Adi Saifurrahman and Salina H.J. Kassim
This study aims to explore and analyse the credit risk assessment procedure conducted by the Indonesian Islamic banks to address the issue of asymmetric information among their…
Abstract
Purpose
This study aims to explore and analyse the credit risk assessment procedure conducted by the Indonesian Islamic banks to address the issue of asymmetric information among their micro-, small- and medium-sized enterprise (MSME) clients. This study also investigates the gaps in credit risk assessment procedures by comparing Islamic banks’ practices and presenting several recommendations to reinforce the credit risk evaluation procedures and eventually promote more inclusion of the MSME segment into the Islamic financial services.
Design/methodology/approach
This paper adopts a qualitative method by implementing a multi-case study research strategy. The data were gathered primarily through an interview approach by incorporating purposive uncontrolled quota sampling.
Findings
The result of this study implies that the Islamic banks in Indonesia have their own unique approaches and strategies in assessing the credit risk and have several similarities in performing their evaluation procedures for the MSME. Despite seemingly adequate approaches and measures taken by the Islamic banks to eliminate the asymmetric information problem, the study identifies several gaps that occur within the Islamic banks’ methods of credit risk assessment.
Research limitations/implications
Since this study focuses on Indonesia and emphasises the two segments of Islamic banks, which consist of Islamic commercial and rural banks, in performing the MSME credit risk assessment; therefore, the findings of this study were limited around the observed Islamic banks within the MSME segment purview.
Practical implications
By referring to the recommendations as proposed by this paper, four implications could be expected from adopting these respective recommendations, among others: more effective evaluation procedures for the MSME, provision of a clear path and more efficient approach to assess the MSME units, lower financing cost and increase the confidence of Islamic banking industry in disbursing more financing to the MSME sector. This mechanism will potentially improve Islamic financial inclusion for the MSME due to the greater access to financial services; hence, the sector could contribute even more to Indonesia’s growing economy.
Originality/value
By incorporating a multi-case study among Indonesian Islamic banks pertaining to their methods in evaluating MSME customers, this study identifies several gaps affecting the effectiveness of MSME credit risk assessment. Furthermore, this study also presents a proposed framework to address these gaps accordingly by suggesting the salient strategies to minimise the issues of information asymmetry and enhance the MSME credit risk assessment procedure.
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Salina H.J. Kassim and Mahfuzur Rahman
This paper aims to identify incidences of default risks in microfinance.
Abstract
Purpose
This paper aims to identify incidences of default risks in microfinance.
Design/methodology/approach
Semi-structured interviews were conducted with individual borrowers in Grameen Bank. Upon completing the interview session from 40 respondents, the results of the interviews are interpreted by a comprehensive content analysis.
Findings
This study identifies the incidences of defaults in microfinance, which are post-disbursement monitoring, technical assistance, inexperienced field workers, weekly payment, accessible database, family member illness, hiding business, lack of motivation and over-stretched financial commitments. Among these incidences, the findings indicate that post-disbursement supervision is highly relevant in ensuring the success of microfinance because 80 per cent of the recipients of microfinance are illiterate women.
Originality/value
This study would be helpful for the investment companies, financial institutions, creditors and borrowers of microfinance. The financial institutions and investment companies need to identify borrower capacity and any obligation that may impede with repayment. It may help them to maximize returns on profit and minimize the risk of losses which contribute to economic growth.
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Salina H. Kassim and M. Shabri Abd. Majid
The purpose of this paper is to provide empirical evidences on the impact of financial shocks on the Islamic banks vis‐a‐vis the conventional banks. Based on the Malaysian…
Abstract
Purpose
The purpose of this paper is to provide empirical evidences on the impact of financial shocks on the Islamic banks vis‐a‐vis the conventional banks. Based on the Malaysian experience over two major financial crises, namely the 1997 Asian financial crisis and 2007 financial crisis, the study aims to test the validity of the proposition that the Islamic banks are more resilient to the financial shocks compared to the conventional banks.
Design/methodology/approach
Focusing on the Malaysian data covering three sub‐periods, namely, the 1997 Asian financial crisis period (July 1997‐September 1999), the non‐crisis period (October 1999‐June 2007) and the 2007 financial crisis period (July 2007‐September 2009), the study employs the impulse response functions and variance decomposition analysis based on the vector auto‐regression (VAR) method.
Findings
The results indicate that both the Islamic and conventional banking systems are vulnerable to financial shocks. This is contrary to the popular belief that the Islamic financial system is sheltered from the financial shocks due to its interest‐free nature.
Research limitations/implications
The results of this study have important implications for the risk management practices of both the Islamic and conventional banks.
Originality/value
This paper contributes in providing the empirical evidence on the impact of financial shocks on the Islamic banks. To the authors' knowledge, there have been no studies comparing of the impacts of the two major financial crises on the Islamic banking sector.
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Raditya Sukmana and Salina H. Kassim
This paper aims to determine the importance of the Islamic banks in the monetary transmission process in the Malaysian economy. In particular, the paper analyzes the relevance of…
Abstract
Purpose
This paper aims to determine the importance of the Islamic banks in the monetary transmission process in the Malaysian economy. In particular, the paper analyzes the relevance of Islamic banks' financing and deposit in channelling the monetary policy effects to the real economy.
Design/methodology/approach
The paper relies on the co‐integration test, impulse response functions, and variance decomposition analysis, focusing on the period from January 1994 to May 2007.
Findings
The results show that both Islamic banks' financing and deposit play important roles in the monetary transmission process in the Malaysian economy. In particular, both Islamic deposit and financing are shown to be statistically significant in linking the monetary policy indicator to the real output.
Practical implications
The results imply that the monetary authority should also consider the Islamic banks in the implementation of monetary policy in Malaysia. The results also imply that ensuring the stability of the Islamic financial institutions is just as important as that of the conventional counterpart to achieve an effective transmission of monetary policy in the economy.
Originality/value
This paper is a pioneer study undertaking empirical investigation on the role of Islamic banks in the monetary transmission process in an economy.
Salina H. Kassim and Turkhan Ali Abdul Manap
The purpose of this paper is to analyze the information content of the Islamic interbank money market rate (IIMMR), with respect to several macroeconomic indicators such as…
Abstract
Purpose
The purpose of this paper is to analyze the information content of the Islamic interbank money market rate (IIMMR), with respect to several macroeconomic indicators such as output, inflation, exports, imports, bank loans and stock market index, and compare it against that of the conventional interbank money market rate using the Malaysian data.
Design/methodology/approach
The paper relies on the causality tests based on the Toda‐Yamamoto method, focusing on the period from January 2000 to December 2006.
Findings
The results provide empirical support for the high information content of the IIMMR.
Practical implications
A major implication of this study is that the IIMMR can be a reliable variable for monetary policy implementation in the Malaysian case.
Originality/value
There have been no studies undertaken in the area of Islamic finance to analyze the information content of the Islamic money market rate to determine its possibility as a monetary policy variable. Alos, the paper enriches the literature by presenting the Malaysian experience in developing its Islamic interbank money market.
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Turkhan Ali Abdul Manap and Salina H. Kassim
The purpose of this paper is to examine the long memory property of equity returns and volatility of emerging equity market by focusing on the Malaysian equity market, namely the…
Abstract
Purpose
The purpose of this paper is to examine the long memory property of equity returns and volatility of emerging equity market by focusing on the Malaysian equity market, namely the Kuala Lumpur Stock Exchange (KLSE).
Design/methodology/approach
The study adopts the Fractionally Integrated GARCH (FIGARCH) model and Fractionally Integrated Asymmetric Power ARCH (FIAPARCH), focusing on the Malaysian data covering the period from April 15, 2004 to April 30, 2007.
Findings
The study finds evidence of long memory property as well as asymmetric effects in the volatility of the KLSE. The traditional ARCH/GARCH is shown to be insufficient in modeling the volatility persistence. The FIAPARCH specification outperforms the FIGARCH model by capturing both asymmetry effects and long memory in the conditional variance.
Research limitations/implications
The results of this study have practical implications for the investors intending to invest in the emerging markets such as Malaysia. Understanding volatility and developing the appropriate models are important since volatility can be a measure of risk which is highly relevant in forecasting the conditional volatility of returns for portfolio selection, asset pricing, and value at risk, option pricing and hedging strategies.
Originality/value
This study contributes in providing the empirical evidence on the long memory property of equity returns and volatility of an emerging equity market with reliable estimation models, which is currently lacking, particularly for emerging markets.
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Hamida Mubasshera and Salina H. Kassim
The purpose of this paper is to examine the relationship between war and interest-based transaction by analyzing the case of the late Ottoman Empire from a historical economic…
Abstract
Purpose
The purpose of this paper is to examine the relationship between war and interest-based transaction by analyzing the case of the late Ottoman Empire from a historical economic perspective. It also attempts to provide a deeper understanding of the Quranic verses where Allah has declared war against people who deal with interest.
Design/methodology/approach
It provides a snapshot of major economic events that occurred in the last phase of the Ottoman rule that contributed in shaping the fate of the empire and, then, systematically explores them.
Findings
A careful study of the chain of events reveals that there exists a strong relationship between war and interest-based transactions, as indicated in the parable given in the Quran where dealing with interest has been described as equivalent to waging war against Allah and His Messenger. The paper claims that Muslims are sure to be defeated in the hands of disbelievers if they themselves are at war with Allah and His Messenger by being involved in interest-based transactions, as validated by the case of the Ottoman Empire. The paper goes on to argue that this is why no specific punishment in this life is mentioned for this crime; rather extreme psychological pressure is imposed, so that the believers do not even consider getting close to dealing with interest.
Originality/value
This paper addresses a missing component in the existing literature of Islamic economics where the political economic aspects of interest has seldom received due attention. A careful analysis of these issues is expected to help people better understand the dire consequences of dealing in interest on a micro level. On a macro level, it can always help to formulate prudent foreign policy by learning from the mistakes of our ancestors.
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M. Shabri Abd. Majid and Salina H. Kassim
– This purpose of this paper is to empirically examine the contribution of the Islamic banking and financial institutions (IBFIs) to economic growth in Malaysia.
Abstract
Purpose
This purpose of this paper is to empirically examine the contribution of the Islamic banking and financial institutions (IBFIs) to economic growth in Malaysia.
Design/methodology/approach
Focusing on the post-1997 economic turmoil, the paper relies on several time series tests, such as autoregressive distributed lag (ARDL), vector error correction model (VECM) and variance decompositions (VDCs).
Findings
The paper documents significant role played by the IBFIs in Malaysian economy. In particular, significant unidirectional causality was found from the IBFIs development to economic growth, supporting the finance-growth led hypothesis or the supply-leading view.
Research limitations/implications
The paper only focuses its analysis on the role of the IBFIs in the Malaysian economy and not the financial sector as a whole. Thus, the findings of this paper are indicative, but inconclusive for the entire financial sector in the country.
Practical implications
Continuous efforts should be undertaken to promote the development of the Islamic banking industry due to its significant contribution to Malaysia’s economic growth by further improving the Islamic financial infrastructure, increasing the pool of human capital in the Islamic banking industry, providing conducive legal environment to the IBFIs and maintaining the Islamic financial sector stability.
Originality/value
This paper is the first attempt to empirically assess the contribution of Islamic banking institutions in Malaysia using ARDL, VECM and VDCs.
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Rosylin Mohd Yusof, Salina H. Kassim, M. Shabri A. Majid and Zarinah Hamid
The purpose of this paper is to analyze the possibility of relying on the rental rate to price Islamic home financing product.
Abstract
Purpose
The purpose of this paper is to analyze the possibility of relying on the rental rate to price Islamic home financing product.
Design/methodology/approach
By comparing two models consisting of either rental rate or lending rate (LR) and selected macroeconomic variables that could influence property value, the study focuses on the Malaysian data covering the period from 1990 to 2006. The study adopts several econometric time‐series analysis, such as the autoregressive distributed lag estimates, bi‐variate Granger causality, and multivariate causality based on the vector error‐correction model.
Findings
The study finds consistent evidence that the rental price (RP) is a better alternative than the LR to price Islamic home financing product. In particular, the rental rate is found to be resilient to short‐term economic volatility, while in the long run, it is truly reflective of the economic fundamentals.
Practical implications
This feature of the RP renders it as a fair pricing mechanism for the Islamic home financing product. Results of this study contribute towards finding an alternative benchmark for the Islamic home financing product which is currently using the conventional interest rate as its benchmark.
Originality/value
To the best of the authors' knowledge, the current study is the first of its kind which provides empirical evidence for the possibility of relying on the rental rate to price Islamic home financing product.
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Rafik Harkati, Syed Musa Alhabshi and Salina Kassim
This paper aims to assess the nature of competition between conventional and Islamic banks operating in Malaysia. It is an effort to enrich the existing literature by offering an…
Abstract
Purpose
This paper aims to assess the nature of competition between conventional and Islamic banks operating in Malaysia. It is an effort to enrich the existing literature by offering an empirical compromise on the differences in the results of studies related to competition between the two types of banks.
Design/methodology/approach
Secondary data on all banks operating in Malaysia’s diversified banking sector is collected from the FitchConnect database for the period 2011-2017. A non-structural measure of competition (H-statistic) as informed by Panzar–Rosse is used to measure the competition between conventional and Islamic banks. Panel data analysis techniques are used to estimate H-statistic. Wald test for the market structure of perfect competition/monopoly is used to affirm the validity and consistency of the results.
Findings
The findings of this study signify that the Malaysian banking sector operated under monopolistic competition during the period of study. The long-run equilibrium condition holds for the Malaysian banking sector. Competition among conventional banks is more intense than that among Islamic banks. Financial reform endeavours of Bank Negara Malaysia (BNM) along with the liberalisation wave of the financial system were successful in promoting competition, rendering the financial system contestable, resilient and dynamic.
Practical implications
Regulators and policymakers may find the results beneficial in terms of rethinking the number of banks operating in the Islamic sector. The number of banks, however, is not the only determinant of competition in the banking sector. Implications of competition change for stability and risk-taking behaviour of banks should be considered.
Originality/value
Within the context of Malaysia’s diversified banking system, given the contradictory results reported in studies on competition, this study is an effort to provide a plausible middle ground. It suggests a possible answer as to why competition nature has not changed since the policy change initiatives of BNM, namely, banks merger, expansion of Islamic banking operation scope and liberalisation process.