nep-isf New Economics Papers
on Islamic Finance
Issue of 2022‒01‒03
five papers chosen by

  1. أهمية المصارف الإسلامية في تفادي الأزمات المالية By Billel Djeghri; Nabila Badis; Karim Zermane
  2. Screening and Monitoring Corporate Loans By Sebastian Gryglewicz; Simon Mayer; Erwan Morellec
  3. Constraints and demands on public finances: Considerations of resilient fiscal policy By Łukasz Rawdanowicz; Sébastien Turban; Jörg Haas; David Crowe; Valentine Millot
  4. Addressing the challenges of digital lending for credit markets and the financial system in low- and middle-income countries By Sommer, Christoph
  5. Mortgage finance across OECD countries By Frank van Hoenselaar; Boris Cournède; Federica De Pace; Volker Ziemann

  1. By: Billel Djeghri (Université de Constantine 2 Abdelhamid Mehri [Constantine]); Nabila Badis (Universite Abbes Laghrour [Khenchela]); Karim Zermane (Universite Abbes Laghrour [Khenchela])
    Abstract: نهدف الى ابراز المصارف الإسلامية كظاهرة إقتصادية جديدة ميزت الثلث الأخير من القرن العشرين، حيث اعتبرت رد فعل حضاري واقتصادي للأمة الإسلامية، وإدراك المسلمين قصور النظام المصرفي الغربي في ملائمة المعتقدات الدينية، إضافة لوعيهم أهمية استغلال ثرواتهم من قبل مؤسسات مالية تنطلق من عقيدة الأمة وثقافتها بدل الركون إلى المصارف والمؤسسات المالية التي تتبنى النظام الغربي القائم على الفائدة المصرفية. بينت الدراسة أن المصارف الإسلامية نجحت في توفير قنوات تمويلية واستثمارية لم يعهدها العمل المصرفي من قبل، وعلى أسس ترتكز على مبدأ المشاركة في الأرباح والخسائر وتختلف عن الفائدة الربوية، لكن بالرغم من أهميته إلا أنه واجه الكثير من التحديات التي تركت أثارت على مسيرته وتطور عمله. كلمات مفتاحية: المصارف الإسلامية؛ الأزمات المالية؛ الأثر والعلاج.
    Abstract: Islamic banks emerged as a new economic phenomenon that characterized the last third of the twentieth century as it represented a cultural reaction and an economic need for the Islamic nation, when Muslims realized the shortcomings of the Western banking system on the appropriateness of their religious beliefs as well as their awareness of the importance of exploiting their wealth by financial institutions based on the nation's creed and culture Dependent on Western banks and financial institutions, or those that adopt the Western system based on banking interest. These banks have succeeded in providing financing and investment channels that were not previously entrusted to banking, and on the basis of bank interest and in accordance with the principle of participation in profits and losses. Islamic banking has faced many challenges that left its mark on the process of its inception and the development of this work.
    Keywords: المصارف الإسلامية,الأزمات المالية,الأثر والعلاج,financial crises,Islamic banks,Impact and Treatment
    Date: 2021
  2. By: Sebastian Gryglewicz (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)); Simon Mayer (University of Chicago - Booth School of Business); Erwan Morellec (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)
    Abstract: We study a dynamic moral hazard problem in which a bank originates a pool of loans that it sells to competitive investors via securitization. The bank controls the default risk of the loans by screening at origination and monitoring after origination, but it is subject to moral hazard. The optimal contract between the bank and investors can be implemented via a time-decreasing stake within the loan pool, so the bank's monitoring incentives decrease and default risk increases over time. We find that screening and monitoring have positive incentive synergies and are complements. Credit ratings distort incentives, potentially increasing credit risk, and are particularly beneficial for high quality and short-maturity loans.
    Keywords: Corporate Bonds, Securitization, CLOs, Debt Maturity, Banking, Dynamic Contracting
    Date: 2021–10
  3. By: Łukasz Rawdanowicz; Sébastien Turban; Jörg Haas; David Crowe; Valentine Millot
    Abstract: Over the past several decades, public debt has increased substantially in many OECD countries, particularly in the aftermath of recessions. The extent of this increase and the resulting debt levels varied across countries, partly reflecting differences in average budget balances. Despite rising debt, governments’ interest payments as a share of GDP have declined, reducing concerns about debt sustainability. Still, high debt levels make public finances vulnerable to negative shocks. Thus, governments will have to balance the need to minimise the risk of fiscal stress and the need to satisfy growing demands on public finances related to population ageing, climate change, low growth, inequalities, accelerated digitalisation and cyclical demand stabilisation. Limitations of various numerical indicators of debt sustainability give some support to a more qualitative assessment of fiscal policy and stress the importance of effective and resilient fiscal frameworks. Credible and transparent fiscal frameworks can help make appropriate policy choices, which are affected by numerous political biases and constraints. However, such frameworks do not guarantee positive outcomes. Further research on interactions between various elements of such frameworks, such as fiscal rules, medium‑term expenditure plans, budget transparency and independent fiscal institutions, is needed.
    Keywords: debt sustainability, fiscal frameworks, fiscal rules, independent fiscal institutions, public finances, sovereign debt
    JEL: E61 E62 H11 H20 H50 H62 H63
    Date: 2021–12–14
  4. By: Sommer, Christoph
    Abstract: The demand for digital financial services has risen significantly over recent years. The COVID-19 pandemic has accelerated this trend and since the focus has shifted towards economic recovery, digital lending has become central. Digital credit products exploit traditional and alternative financial and non-financial data to provide access to finance for households and micro, small and medium enterprises (MSMEs). While it makes lending more inclusive for underserved or unserved households and firms, its increasing influence also brings forth challenges that need to be addressed by policy-makers and regulators in order to guarantee well-functioning credit markets and broader financial systems that foster sustainable economic development. A central concern is the adverse effect of digital lending on the stability and integrity of credit markets (and potentially the wider financial systems). The rise in non-performing loans, even before the COVID-19 crisis, has been associated with an increase in digital credits. New players with little experience enter the market and exploit regulatory arbitrage, but often these players have no (or only a partial) obligation to report to respective systems for sharing credit information or to supervisory bodies, which introduces severe vulnerabilities. In addition, the low entry threshold of digital financial products, due to their convenience and simplicity for customers, provides fertile ground for exploitative financialisation. Underserved households and MSMEs with limited financial literacy may be lured into taking up unsuitable and unaffordable digital credits, leading to over-indebtedness and bankruptcy. The last challenge arises from significantly shorter loan maturities in MSME lending if current forms of digital lending are scaled up. This is problematic, as firms need loans with longer maturities to realise productivity-enhancing medium- and long-term investments, many of which include complementary investments in labour, thereby contributing to an improvement in job quality. Governments and regulators need to strike a balance between leveraging the potential of digital lending for inclusive finance and economic recovery from the COVID-19 crisis, and mitigating associated risks. In particular, they should, together with providers of technical and financial development cooperation, consider the following: - Fostering the integrity of (digital) credit markets. Regulators should establish specific licenses and regulations for all digital financial service providers, and introduce obligatory reporting requirements to supervisory bodies and national systems for sharing credit information. - Preventing exploitative financialisation. Regulators need to require digital lenders to present the costs and risks of their loan products in a manner comprehensible to consumers with little financial literacy, and extend consumer protection policies to digital financial services. - Ensuring availability of loans with longer maturities. Development finance institutions and other national and international promoters of (M)SMEs should assist local banks in the provision of longer-term loans, e.g. by offering respective funds or partial credit guarantees. - Establishing regulatory sandboxes. Regulators should launch regulatory sandboxes to test legislation in a closed setting and to learn about risks without hindering innovation.
    Date: 2021
  5. By: Frank van Hoenselaar; Boris Cournède; Federica De Pace; Volker Ziemann
    Abstract: The landscapes of housing loan markets vary considerably across OECD countries, reflecting differences in preferences and policy settings. This paper first draws a topography of disparities in mortgage structure, documenting considerable variation across OECD countries in key features such as in use of fixed vs variable interest rates and typical maturities. The paper then discusses policies that can influence these outcomes. It highlights the scope for encouraging inclusive access to housing through tax-and-spending programmes that are neutral between renting and owning rather than through often very costly tax advantages for mortgage borrowing. The paper finally proposes a novel indicator to measure the balance between the rights of borrowers and lenders. Mortgage markets are deepest in countries where the index shows that creditor and borrower rights are balanced rather than severely tilted to one side.
    Keywords: finance, housing, mortgage markets
    JEL: G21 R21
    Date: 2021–12–14

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