Related Papers
Mohsin Ali
Financial Assets’ pricing benchmarks serve multiple purposes in financial markets and hence play a critical role. First, they serve as a reference point for pricing instruments; second, they reflect the opportunity cost and third, they serve as a reference rate for the relative performance of investment portfolios. Hence, a benchmark that is transparent, liquid, easy to calculate and non-manipulative is considered critical for the efficiency of financial markets. Recent scandal of LIBOR’s manipulation by Barclays bank emphasizes the importance of a non-manipulative benchmark. In this paper, we propose an alternative pricing model and show how it could work to serve the purpose of a potential benchmark for pricing. This model was proposed by Abbas Mirakhor (1996) by utilizing the concept of Tobin’s q3 to arrive at the cost of capital (CoC) without resorting to fixed interest rate. We have empirically tested the model on Malaysian firms. To arrive at the CoC, we derived q-ratios at firm level and aggregated the same at the industry level. Our findings suggest that the model proposed by Mirakhor (1996) can be used to estimate CoC in an interest free economy.
ISRA International Journal of Islamic Finance
The Fourth Market theory and interest rate benchmarking in the Islamic finance industry
Ahmed Tahiri Jouti
Purpose This paper aims to understand the issue of interest rate benchmarking in Islamic financial institutions (IFIs) from a macro-economic perspective and assessing the relevance of creating a Sharīʿah-compliant profit rate benchmark to solve this issue. This paper also aims at suggesting an Islamic alternative that will handle both the negative economic impact on IFIs as well as on their financial performance. Design/methodology/approach The paper is based on literature review of conventional finance and Islamic finance theories to construct a theoretical model to assess the impact of interest rate benchmarking on the ability of IFIs to achieve the objectives of the Islamic economy. Findings The macro-economic perspective concludes that conceiving a profit rate benchmark for the Islamic finance industry is not relevant to raising the Sharīʿah credibility of the industry. Indeed, several adjustments need to be introduced in terms of the business model. Research limitations/implica...
Corporate Ownership and Control
Sharia Maqashid Index as a Measuring Performance of Islamic Banking: A More Holistic Approach
2017 •
Agus Sobari
So far, measurements of financial performance of Islamic banking is still predominantly still used by indicators of financial performance of conventional banking system. Its implication, many stakeholders, especially customers of Islamic banks. For Moslems are difficulty in measuring the benefits of the existence of Islamic banking. It is clearly due measure of success of Islamic banking course will be very different from conventional banking successes. If the benchmarks used today is still conventional, the consequences will be contained incorrect results of performance comparison of Islamic banking and conventional banking. Thus, both of the banking system becomes irrelevant and less apt to be compared directly. The size of Islamic banking performance should not directly benchmarking with conventional banking. It must be linked to the objectives and the establishment of Islamic banking noble intentions, namely to provide human well simultaneously implement the principles contained...
Pricing Benchmark and its Impact on Islamic Financial Institutions in Sri Lanka
Riyad Rooly, Ahamed Hilmy
As far as the history of Islamic banking and finance concern, it is noted that a unique feature of banking and finance operation consist of risk sharing mechanism which is called profit and loss sharing (PLS) paradigm. The profit or loss of the operation is determined by pricing benchmark which is considered as an important element in the practices of financial institutions in Sri Lanka. The purpose of using pricing benchmark is primarily related to reducing information asymmetries concerning the value of traded and non-traded financial assets. The pricing benchmark became a debatable topic in Islamic financial institutions in Sri Lanka since there seems no differences between conventional and Islamic banking practices in setting the pricing mechanisms. This study examined the pricing benchmark and its impact on Islamic financial institutions in Sri Lanka. The primary objective of this study is to investigate the reasons behind the application of pricing benchmark to determine profit sharing rate as pricing for their financial products and its impact on the practices of Islamic Financial institutions in Sri Lanka. The data was collected from primary sources such as interview and the secondary sources such as literature survey. The sample of the study consisted of Islamic financial institutions in Sri Lanka. The findings of this study reveals that application of pricing benchmark to determine profit sharing rate is unavoidable as per the central bank regulations which is challenging to the shari'ah compliance. And also the impact of pricing benchmark has been found from both side of Islamic financial institutions and customers. The outcome of this study will provide information to the policy makers, especially to Shar'ah advisers, and regulators to mitigate the obstacle to set an alternative pricing benchmark for Islamic financial institutions in Sri Lanka to comply with Shari'ah perspective.
Dichotomy between Sharī'ah Compliance and the Economic Goals of Islamic Finance Institutions
Muhammad Ayub
Islamic banking has crossed the milestone of forty years since the Dubai Islamic Bank and the Islamic Development Bank were established in 1975. Islamic banking windows, standalone Islamic banking systems and even full-fledged Islamic banks, are operating as a part of global finance industry in the scenario wherein interest based institutions capture the overwhelming part of the business. Islamic banking institutions (IBIs) use Islamic equivalents of almost all conventional finance products for financing and liquidity and risk management, from " over draft " to the most toxic derivatives like swaps to compete with the conventional banks in profitability. As a commercial necessity and the need to compete for profitability, many Islamic finance professionals, academics and some Sharī " ah scholars advocate for the use of such products and devices treating it " ╒ājjah " for risk hedging on the basis of " ma╖la╒ah " or 'umūm balwa ". The path dependency syndrome may lead to credibility loss to Islamic finance resulting in persistent financial exclusion of the faith based clients / investors. This paper discusses the severity of the dichotomy between economic goals and the Sharī " ah compliance focusing on the negative impact of financial derivatives and suggests some policy initiatives and steps to reduce it and make Islamic banking and finance an increasingly sustainable global discipline based on sound principles. It recommends that the jurists and Islamic finance professionals should explore the Sharī " ah rules and real business potentials to find answers to the current Islamic banking conundrum and lead the industry on the right path of developing Sharī " ah based ethical products and using really Sharī " ah based devices to hedge risk.
Maqasid al-Shari’ah and Islamic financial products : a framework for assessment
2011 •
Habib Ahmed
Contemporary practice of Islamic finance has been criticised for not fulfilling the maqasid. The debate surrounding the practice of Islamic finance has led to the distinction between Shari'ah-compliant and Shari'ah-based Islamic products. However, there are no clear definitions as to what these terms entail. Whereas some scholars assert that Shari'ah-compliant and Shari'ah-based products are the same, there is a need to distinguish between different nuances of Islamic finance in terms of legal and social Shari'ah requirements. In this research note (note), an objective way of classifying categories of Islamic financial products is suggested. In particular, the legal and social Shari'ah requirements implied in the maqasid are used to classify Islamic financial products as Shari'ah-based, Shari'ah-compliant and pseudo-Islamic. The note also identifies the role of different stakeholders in choosing the types of products.
ISLAMIC FINANCE INSTRUMENTS AND MARKETSViewpoint: Shariah Law—Bringing a New Ethical Dimension to Banking
Mohamed Hamza
Islamic finance: An overview
talha akram
Alternative Pricing Mechanisms for Islamic Financial Instruments: Economic Perspective
2010 •
Dr. Nidal Alsayyed
The Islamic banking industry has been trying for the last two decades to extend its outreach to expand its operation business and services in a comparable zone to conventional banking. This paper discusses one of the important hurdles in the growth of Islamic banking which is the use of KIBOR as benchmark for pricing the Islamic banking products. Muskun home financing product of BankIslami Pakistan Limited is used in this paper to elaborate the pricing and benchmarking of product, spread between the conventional interest rate and Islamic profit rate as well as the alternative product pricing mechanism to be used by Islamic banks for this product. Details of Muskun home financing product are discussed in this paper in addition to the marketing strategy, market approach, product development, and all other relevant processes.
Islamic Economic Studies
Islamic banking and Finance in Theory and Practice: A Survey of State of the Art
2006 •
Nazmira Othman
