

References 0 publications

Does PLS in Islamic banking limit excessive money creation?

Does PLS in Islamic banking limit excessive money creation?

Banking research in the GCC region and agenda for future research – A bibliometric examination

Lending cyclicality in dual banking system: empirical evidence from GCC countries

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