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Appendix I. Sources and Uses of Fund for IBs
Appendix II. Empirical Results for Change in Credit and Change in Assets
Appendix III. Description of the Database
Annex I. List of Banks
We would like to thank Hassan Al-Atrash for his valuable support and for guiding this research. We are grateful to Abbas Mirakhor, Adnan Mazarei, Daniel Hardy, Gabriel Sensenbrenner, Ghiath Shabsigh, Juan Carlos Di Tata, Khaled Sakr, Mahmoud El-Gamal, May Khamis, Mohsin Khan, Patrick Imam, Rifaat Ahmed Abdel Karim, and Simon Archer for their helpful comments on an earlier draft. We would also like to thank participants of the Middle East and Central Asia Department seminar for their helpful suggestions. Special thanks to Anna Maripuu, Yuliya Makarova, Arthur Ribeiro da Silva, and Patricia Poggi for valuable assistance.
The establishment of modern Islamic financial institutions started three decades ago. Currently, there are at least 70 countries that have some form of Islamic financial services; almost all major multinational banks are offering these services. See Imam and Kpodar (2010) for more details on how Islamic banking spread.
Oman is excluded since it does not have Islamic banks.
While IBs dominate the banking sectors in Iran and Sudan, these countries were not included in the analysis because the focus of this paper is on comparing the performance of the two groups of banks in the same country.
Asymmetric information occurs when buyers or sellers are not equally informed about the quality of what they are buying and selling. The asymmetry always runs in the same direction, with the security issuer (borrower or party receiving financing) having more information than the investor (lender or party providing financing) about the issuer’s (borrower or receiver of financing) future performance.
The discussion here refers to justice in economic sense and not just to the exploitation of poor debtors by rich creditors. For more details, see El-Gamal (2001).
This means that an investment is structured on exchange or ownership of assets, placing Islamic banks closer to the real economy compared to conventional banks that can structure products that are mainly notional or virtual within an infinite range.
The term toxic assets refers to certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder. The term has become common during the financial crisis of 2007–10, in which they played a major role (Wikipedia). Complicated financial assets such as some collateralized debt obligations and credit default swaps falls in this category. These assets are not Shariah compliant and hence IBs cannot invest in them
The main sources used in building the database include banks’ annual and interim reports, Zawya database, and information from rating agencies.
*, ** and *** indicate that the hypothesis that the difference between IBs’ weighted average and CBs’ weighted average is greater than zero is significant at 10, 5, and 1 percent significance levels, respectively.
CBs receive higher share of public sector deposits in many countries. For example, public sector deposits in Jordan Islamic banks (largest IBs in Jordan) where about 1.5 percent of total deposits while public sector deposits averaged 8 percent in the banking system deposits in 2008.
CBs have more flexibility in debt restructuring given that they can provide their customers with cash (liquidity), which facilitates compliance with regulatory requirements for debt rescheduling/restructuring. Turkey relaxed the classification and provisioning requirements during the crisis.
We also examined the impact of the exposure to the household and trade sectors, capital adequacy ratios, growth in credit, and interaction (real estate and construction x country dummies) variables, which proved to be insignificant
The omitted category (country) is Bahrain offshore.
This helps in providing more stable sources of funds. It remains the case that in several countries one or two IBs dominate the market. This contributes to the stability of funds.
They defined large banks as banks with assets exceeding US$1 billion while we define large banks based on the median of bank assets in each country.
While the IBs dummy is not significant at 10 percent significant level, it is very close to be significant.
GIB is owned by the six Gulf Arab states.
See GIB’s 2008 Annual Report for more details. The analysis does not account for the potential reduction losses due to the purchase of these assets.
Islamic financial institutions carry 40 percent more liquidity than their conventional counterparts and commit about 95 percent of their funds to short-term Ijarah, Murabahah and Musharakah instruments (Khan et al, 2008).
A Liquidity Management Task Force was formed in early 2009 by the IFSB and the Islamic Development Bank to find ways to address this problem.
This includes the default of East Cameron Gas Company sukuk (US$167 million), Kuwait Investment Dar sukuk (US$100 million) and the Saad Group US$650 million Golden Built Sukuk. Given that these will represent the first cases to work-out sukuk default or restructuring, they will set a precedent for future restructuring. See Sukuk, Interrupted (Deutsche Bank; 2009) for further discussion.
While Nakheel sukuk holders did not face any losses while conventional loans and bond were restructured with losses to lender/holders, the legal uncertainty remains an issue that needs to be addressed.
Some Shariah scholars are reluctant about full and total harmonization of Shariah standards. In their view, the standardization of Shariah may be against the fundamental premise of Ijtihad, the process of deducting Shariah rules from their authentic sources. If rules become standard, and imposed by legal authorities, then Ijtihad cannot be applied anymore. This will eventually damage the very reason why Shariah can be applied in all circumstances, times and places.
Securing minimum features in the contracts, including approval by an appropriate Shariah board, would facilitate product innovation.
Islamic products tend to be more complicated than their conventional counterparts since they usually involve more than one concept and non-standard transaction structures
In the UAE some IBs exceeded the 25 percent limit on lending to real estate sector.
For a description of various Islamic financial contracts, see http://en.wikipedia.org/wiki/Islamic_banking#Mudarabah_.28profit_sharing.29.