nep-isf New Economics Papers
on Islamic Finance
Issue of 2022‒03‒28
six papers chosen by

  1. Banks' Capital Structure Determinants: A Comparative Analysis Between Islamic and Conventional Banks based on Corporate and Regulatory Approaches By Kaouther Toumi
  2. Uniqueness of Clearing Payment Matrices in Financial Networks By Péter Csóka; P. Jean-Jacques Herings
  3. On Target? The Incidence of Sanctions Across Listed Firms in Iran By Draca, Mirko; Garred, Jason; Stickland, Leanne; Warrinnier, Nele
  4. The Changing Role of Banks in the Financial System: Social versus Conventional Banks By Simon Cornée; Anastasia Cozarenco; Ariane Szafarz
  5. Shadow banking and the four pillars of traditional financial intermediation By Emmanuel Farhi; Jean Tirole
  6. ESG and Systemic Risk By George-Marian Aevoae; Alin Marius Andries; Steven Ongena; Nicu Sprincean

  1. By: Kaouther Toumi (LGCO - Laboratoire Gouvernance et Contrôle Organisationnel - UT3 - Université Toulouse III - Paul Sabatier - Université Fédérale Toulouse Midi-Pyrénées)
    Abstract: The research aims to empirically investigate the banks' capital structure determinants by considering 386 listed and unlisted banks categorized into 74 IBs, 256 CBs, and 56 HBs from 20 countries for 2008-2016 based on corporate and regulatory approaches. The main findings are interesting. From a corporate approach, we find differences between IBs, CBs and HBs regarding the determinants of their capital structure which offer an empirical confirmation of the reduced information asymmetry in an Islamic finance context. From a regulatory approach, the findings show similarities regarding the negative impact of deposit insurance schemes on the regulatory capital for all types of banks. When focusing on IBs, we evidence that banks subject to Shari'ah-compliant deposit insurance schemes hold lower capital than those subject to conventional deposit insurance schemes.
    Keywords: Islamic ethics,Banks,Corporate finance theories,Regulation,Financial decision
    Date: 2021
  2. By: Péter Csóka (Department of Finance, Corvinus University of Budapest and Centre for Economic and Regional Studies); P. Jean-Jacques Herings (Department of Economics, Maastricht University)
    Abstract: We study bankruptcy problems in financial networks in the presence of general bankruptcy laws. The set of clearing payment matrices is shown to be a lattice, which guarantees the existence of a greatest and a least clearing payment. Multiplicity of clearing payment matrices is both a theoretical and a practical concern. We present a new condition for uniqueness that generalizes all the existing conditions proposed in the literature. Our condition depends on the decomposition of the financial network into strongly connected components. A strongly connected component which contains more than one agent is called a cycle and the involved agents are called cyclical agents. If there is a cycle without successors, then one of the agents in such a cycle should have a positive endowment. The division rule used by a cyclical agent with a positive endowment should be positive monotonic and the rule used by a cyclical agent with a zero endowment should be strictly monotonic. Since division rules involving priorities are not positive monotonic, uniqueness of the clearing payment matrix is a much bigger concern for such division rules than for proportional ones. We also show how uniqueness of clearing payment matrices is related to continuity of bankruptcy rules.
    Keywords: Financial networks, systemic risk, bankruptcy rules, fixed points.
    JEL: C71 G10
    Date: 2021–09
  3. By: Draca, Mirko (Department of Economics, University of Warwick); Garred, Jason (Department of Economics, University of Ottawa); Stickland, Leanne (Deloitte UK); Warrinnier, Nele (School of Economics and Finance, Queen Mary University of London & LICOS Centre for Institutions and Economic Performance, KU Leuven)
    Abstract: How successful are sanctions at targeting the economic interests of political elites in a ected countries? We study the case of Iran, using information on the stock exchangelisted assets of two speci c political entities with signi cant in uence over the direction of Iran's nuclear program. Our identi cation strategy focuses on the process of negotiations for sanctions removal, examining which interests bene t most from news about diplomatic progress. The results indicate the `bluntness' of sanctions on Iran, but also provide evidence of their e ectiveness in generating substantial economic incentives for elite policymakers to negotiate a deal for sanctions relief. JEL Classification: D74 ; H56 ; F51
    Keywords: National Security ; Sanctions ; Iran
    Date: 2022
  4. By: Simon Cornée (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France ; Center for European Research in Microfinance (CERMi), France); Anastasia Cozarenco (Montpellier Business School and CERMi, France); Ariane Szafarz (Université Libre de Bruxelles (ULB), SBS-EM, CEBRIG and CERMi, Belgium)
    Abstract: Social banks have emerged as a new group of banks that call themselves as “alternative”, “ethical”, “sustainable”, and “value-based”. Their small market share increases at a rapid pace and is still expected to grow in the future. Social banks are institutions with both (at least some) activities of financial intermediation and one or several non-financial missions, typically based on environmental and social values. By unpacking the observable, real-life differences between social banks and conventional banks, this chapter paves the way to theorizing the multidimensional characteristics of social banks within the global banking industry. Business models, governance issues, lending technologies; and social outcomes appear to be key aspects to understand how innovative, value-based, social banks work and how they might one day substantively affect mainstream banking business.
    Keywords: Social banks, ethical banks, social mission, financial cooperatives, microcredit
    JEL: G21 B55 H23 G32 G28 H81
    Date: 2022–02
  5. By: Emmanuel Farhi (Harvard University [Cambridge], NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research); Jean Tirole (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IAST - Institute for Advanced Study in Toulouse)
    Abstract: Traditional banking is built on four pillars: SME lending, insured deposit taking, access to lender of last resort, and prudential supervision. This paper unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insurance services (LOLR, deposit insurance) are complementary. The model also shows how prudential regulation must adjust to the emergence of shadow banking, and rationalizes structural remedies to counter bogus liquidity hoarding and financial contagion: ring-fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms.
    Keywords: Narrow banks,CCPs,Ring-fencing,Migration,Supervision,Deposit insurance,Lender of last resort,Retail and shadow banks
    Date: 2021–11
  6. By: George-Marian Aevoae (Alexandru Ioan Cuza University - Faculty of Economics and Business Administration); Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: How do changes in Environmental, Social and Governance (ESG) scores influence banks’ systemic risk contribution? We document a beneficial impact of the ESG Combined Score and Governance pillar on banks’ contribution to system-wide distress analysing a panel of 367 publicly listed banks from 47 countries over the period 2007-2020. Stakeholder theory and theory relating social performance to expected returns in which enhanced investments in corporate social responsibility mitigate bank specific risks explain our findings. However, only better corporate governance represents a tool in reducing bank interconnectedness and maintaining financial stability. A similar relationship for banks’ exposure to systemic risk is also found. Our findings stress the importance of integrating banks’ ESG disclosure into regulatory authorities’ supervisory mechanisms as qualitative information.
    Keywords: Systemic Risk; Financial Stability, Corporate Social Responsibility (CSR), Environmental, Social and Governance (ESG) Scores
    JEL: G01 G21 M14
    Date: 2022–03

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