nep-isf New Economics Papers
on Islamic Finance
Issue of 2020‒10‒19
fourteen papers chosen by
Mohamed Mohamed Tolba Said

  1. The Islamic macroeconomic model: How to Apply it By ALJARHI, Mabid
  2. The Impact of Interest Rate Changes on the Islamic Foreign Exchange Forward in the Malaysian Derivative Market By Arif, Nor Azmah Md.; Muda, Ruhaini; Alam, Md. Mahmudul; Mohamad, Saadiah
  3. Islamic vs Conventional banks: what differences ? Tunisian case By NEIFAR, Malika; Gharbi, Leila
  4. Contribution of Islamic Social Capital on Green Economic Growth in Malaysia By Hamid, Nazrah Abdul; Muda, Ruhaini; Alam, Md. Mahmudul; Omar, Normah; Nadzri, Farah Aida Ahmad
  5. Challenges and Prospects of the Halal Hotel Industry in Muslim-majority and Muslim-minority Countries: The Case of Malaysia and Thailand By Waehama, Wanamina; Alam, Md. Mahmudul; Hayeemad, Mahmood; Waehama, Waemamu
  6. Transfer Paradox in a General Equilibrium Economy: a First Experimental Investigation By Kenju Kamei
  7. SIR Economic Epidemiological Models with Disease Induced Mortality By Aditya Goenka; Lin Liu; Nguyen, Manh-Hung
  8. The Case Against the Universal Basic Income By Nguyen, Hai Le Dong
  9. An economic assessment of the evolution of the corporate tax system in Italy By Ernesto Zangari
  10. Global financial markets and oil price shocks in real time By Venditti, Fabrizio; Veronese, Giovanni
  11. Chinese and Indian investment in Ethiopia: Infrastructure for ‘debt-trap diplomacy’ exchange and the land grabbing approach By Addis, Amsalu; Asongu, Simplice; Zuping, Zhu; Addis, Hailu
  12. COVID-19, economic policy uncertainty and stock market crash risk By Zhifeng Liu; Toan Luu Duc Huynh; Jianjun Sun; Peng-Fei Dai
  13. Institutional Roots of Economic Decline: Lessons from Italy By Marco Simoni
  14. It’s not about the money! EU funds, local opportunities, and the Brexit vote By Riccardo Crescenzi; Marco Di Cotaldo; Mara Guia

  1. By: ALJARHI, Mabid
    Abstract: Islamic macro models are two categories. The first was inspired by Mannan (1970), Siddiqui (1981, 2006) and Chapra (1985, 1996). It is elaborated by Khan and Mirakhor (1994), Iqbal and Mirakhor (2011), in addition to Mirakhor and Zaidi (2007). It uses a pure equity-based system, keeping the concept of a stable equilibrium, to draw conclusions about efficiency, equilibrium and stability. It ignores the institutional details of the monetary and financial structure. The second proposes an institutional structure of the monetary of financial sector of an Islamic economic system, with distinctive features of money creation and finance allocation, with the necessary instruments for the anchor and conduct of monetary policy. Shari'ah behavioral rules have been translated into an institutional structure. It uses an updated Al-Jarhi (1981, 1983) with several consequent modifications and improvements to do away with the neoclassical IS-LM, and prepare to switch to a more realistic disequilibrium structure . Based on Al-Jarhi’s updated and modified model, is proposed for economic development and stabilization. Implementation highlights gradualism and institutional competition as driving forces. The legal and regulatory environment is modified to provide both conventional and Islamic institutions working side-by-side to have an equal opportunity, leaving competition to have the final say.
    Keywords: Islamic economics, Islamic finance, Islamic macroeconomics, monetary policy, fiscal policy, development policy, policy anchor, interest rate, lending based, debt money, investment based, investment money.
    JEL: E19 E42 E44 E51 E58 E61 E62 E63 Z12
    Date: 2018–12–21
  2. By: Arif, Nor Azmah Md.; Muda, Ruhaini; Alam, Md. Mahmudul (Universiti Utara Malaysia); Mohamad, Saadiah
    Abstract: Islamic foreign exchange forward plays a significant role to mitigate various foreign currency exchange risks. The main challenge that impedes the development and operation of the Islamic foreign exchange forward as a hedging instrument is the behaviour of relying on existing conventional framework with core conception of relying on interest rate and excessive risk taking. This study utilized monthly data from April 2004 to October 2017 of the Malaysian derivatives market. This study found that in the absence of an alternative profit-rate related benchmark and cross border activities, Islamic banks are constrained to use the interest rate benchmark. In the short run, both medium term (6-months) and longer term (12-months) tenures indicate faster speed of adjustment possibility due to higher trading volume and less demand for the medium term for the Islamic foreign exchange forward contract. It implies a need of the Islamic foreign exchange forward as a longer-term hedging instrument and not for a short term speculation and risk-taking purposes, as prohibited by shariah.
    Date: 2020–09–17
  3. By: NEIFAR, Malika; Gharbi, Leila
    Abstract: The aim of the paper is to determine whether Tunisian Islamic and conventional banks are distinguishable from one another [on the basis of financial characteristics, in particular, profitability, liquidity, credit, insolvency risks] during 2005-2014 for a sample contains 16 banks (14 conventional and 2 Islamic).The comparison analysis between interest-free banks (IBs) and conventional banks (CBs) of bank specific factors reveals that there are differences between Islamic and conventional banks behaviour. Regression based Comparison analysis show that Interest-free banks are more profitable, more capitalized, more liquid and more stable but more riskier and less solvent than CBs. Large IBs are more profitable, more capitalized and riskier than small IBs. Small IBs have also lower Z-score than Large IBs. We conclude that the stability of IBs is attributed to size effect (Large IBs). Moreover, the stability of large IBs is driven by higher capitalization and liquidity. Across Tunisian banks, Zitouna bank is more stable while AL Baraka bank is riskier and more solvent. We find also that post Tunisian Revolution, there is no significant difference in terms of stability between IBs and CBs. However over the study period, IBs have lower insolvency risk and tend to be more capitalized and stable than CBs.
    Keywords: Financial stability, Profitability, Liquidity, Credit and Insolvency risk, GFC 2008, TUN 2011, Size, Market share, Tunisia, interest-free banking.
    JEL: G0 G21 G28 G32 Z12
    Date: 2020–09–09
  4. By: Hamid, Nazrah Abdul; Muda, Ruhaini; Alam, Md. Mahmudul (Universiti Utara Malaysia); Omar, Normah; Nadzri, Farah Aida Ahmad
    Abstract: This paper studies the relationship between social capital on the green growth in Malaysia, with the aim of ascertaining whether faith based social capital has a role in sustaining economic growth. The study utilizes the annual data over the period of 1970-2015. This study employs the Autoregressive Distributed Lag (ARDL) model and causality using the Vector Error Correction Model (VECM). The findings demonstrate the long and short-run associations between social capital and green growth in Malaysia. The causality only runs in a unidirection from social capital to the green economic growth. The findings have important policy implications for green economic growth measurement to account for social well-being and to fulfil the objectives of Islamic Sharia.
    Date: 2020–09–17
  5. By: Waehama, Wanamina; Alam, Md. Mahmudul (Universiti Utara Malaysia); Hayeemad, Mahmood; Waehama, Waemamu
    Abstract: The number of Muslim tourists has surged in recent years due to increased number of Muslim population with higher segment of better educated and more prosperous Muslim community. Although this is undoubtedly an opportunity for the hotel industry, the unique religious and cultural needs of Muslims pose some challenges for hoteliers. A response to this has been the development of halal hotels which offer food, accommodation and entertainment that is halal. While establishing halal hotels in Muslim-majority countries like Malaysia seems to be easier with the inherent good understanding of Islamic practices as well as support from the government, halal hotel industry could also give competitive advantage to Muslim-minority industry such as Thailand. It is therefore pertinent and timely to look into the challenges and prospects of halal hotel industry in Malaysia and Thailand. The comparative research framework must include a considerable number of hotels encompassing a variety of scales of operation from both countries to obtain reliable qualitative data. The findings could assist policymakers and relevant authorities in setting the way forward for the industry particularly by establishing relevant regulation and economic environment that support the industry.
    Date: 2020–09–17
  6. By: Kenju Kamei (Durham University Business School)
    Abstract: The transfer paradox, whereby a transfer of resources that influences the equilibrium price benefits the donor while harming the recipient, is a classic paradox in general equilibrium theory. This paper pursues an experimental investigation of the transfer paradox using a theoretical framework of a three-agent pure exchange economy that is predicted to have such a paradox. Two treatments were conducted. In the first treatment, there was one subject for each agent role in the experimental economy. In the other treatment, there were five subjects for each agent role (a total of 15 subjects) in the experimental economy. The experiment results indicate that a transfer of endowments among agents influenced the market clearing price, and consequently the donors benefited from this transfer, consistent with the competitive equilibrium theory. The equilibrium effects were strongest in the treatment with larger group size, resonating with the idea that having a larger number of market participants encourages them to behave competitively. Further, when given an option to make a transfer, the majority of the donor agents endogenously decide to adjust the endowment distribution. A detailed analysis found that the subjects’ decisions to transfer were mainly driven by the equilibrium effects on prices, and their decisions were largely unaffected by their measured level of cognitive ability.
    Keywords: experiments, transfer paradox, general equilibrium, equilibrium effects
    JEL: C92 D51
    Date: 2020–09
  7. By: Aditya Goenka (University of Birmingham); Lin Liu (University of Liverpool); Nguyen, Manh-Hung (Toulouse School of Economics)
    Abstract: This paper studies an optimal growth model where health expenditures (alternatively lockdowns) can be made to reduce infectivity of the disease when there is an infectious disease with SIR dynamics and infections can cause disease related mortality. We study implications of two different SIR models - with early mortality and with late mortality from the disease - on health outcomes, optimal response and on economic outcomes in equilibrium. We characterize the steady states and show how these vary when varying mortality. The outcomes are sensitive to the specification of the epidemiology model. We also study sufficiency conditions and provide the first results in economic models with SIR dynamics with and without disease related mortality - a class of models which are non-convex and have endogenous discounting so that no existing results are applicable.
    Keywords: Infectious diseases, Covid-19, SIR model, mortality, sufficiency conditions, economic growth, lockdown, prevention, health expenditure.
    JEL: E13 E22 D50 D63 I10 I15 I18 O41 C61
    Date: 2020–10
  8. By: Nguyen, Hai Le Dong (Global Association of Economics Education)
    Abstract: With the cost of implementation shrinking and robot-to-workers ratio skyrocketing, the effects of automation on our economy and society are more palpable than ever. According to various studies, over half of our jobs could be fully executed by machines over the next decade or two, with severe impacts concentrated disproportionately on manufacturing-focused developing countries. In response to the threat of mass displacement of labour due to automation, economists, politicians, and even the business community have come to see Universal Basic Income (UBI) as the panacea. This paper argued against a UBI by addressing its implementation costs and efficiency in mitigating the impact of automation through quantitative evidence as well as results of failed UBI-comparable programs across the world. The author of this paper instead advocated for the continuation of existing means-tested welfare systems and further investment in education scheme for unskilled and low-skilled labour. This paper was submitted to the “Young Economist of the Year 2019” essay competition hosted by the Financial Times and the Royal Economic Society, where it won a high commendation and was one of the 36 best papers shortlisted among 1,300 qualified submissions to be honoured on the website of the Royal Economic Society (2.7% acceptance rate). Due to the rules and policies of the Royal Economic Society, the author could only make this paper available to the public at least one year after the original date of submission.
    Date: 2019–06–24
  9. By: Ernesto Zangari (Bank of Italy)
    Abstract: This paper provides an assessment of the evolution of the Italian corporate tax system over the last decade through the computations of new and updated effective tax rates. The analysis takes into account the specificities of Italy’s Allowance for Corporate Equity (ACE) and looks at the evolution of market interest rates to evaluate the effects. It relies on a new method to measure the effect of the limits to the deductibility of the cost of debt. Over the period 2010-2020, the legislative changes led to effective taxation becoming highly volatile. This dynamic was mostly driven by the evolution of the ACE regime. Since 2016, the temporary tax incentives for purchasing machinery greatly reduced the cost of capital. However, since 2019 the provision that phased out the incentives at higher-levels of investment may have lowered their effectiveness for larger firms. The analysis also shows that ACE has better economic properties than the Mini-Ires regime that replaced it temporarily in 2019, in terms of incentive to invest and to increase equity funding.
    Keywords: taxation, effective tax rates, corporate taxation, EMTR, allowance for corporate equity
    JEL: H25 H32 H71
    Date: 2020–09
  10. By: Venditti, Fabrizio; Veronese, Giovanni
    Abstract: The role that the price of oil plays in economic analysis in central banks as well as in financial markets has evolved over time. Oil is not seen anymore just as a input to production but also as a barometer of global economic activity as well as a financial asset. A high frequency structural decomposition of the price of oil can therefore inform on the state of the global business cycle as well as on global financial market sentiment. In this paper we develop a method to identify structural sources of oil price fluctuations at the daily frequency and in real time. The identification strategy blends sign, narrative restrictions and instrumental variable techniques. By using data on asset prices, oil production and global economic activity we account for the double nature of oil: a financial asset as well as a physical commodity. The model offers novel insights on the relationship between the price of oil and asset prices. We also illustrate how the model could have been used in real time to interpret oil price movements in periods of high geopolitical tensions between the US and Iran and to read the drop of crude prices due to fears related to the Corona virus. JEL Classification: Q43, C32, E32, C53
    Keywords: oil prices, proxy-SVAR, sign restrictions, VAR
    Date: 2020–09
  11. By: Addis, Amsalu; Asongu, Simplice; Zuping, Zhu; Addis, Hailu
    Abstract: Purpose: The aim of this study is to examine the motive of China’s and India’s engagement in African countries particularly in Ethiopia, and to address the land grabbing and debt-trap diplomacy between Ethiopia and the Asian drivers, which creates challenges across the diverse social, political, economic, and ecological contexts. Methodology/approach: This study utilises both primary and secondary data. The available literature is also reviewed. The primary data were gathered through semi-structured interviews and discussions from: (i) several authority offices in Ethiopia, sources close to authorities, information-rich informants, employees, and (ii) perspectives, perceptions, and prospects from individual members of society. Findings: The study unmasks the win-win cooperation strategy from the perspective of the members of society in Ethiopia, evaluates whether China and India have strings attached or land grabbing motives. The study also shows that whether China’s and India’s move was deliberate, the implications of debt-trap diplomacy and exploitation in Ethiopia are apparent. Additionally, this study investigated several considerable potential threats to Ethiopia that will persist unless significant measures are taken to control the relations with Asian drivers. Limitations: Some of the limitations of this paper pertain to the primary data collection process from the Ethiopian Investment Commission (EIC) and other authorities, which was very challenging because people can be punished for talking to journalists or researchers. Furthermore, some investors were not willing to participate in discussions because they were engaged in areas that are not related to their licenses. Many interviewees were also not willing to disclose their names, and the data are not exhaustive in the number of investment projects covered. Originality/value: This study provides new evidence on the influence of Chinese and Indian investment, aid and trade on Ethiopia's social, political, and economic spheres. Additionally, this study contributes to the ongoing debate on land grabbing anddebt-trap diplomacy in Ethiopia.
    Keywords: Ethiopia, China, India, Land grabbing, Investment, Debt-trap diplomacy
    JEL: O1 O20 O40 O5 O55
    Date: 2020–01
  12. By: Zhifeng Liu; Toan Luu Duc Huynh; Jianjun Sun; Peng-Fei Dai
    Abstract: This paper investigates the impact of economic policy uncertainty (EPU) on the crash risk of US stock market during the COVID-19 pandemic. To this end, we use the GARCH-S (GARCH with skewness) model to estimate daily skewness as a proxy for the stock market crash risk. The empirical results show the significantly negative correlation between EPU and stock market crash risk, indicating the aggravation of EPU increase the crash risk. Moreover, the negative correlation gets stronger after the global COVID-19 outbreak, which shows the crash risk of the US stock market will be more affected by EPU during the epidemic.
    Date: 2020–10
  13. By: Marco Simoni
    Abstract: The economic decline of Italy since the mid 1990s is a critical case in contemporary political economy because its model of capitalism was deeply reformed at the time when its decline commenced. This paper argues that economic stagnation cannot be attributed to special interest politics, nor to the lack of market-friendly reforms in a globalized economic context, as previous literature argues. Instead, Italian economic decline is a consequence of institutional change which on the one hand has destroyed previous institutional complementarities, and on the other hand has led to an incoherent, or “hybrid,” setting. In the institutional spheres of corporate governance and labor, economic reforms established new institutions alternatively apt to support both strategic coordination and market coordination, resulting in institutional incoherence. In addition, building on the case of Italy and based on patent data relative to 19 OECD countries, this paper unpacks the link between institutional coherence and economic performance. It articulates a novel hypothesis according to which higher specialization in innovation patterns, derived from institutional coherence, also leads to higher overall innovation volumes. Hence, reforms that undermine a prevalent mode of coordination across the economy also undermine innovation capacity, leading to economic decline.
    Keywords: Varieties of Capitalism, Economic Growth, Italy
    Date: 2019–04
  14. By: Riccardo Crescenzi; Marco Di Cotaldo; Mara Guia
    Abstract: Growing Euroscepticism across the European Union (EU) leaves open questions as to what citizens expect to gain from EU Membership and what influences their dissent for the EU integration project. This paper looks at EU Structural Funds, one of the largest and most visible expenditure items in the EU budget, to test the impact of EU money on electoral support for the EU. By leveraging the Referendum on Brexit hold in the United Kingdom, a spatial RDD analysis offers causal evidence that EU money does not influence citizens’ support for the EU. Conversely, the analysis shows that EU funds contribute to mitigate Euroscepticism only where they are coupled with tangible improvements in the local labour market conditions. In order to gain support from its citizens, the European Union needs to produce tangible impacts, generating opportunities at the local level where these are felt the most by voters.
    Keywords: Europe, EU funds, Cohesion Policy, Brexit, Euroscepticism, RDD
    Date: 2019–10

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