nep-isf New Economics Papers
on Islamic Finance
Issue of 2019‒01‒14
ten papers chosen by
Halimatun Aris

  1. Islamic Financial Institutions and Participatory Finance Constraints: The Case of Pakistan By Ali, Azam; Kishwar, Tanveer; Zulkhibri, Muhamed
  2. Stress Testing Frameworks and Practices in Dual Banking System: A Preliminary Assessment By Zulkhibri, Muhamed; Ismail, Abdul Ghafar
  3. Developing a Model for Corporate Governance and Conflict of Interest Deterrence in Shari’ahbased Cooperatives By Shafii, Zurina; Obaidullah, Mohamed; Samad, Rose Ruziana; Yunanda, Rochania Ayu
  4. Envy and the Islamic Revival: Experimental Evidence from Tunisia By Maleke Fourati
  5. Islamic Microfinance Experience in a Secular State: Case of Benin By Seck, Ousmane
  6. Integrating Microfinance and Cooperatives for Jobs Creation in Tunisia By Abdelkafi, Rami; Nabi, Mahmoud Sami
  7. Waqf Resource Mobilization for Poverty Alleviation Based on Maqasid Framework By Hassanain, Khalifa M. Ali
  8. An Investigation into Goodness of Zakat Laws in Selected Countries By Obaidullah, Mohammed
  9. The Institutional Foundations of Religious Politics: Evidence from Indonesia By Samuel Bazzi; Gabriel Koehler-Derrick; Benjamin Marx
  10. Challenges Facing Intra-Regional Trade among North African Countries By Ali, Abdelrahman Elzahi Saaid

  1. By: Ali, Azam (State Bank of Pakistan); Kishwar, Tanveer (Jinnah University for Women, Karachi, Pakistan); Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI))
    Abstract: Islamic financial contracts are designed to facilitate financing according to Islamic norms. Islamic financing in its first stages used only the partnership modes of Musharakah and Mudarabah. Later it is realized that, to avoid moral hazards, yet compete successfully with conventional banks, it is necessary to use all permissible Islamic modes and consequently, trade and leasing techniques were developed. This paper aims to identify the constraints faced by Islamic financial institutions in the adoption of participatory finance i.e., Musharakah and Mudarabah financing. The two basic categories of financing are: 1) profit-and-loss-sharing (PLS), also called participatory finance, i.e. Musharakah and Mudarabah and 2) purchase and hire of goods or assets and services on a fixed-return basis, i.e., Murabahah, Istisna', Salam and Ijarah also called non-participatory finance. This paper suggests that innovation and creativity is necessitated more than ever to promote participatory modes of financing and to make it the preferred choice for meeting the increasingly sophisticated and diversified financial needs.
    Keywords: Participatory Finance; Impact Analysis; Islamic Banks; Pakistan
    JEL: A13 B41 E50
    Date: 2018–05–08
  2. By: Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI)); Ismail, Abdul Ghafar (The Islamic Research and Teaching Institute (IRTI))
    Abstract: This paper critically reviews and evaluates stress-testing frameworks and practices of supervisory authorities in a dual banking system namely Malaysia, Indonesia and Pakistan. The analysis suggests that similar to single banking system, there are two main designs to stress testing -bottom-up and top-down - depending on the institutional responsibilities and computational capabilities, while relying on two main techniques of stress tests, sensitivity tests and scenario tests (historical or hypothetical). None of these countries differentiates the stress testing design and approach between conventional and Islamic banking industry. The application of stress testing in these countries follows similar approach to conventional banking system. The analysis also suggests that stress-testing approach for Islamic banking system should be developed capturing the unique balance sheets structure and risks of Islamic banking so that it provides accurate assessments of vulnerability in the Islamic banking system.
    Keywords: Islamic bank; stress-tests; systemic risks; financial stability
    Date: 2017–05–17
  3. By: Shafii, Zurina (Universiti Sains Islam Malaysia); Obaidullah, Mohamed (The Islamic Research and Teaching Institute (IRTI)); Samad, Rose Ruziana (Universiti Sains Islam Malaysia); Yunanda, Rochania Ayu (Universiti Sains Islam Malaysia)
    Abstract: Different from a conventional cooperative, a Shari’ah-based cooperative observes Shari’ah principles. As these cooperatives offers Islamic financial products and involves in Shari’ah compliant investment, they are bound to observe Shari’ah governance structure, transparency, disclosure of information and strict compliance with Shari’ah principles. Compliance with the Shari’ah principles will strengthen public confidence in the credibility of the system of the Islamic Muamalat particularly in the cooperative movement. Due to the infancy of Shari’ahbased cooperative industry that needs for proper governance measures, this paper aims to discuss corporate governance in Shari’ah-based cooperatives in the attempt to propose a model for resolving stakeholders’ conflicts of interest
    Keywords: Microfinance; Cooperatives; Shari’ah; Corporate Governance
    Date: 2017–07–11
  4. By: Maleke Fourati (UNSW Business School)
    Abstract: The Islamic revival defined as the call for a resurgence of Islamic culture by opposition to Western culture and an increase in participation in political Islam, has become a widespread phenomenon in the Muslim world since the 1970s. It is often discussed in the literature as being motivated by psychological factors but with little empirical evidence. In this paper, I test whether envy, defined as a feeling of grievance caused by someone else’s possessions and/or qualities, is causing the Islamic revival. While testing the effect of envy on the Islamic revival is particularly challenging as envy is endogenous to a person’s social state, personal characteristics, and preferences, I exogenously trigger the feeling of envy by a 2 by 2 design experiment conducted in Tunisia. I ran a dictator game with 600 nationally representative Tunisians to test whether participants exposed to envy, which I capture by the interaction between a priming video triggering envy and a low stake, increases participants donation share to a religious charity affiliated with the Tunisian Islamic party, Ennahdha, which represents the Islamic revival. The effect is particularly strong among participants who declare themselves as highly religious. I also test for the external validity of my experimental results and find consistent patterns.
    Date: 2018–10–10
  5. By: Seck, Ousmane (The Islamic Research and Teaching Institute (IRTI))
    Abstract: Islamic finance has gained interest in Muslim as well as non-Muslim countries as financial markets are trying to attract capital from investors in search of investment opportunities in accordance with Islamic principles. While the industry is growing on fertile grounds in countries such as Malaysia, the United Arab Emirates, Saudi Arabia, a mix of other countries such as the United Kingdom, Luxemburg, Hong Kong, Senegal, South Africa etc., have tapped into that market by issuing Sukuk or Islamic bonds, although their regulatory frameworks are not designed for their specificities. In 2010, Benin, a former French colony, which inherited its secular constitution has introduced Islamic microfinance without modifying its regulatory framework. The objectives in this paper are three-fold: review the microfinance policy, the regulatory framework and its relevance to the effective functioning of Islamic microfinance. The paper also presents the experience of Benin in Islamic microfinance, and the evaluation of its impact in a policy environment characterized by secularism that implies exclusion of religious specificities. Using a combination of evaluation studies, survey of stakeholders and experts in Islamic microfinance in Benin, and complementary interviews, this research finds that the impact of Islamic microfinance is not separable from the impact of the overall microfinance sector in which it is blended. The impact appears to be positive in terms of contributing to the improvement of living conditions, and loosening the financing constraints on households and small and medium enterprises through additional financial resources.
    Keywords: Islamic microfinance; Poverty alleviation; Financial Inclusion; SMEs; Africa
    Date: 2017–05–30
  6. By: Abdelkafi, Rami (The Islamic Research and Teaching Institute (IRTI)); Nabi, Mahmoud Sami (The Islamic Research and Teaching Institute (IRTI))
    Abstract: Although Tunisia has completed its political transition toward democracy, its economy remains fragile and faces huge challenges. Professional insertion of young people in the labor market is among the top economic priorities of the country. Sound public policies with the objective of creating employment opportunities on a short-term horizon have to support the implementation of structural reforms aiming at boosting the private sector, improving the labor market and restructuring the education system. This paper is a contribution to the discussions on short-term solutions to the youth unemployment, which may accompany structural policies over the long term. We propose a jobs creation program for the youth including several components. The implementation of the proposed program assigns an important role to the government in terms of training, incentives to involve the private sector and in terms of funding. The originality of the proposed program is in linking microfinance to cooperative structure; two efficient tools against social exclusion and which are underutilized in jobs creation in Tunisia. The financial participation of the government is proposed according to a specific funding mechanism of Islamic microfinance: decreasing partnership. This mode of financing allows for a full public financing of the cooperatives' capital with an exit strategy after several years, incentivizing the cooperators to generate sufficient profits to buy the government shares
    Keywords: Microfinance; Cooperatives; Employment; Tunisia
    Date: 2017–03–16
  7. By: Hassanain, Khalifa M. Ali (The Islamic Research and Teaching Institute (IRTI))
    Abstract: This study adopts the framework practiced by various multilateral development banks (MDBs), particularly International Development Association (IDA), to explore the potential establishment of a global Waqf fund, as this framework is proven effective. The framework revolves around the IDA operations with replenishments, allocation of funds by implementing specific formulas and the determination approach, which is mainly to monitor effectiveness of the earlier processes. The study proposes to integrate Islamic vision of development based on Maqasid al-Shari’ah with IDA principles for the allocation of funds for a potentially global Waqf fund. The objective is to create more effective approach for raising and using resources for a global Waqf fund.
    Keywords: Maqasid al-Shari’ah; IDA; Poverty Alleviation; Human Development Index
    JEL: E02 O15 O19 Z12
    Date: 2018–11–08
  8. By: Obaidullah, Mohammed (The Islamic Research and Teaching Institute (IRTI))
    Abstract: Zakat as an annual flow of charity funds has received increasing attention of financial regulators and policy makers. Unlike other forms of Islamic philanthropy, zakat is mandated and compulsorily levied on every high-net-worth Muslim. Its primary goal is to serve as a tool to provide for the basic needs of the poor and the needy. Traditionally, most Muslim societies have viewed zakat as a purely religious matter. In such countries, zakat is managed entirely by the state apparatus dealing with religious affairs of its people. In some other countries with secularism as the avowed policy, the state sees no role for itself in religious matters and leaves the same to individuals and non-state actors. In yet another set of countries, the state sees the importance of a proactive role for itself in zakat management even while the task of zakat collection and distribution remains in the private domain. These countries have witnessed an increasing integration of zakat with the financial system. This paper hypothesizes that the regulatory framework for zakat management has an important bearing upon the mobilization of such funds and their utilization for alleviation of poverty. Using the concept of “goodness of laws” it undertakes a comparative analysis of the 29 sets of zakat laws as they exist in eight countries across the globe and seeks to delineate the “core principles” that should form the basis of legal and regulatory reforms that are necessary to strengthen the sector
    Keywords: Philanthropic; Zakat; Regulation; Governance; Taxation
    Date: 2017–03–26
  9. By: Samuel Bazzi (Boston University (Boston, Massachusetts) (BU)); Gabriel Koehler-Derrick (Harvard University); Benjamin Marx
    Abstract: Why do religious politics thrive in some societies but not others? This paper explores the institutional foundations of this process in Indonesia, the world’s largest Muslim democracy. We show that a major Islamic institution, the waqf, fostered the entrenchment of political Islam at a critical historical juncture. In the early 1960s, rural elites transferred large amounts of land into waqf—a type of inalienable charitable trust—to avoid expropriation by the government as part of a major land reform effort. Although the land reform was later undone, the waqf properties remained. We show that greater intensity of the planned reform led to more prevalent waqf land and Islamic institutions endowed as such, including religious schools, which are strongholds of the Islamist movement. We identify lasting effects of the reform on electoral support for Islamist parties, preferences for religious candidates, and the adoption of Islamic legal regulations (sharia). Overall, the land reform contributed to the resilience and eventual rise of political Islam by helping to spread religious institutions, thereby solidifying the alliance between local elites and Islamist groups. These findings shed new light on how religious institutions may shape politics in modern democracies.
    JEL: D72 D74 P16 P26 Z12
    Date: 2018–10
  10. By: Ali, Abdelrahman Elzahi Saaid (The Islamic Research and Teaching Institute (IRTI))
    Abstract: The high rate of unemployment and the slow progress of economic growth in most North African countries have spotlighted the importance of inter-regional trade among them as an alternative solution to achieve inclusive growth in the long run. This paper investigates challenges facing intra-regional trade for the North African Arab countries, namely: Mauritania, Sudan, Egypt, Morocco, Libya, and Algeria. Beside that, the study attempt to identify the possible trade linkages and the elements of succession to boom inter-regional business among these countries. This study lays out the options that policymakers can adopt to overcome these challenges. The results reveal that in spite of the existent of the linkages between these countries that might lead to the successful inter-regional trade among them, there are more challenges, which have hindered its contribution based on the highly requested inclusive economic growth. The results of this study show a strong policy implication for the policy makers in these countries that might support the facilitation and the promotion of interregional trade among them.
    Keywords: Economic Integration; Inter- regional Trade; Trade-integration; OIC
    Date: 2017–07–11

This nep-isf issue is ©2019 by Halimatun Aris. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.