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Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?

Abstract In theory, risk sharing based Financing (RSF) is considered a corner stone of Islamic finance. It is argued to render Islamic banks more resilient to shocks. In practice, however thus feature of Islamic financial products is almost negligible. Instead, debt-based instrument, with convent...

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Main Authors: Mirzet SeHo, Alaa Alaabed, Abul Mansur Mohammed Masih
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Language:English
Published: Universiti Sains Islam Malaysia 2017
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Keywords: Islamic banks, risk-sharing, financing, interest rate, dynamic system GMM.
Online Access:http://ddms.usim.edu.my:80/jspui/handle/123456789/14852
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spelling my.usim-148522017-05-16T04:35:39Z Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk? Mirzet SeHo, Alaa Alaabed Abul Mansur Mohammed Masih Keywords: Islamic banks, risk-sharing, financing, interest rate, dynamic system GMM. Abstract In theory, risk sharing based Financing (RSF) is considered a corner stone of Islamic finance. It is argued to render Islamic banks more resilient to shocks. In practice, however thus feature of Islamic financial products is almost negligible. Instead, debt-based instrument, with conventional like features, have overwhelmed the nascent industry. In addition, the framework of present-day economic, regulatory and financial reality inevitable exposes Islamic banks in dual banking systems to problems of conventional banks. This includes, but is not limited to, interest risk rate. Empirical evidence has, thus far, confirmed such exposures, despite Islamic bank’s interest-free operations. This study applies system GMM in modeling the determinants of RSF, and finds that RSF is insensitive to changes in interest rates. Hence, our result provide support to the “stability” view of risk-sharing-based financing. This suggest RSF as the way forward for risk management at Islamic banks, in the absence of widely acceptable Shariah compliant hedging instruments. Further support to the stability view is given by evidence of counter-cyclicality. Unlike debt-based lending that inflates artificial asset bubbles through credit expansion during the upswing of business cycles, RSF is negatively related to GDP growth. Our result also imply a significantly strong relationship between risk- sharing deposits and RSF. However, the pass- through of these deposits to RSF is economically low. About 40 percent of risk-sharing deposits are channeled to risk-sharing financing. This raises questions on the validity of the industry’s claim that depositors accustomed to conventional banking shun away from risk sharing and signals potential for better balance sheet management at Islamic banks. Overall, our findings suggest that, on the one hand, Islamic banks can gain ‘independence’ from conventional banks and interest rates through risk- sharing products, the potential for which is enormous. On the other hand, RSF could enable policy makers to improve systemic stability and restrain excessive credit expansion through its counter cyclical features. 2017-05-16T04:35:39Z 2017-05-16T04:35:39Z 2016-12 http://ddms.usim.edu.my:80/jspui/handle/123456789/14852 en Universiti Sains Islam Malaysia
institution Universiti Sains Islam Malaysia
building USIM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universit Sains Islam i Malaysia
content_source USIM Institutional Repository
url_provider http://ddms.usim.edu.my/
language English
topic Keywords: Islamic banks, risk-sharing, financing, interest rate, dynamic system GMM.
spellingShingle Keywords: Islamic banks, risk-sharing, financing, interest rate, dynamic system GMM.
Mirzet SeHo, Alaa Alaabed
Abul Mansur Mohammed Masih
Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?
description Abstract In theory, risk sharing based Financing (RSF) is considered a corner stone of Islamic finance. It is argued to render Islamic banks more resilient to shocks. In practice, however thus feature of Islamic financial products is almost negligible. Instead, debt-based instrument, with conventional like features, have overwhelmed the nascent industry. In addition, the framework of present-day economic, regulatory and financial reality inevitable exposes Islamic banks in dual banking systems to problems of conventional banks. This includes, but is not limited to, interest risk rate. Empirical evidence has, thus far, confirmed such exposures, despite Islamic bank’s interest-free operations. This study applies system GMM in modeling the determinants of RSF, and finds that RSF is insensitive to changes in interest rates. Hence, our result provide support to the “stability” view of risk-sharing-based financing. This suggest RSF as the way forward for risk management at Islamic banks, in the absence of widely acceptable Shariah compliant hedging instruments. Further support to the stability view is given by evidence of counter-cyclicality. Unlike debt-based lending that inflates artificial asset bubbles through credit expansion during the upswing of business cycles, RSF is negatively related to GDP growth. Our result also imply a significantly strong relationship between risk- sharing deposits and RSF. However, the pass- through of these deposits to RSF is economically low. About 40 percent of risk-sharing deposits are channeled to risk-sharing financing. This raises questions on the validity of the industry’s claim that depositors accustomed to conventional banking shun away from risk sharing and signals potential for better balance sheet management at Islamic banks. Overall, our findings suggest that, on the one hand, Islamic banks can gain ‘independence’ from conventional banks and interest rates through risk- sharing products, the potential for which is enormous. On the other hand, RSF could enable policy makers to improve systemic stability and restrain excessive credit expansion through its counter cyclical features.
format
author Mirzet SeHo, Alaa Alaabed
Abul Mansur Mohammed Masih
author_facet Mirzet SeHo, Alaa Alaabed
Abul Mansur Mohammed Masih
author_sort Mirzet SeHo, Alaa Alaabed
title Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?
title_short Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?
title_full Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?
title_fullStr Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?
title_full_unstemmed Risk Sharing Financing Of Islamic Banks: Better Shielded Against Interest Rate Risk?
title_sort risk sharing financing of islamic banks: better shielded against interest rate risk?
publisher Universiti Sains Islam Malaysia
publishDate 2017
url http://ddms.usim.edu.my:80/jspui/handle/123456789/14852
_version_ 1645153758799200256
score 13.222552

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