Islamic banking performance and risks in MENA
Islamic finance was only a dream 50 years ago became reality now. Nevertheless, it is one of the fastest growing industries currently as well as it showed some strength at the time of Global Financial crisis (2007-2009). These features and others made Islamic banks a feasible and viable alternative for conventional banking system.
Although Islamic Banking showed good signs but they faced and still facing some challenges (Risks). This paper revises the current risks faced by Islamic Banks especially in MENA region. Additionally, it’s going to measure their performance in these countries. Finally it will classify the upcoming challenges probably could be faced by the industry.
Main source of data will be Bankscope and the below researches will added as secondary source of data and many more (references):
• International Journal of Economics and Financial Issues
• Duisenberg school of finance researches
Banking in the Islamic world began to extend generally in Arab and Islamic nations, for example, Iran, Pakistan, and Bangladesh and the first hint of an Islamic banking framework showed up in the mid-1970s. The key Islamic bank was the Dubai Islamic Bank (DIB) in the United Arab Emirates took after by the foundation of the International Islamic Development Bank (IDB) in Jeddah, Saudi Arabia. Thusly, numerous private and semiprivate business Islamic, banks were created in Egypt, Sudan, Kuwait, and Bahrain after 2005 (Iqbal and Molyneux 5). Islamic banks demonstrated had the capacity fund their operations and even turn a benefit while as yet watching the Shariah necessity of charging no hobby. Islamic saving money has adjusted the sharing of benefit and misfortune through various ways. The primary methodology was through partnership , or the sharing of ventures by the bank without participating in any of the administration groups. At that point there was Mudrabah approach, which was taking into account the mark-up up for a resale or renting contract, called ijara, which in Western banks is the analogous of working at interest (Bellalah and Ellouz). Operating a bank in this way would expand the security of managing an account framework on the grounds that it urges banks to differentiate their speculations to minimize hazard and build benefits. This practice in swing has a tendency to pull in more speculators and in this manner helps banks work all the more effectively. The Shariah keeping money frameworks lead through four diverse business laws. The principal is the rule of the bank lender and borrower partaking in the last benefit and misfortune. The second is static charges that built up heretofore. The third is evaluating no interest, and the fourth is the lender-borrower coalition. International Monetary Fund (Finance and Development | F&D) expressed that Islamic banks were in consistent development and quantities of Islamic money have expanded from 80 establishments to around 310 organizations in 2005. In expansion, the collective resources of the Islamic bank industry were about $250 billion amid 2007, while the development rate was around 16% for each year, which is around three times the development rates in the customary Western, banking system framework (Parker). Amid 2009, the advantages in Islamic banks have expanded by 28% (Sharia Calling), and the estimation of Islamic banks resources were about US $882 billion. In a study by Little it is suggested that resources in Islamic banks overall would be reaching $4 trillion by 2015.
Islamic banks deal with distinctive business exchanges and need to settle on speculation choices, which include some level of danger. As per Ariffin et al., Islamic banks face parallel danger to Western banks; be that as it may, there are differences in the level of the dangers. Hussain and Al-Ajmi expressed that credit, liquidity, and operational danger are discovered to be the most critical dangers confronting Islamic banks. Along these lines, the paper concentrates on dangers and how dangers are corresponded to proficiency in Islamic banks. There has been a couple of scholastic studies that talks about dangers and effectiveness in Islamic saving money. The paper is requested as takes after. Part 1 introduction, Part 2 literature review and speculations, Part 3 reports on methodology, Part 4 spotlights on scope and constraints, Part 4 highlights the resources used, Part 5 includes the timetable. Part 6 the reference list.
2. Research Questions:
This paper is going to revise the below questions:
1. What are the type of risks recently faced by Islamic Banks in MENA countries?
2. Taking in mind the recent challenges faced by Islamic Banks in MENA countries, how their performance can be measured?
3. What will be the new challenges faced by Islamic Banks in the future?
3. Aims and Objectives
The purpose of this Paper is to revise the mentioned Research Questions related Islamic banking performance and risk in MENA countries. It will compare the risks between the Conventional banks and Islamic banks in the region, but mainly focusing in Islamic Banks. As well as how manage these risks. Additionally, it measures the performance of Islamic banks in MENA countries.
4. Literature Survey
There have been a number of studies that discuss the potential risks and the overall effectiveness in Islamic banks. This segment of this paper will examine the liquidity, credit, operation dangers and productivity. Idries has characterized that liquidity danger is the conceivable misfortune result from the Bank's inability to either to meet its obligations or to reserve increments in resources as they fall due without acquiring undesirable expenses or misfortunes. Bauer and Ryser demonstrated bank's supporting ruling against any danger rely on upon starting obligation proportion, the extent of the liquidation costs, administrative limitations, the instability of the hazardous resource and the spread between the riskless interest rate and the store rate. Siddiqui found that Islamic banks in Pakistan to be better execution regarding resources and return set up to enhanced danger administration with keeping safe liquidity. The following study by Muhammad et al., have examined the liquidity hazard administration in Islamic banks in Pakistan and the discoveries were certain however unimportant relationship of size of the bank and net-working money to net resources with liquidity hazard in Islamic banks. Moreover, return on resources in Islamic banks discovered to be a positive relationship to liquidity hazard administration. While the following study, by Muhammad et al., investigated liquidity and credit hazard and the discoveries, recommended productivity and liquidity administration in traditional managing an account has performed better than Islamic keeping money. On the other hand, credit hazard administration and dissolvability upkeep, execution of Islamic keeping money is superior to customary managing an account division. Concurring McNeil et al., , has characterized credit danger to be the adjustment in portfolio because of the unpredicted moves in the credit nature of the backer or exchanging accomplice. As indicated by Arunkumar furthermore, Kotreshwar informs that credit danger reasons for 70% of the aggregate hazard in that, banks face while the other 30% is shared by business sector and operational danger. Likewise, Khan expressed that credit danger is source flimsiness in the managing an account framework. Abedifar et al. has researches the danger and security in Islamic keeping money for the time of 1999 to 2009. The study discovering indicated as far as bankruptcy danger little Islamic banks have seemed more steady, and the credit nature of Islamic banks is less receptive to local premium rates contrasted with customary banks. While Operational danger is, the kind of danger can bring about immediate or roundabout misfortune brought on by deficient or unsuccessful inside practices, individuals, and innovation or from outer occasions' (BCBS, 2). Al-Tamimi and Al-Mazrooei and Hassan have found that Islamic banks confronted with comparable credit hazard and working danger to different banks, and Ray and Cashman indicated that operational danger would impact choice making in diverse ways. Marliana et al., demonstrated operational hazard in Islamic banks was huge and got to be more confounded contrasted and traditional keeping money due to the special contractual components and general lawful environment. The following arrangement of studies has dissected the relationship dangers and proficiency. Berger et al. found there was a negative relationship between expense productivity and hazard in fizzled banks. Berger et al. offered clarifications for this negative relationship that wasteful banks, and additionally having issues of managing their interior expenses, may have issues in the valuation of the credit hazard, so that a terrible administration of expenses runs together with more noteworthy credit hazard. Alam inspected the relationship in the middle of danger and effectiveness inside of the two managing an account frameworks. Also, the study demonstrated that bank wastefulness and danger are emphatically corresponded for traditional banks and contrarily related for Islamic banks, which unmistakably highlight the inalienable contrast between risk–efficiency connections between these two unmistakable bank sorts. As per Beck et al., there was likewise solid confirmation of higher underwriting of Islamic banks and this capital pad in addition to higher liquidity stores clarifies the generally better execution of Islamic banks amid the late financial inconveniences. In the meantime, Abedifar et al., indicated results on layaway danger proposed that Islamic banks compose off credits all the more every now and again or/and have lower credit recoverability contrasted with customary banks. Too, the study demonstrated that Islamic banks advantage not exactly customary banks from the negative impact of benefit size on both their credit and indebtedness dangers. Ariffin et al., studied 28 Islamic banks in 14 nations by asking danger administration groups for these banks about the dangers that Islamic banks confronted contrasted with banks in the customary managing an account framework. Ariffin et al. demonstrated that Islamic banks confronted the same dangers as Western banks however utilized less actually propelled danger estimation strategies than their Western partners. As per Srairi , Islamic banks generally assumed more hazard than Western banks due to absence of experience and newness to all the money related devices that could help them. Subsequently, Islamic banks obliged more money to deal with this level of danger. Johnes et al., deliberate the proficiency of Islamic versus Western banks through the Participation Council of the Arab States inside of the Gulf GCC territory. Two instruments were utilized to gauge the proficiency, the money related proportions investigation, and the DEA. Information were gathered for six banks in the GCC territory for 2004 to 2007. Pioneers of Islamic banks were less cost productive however more income and benefit productive than Western bank
5.1 Exploration Design
The quantitative correlational exploration outline was decided for the paper. In correlational outlines examination plan, specialists who include in correlational exploration don't impact variables; maybe, they accumulate information on existing variables and explore relations between those variables (Creswell). In this way, the study would be inspecting the connection between dangers and impacts on proficiency of the Islamic banks in MENA managing an account areas; this study uses the budgetary information of Islamic banks for MENA managing an account from the time of 2006 to 2009.
5.2 Information Envelopment Analysis
The DEA model is a typical devices used to quantify proficiency in the keeping money framework. The DEA is a straight programming framework intended to show whether a particular choice making unit (DMU), or bank, is effective or not productive. The DEA framework framed a standard set by the proficient banks for correlation with wasteful companions. In this framework, banks got scores of either 0 or 1. Effective banks had a score of one, implying that they had best yield levels in contrast with different banks in the specimen. Charnes et al., built up the DEA model in light of steady return to scale (CRS). The scientists purposefully outlined a framework that would sum up the single-data, single-yield measure of a choice making unit (DMU) to a various info, numerous yields setting. Broker et al., (1984) extended the DEA framework to incorporate variable come back proportional (VRS). Concurring to Farrell, the accompanying recipe is the least difficult approach to quantify productivity:
Productivity = information/yield.
Furthermore, Farrell proposed that a bank could make different yields utilizing numerous inputs. The strategy sets a standard for the most productive DMU in contrast with the less proficient banks by inspecting numerous yields and inputs. Farrell proposed the accompanying equation:
Proficiency = the weighted total of inputs/the weighted entirety of yields
DEA investigation technique mulled over the N DMUs in the managing an account industry with all the inputs in an example being portrayed by n, and the yields described by m. Subsequently, the proficiency of banks would be figured with a proper mathematical statement.
The effectiveness is communicated as the most extreme number of yields that can be made for a given number of inputs. The DEA is organized with the best generation work exclusively in light of watched information, so factual tests for importance of the parameters are redundant. A few DEA models exist. The analyst utilized the consistent comes back proportional (CRS) show by taking after Yudistira and utilizes a yield situated model where DMUs are viewed as ideal when they produce the most noteworthy conceivable yield from a given measure of data. The specialist utilized the CRS Model to survey the relative productivity of its Islamic banks for the time of 2006 to 2009. Separate measures were ascertained for every year. The analyst utilized the DEA Excel Solver grew by Zhu (2002), and all the variables were measured in U.S. dollars. Islamic banks have a tendency to issue reports in the cash of their nation of operations. The specialist subsequently, took after Pastor, Pérez, and Quesada by changing over the Islamic banks' nearby monetary standards into U.S. dollars by utilizing the conversion scale on the first date of the study implementation.
The examined information were translated to answer the research question (i.e., Does effectiveness and dangers are corresponded in Islamic managing an account framework). The coefficient of connection can be utilized to discover the likelihood that the information bolsters the invalid theory and this data can be utilized to back or reject the invalid theory at a level of importance of p ≤ 0.05 to figure out if to reject or neglect to reject the invalid speculations about the proficiency and dangers in Islamic managing an account frameworks. The invalid and substitute explanations of theory are the following:
HO: There is no connection between proficiency and credit hazard in Islamic banks in the MENA range.
H1: There is connection between effectiveness and credit chance in Islamic banks in the MENA region.
5.3 Problems with measures
As indicated, all measures are imperfect. To the imperfections noted above, one may add that one relies on the accuracy of organizational accounts, and on the honesty/competence of those who compile and audit them. Events of September 2008 in the world’s financial markets, most notably those concerning the collapse of Lehman Brothers and HBOS, suggest that any measure of size or performance is at best suggestive. This is all the more so, again as recent events have illustrated, given that many “assets”—especially given, until recently, the widespread practice of banks buying and selling other institutions accounts—may have values little related to their paper worth. One may also note that the worth of individual financial institutions can be extremely volatile. Although not a bank, the example of Long Term Capital Management is illustrative. In 1998, it had equity of US$ 4.7 billion, yet by the end of the year the US Federal Reserve had to organize a bail out of the institution. The cost of the bail out was US$3.75 billion (Lowenstein).
6. Scope and Constraints
As indicated in the past segment, the proof of Islamic fund having had a huge effect on access to date is exceptionally frail. There may be a few conceivable reasons why: (i) the watched shortcoming in monetary framework in OIC and ISB nations, which could restrict the limit of Islamic banks to choose, screen, and reserve families and SMEs—For sample, on quality of legitimate rights, the execution of OIC nations is well beneath the normal in other, non-MENA locale; (ii) advancement in Islamic managing an account is obliged in light of the fact that the administrative environment in most OIC and ISB nations is still in its nascent stages (IFC), which power restrict the limit of Islamic banks to plan approved Islamic items that address the issues of SMEs and families;
(iii) notwithstanding its development, Islamic keeping money still speaks to under 2 percent of managing an account resources around the world (UKIFS), and in this way may need to grow encourage keeping in mind the end goal to make a discernible effect on inclusion;31 and (v) Islamic banks confront a lack of qualified ability and are constrained to enlist staff prepared in routine managing an account, potentially constraining the capacity of these foundations to grow the effort of their administrations (Jabr). In any case, there is by all accounts potential to create Islamic back as a method for enhancing budgetary access, especially in specific nations (IFC, 2014). In Saudi Arabia, for instance, 90 percent of SMEs demonstrate an in number inclination for Shari'ah-agreeable items. SMEs in Morocco and Jordan (54 percent and 45 percent, individually) likewise reported an in number enthusiasm for Shari'ah-agreeable keeping money administrations. All in all, there is a significant interest for Islamic managing an account among the MENA area's SMEs: more or less 35 percent of such organizations express their requirement for financing by Islamic banks.
In this section the resources should be listed that will be needed to accomplish the study, like the library or IT facilities, specialist software or tools, laboratories or equipment, and also any tools you will use for data analysis. In our case a laptop with internet access, the access to the papers that we need through the university’s library and the Word program is what we require to complete our research.
Phases of the Islamic banking performance and risks in MENA making process Number of days/weeks required Starts at Ends at
Phase ONE: Reading and research
a) Seek to identify an original, manageable topic
b) Reading and research into chosen topic
Phase TWO: The detailed plan
a) Construct a detailed plan of the dissertation
Phase THREE: Initial writing
a) Draft the various sections of the dissertation
b) Undertake additional research where necessary
Phase FOUR: The first draft
a) Compile and collate sections into first draft of dissertation
b) check the flow of the dissertation
c) Check the length of the dissertation
d) Undertake any additional editing and research
Phase FIVE: Final draft
a) Check for errors
b) Prepare for submission
c) Final proof-read (by a friend or yourself) and final editing
d) Compile bibliography
e) Get the dissertation bound
f) Submit your dissertation
9. Reference list / Bibliography
Al-Wesabi, Hamid, and Nor Hayati Ahmad. 'Credit Risk Of Islamic Banks In GCC Countries'. International Journal of Banking and Finance 10.2 (2013): n. pag. Print.
Aqeeq, Muhammad Arsalan. 'Islamic Banking In Oman Today & The Way Forward'. SSRN Journal n. pag. Web.
Ariffin, Noraini Mohd, Simon Archer, and Rifaat Ahmed Abdel Karim. 'Risks In Islamic Banks: Evidence From Empirical Research'. Journal of Banking Regulation 10.2 (2009): 153-163. Web.
Bellalah, M., and S. Ellouz. 'Islamic Finance, Interest Rates And Islamic Banking: A Survey Of The Literature'. Finance India: special issue 18 (2004): 533-546. Print.
Ben Naceur, Sami, Adolfo Barajas, and Alexander Massara. 'Can Islamic Banking Increase Financial Inclusion?'. IMF Working Papers 15.31 (2015): 1. Web.
Ernst & Young,. World Islamic Banking Competitiveness Report 2013-2014. 2015. Web. 30 June 2015.
Farooq, Moazzam, Sweder van Wijnbergen, and Sajjad Zaheer. 'Will Islamic Banking Make The World Less Risky? An Empirical Analysis Of Capital Structure, Risk Shifting And Financial Stability'. SSRN Journal n. pag. Web.
Finance and Development | F&D,. 'Finance And Development'. N.p., 2015. Web. 30 June 2015.
Iqbal, Munawar, and Philip Molyneux. Thirty Years Of Islamic Banking. Houndmills: Palgrave Macmillan, 2005. Print.
'Islamic Banking & Risk Management In Oman'. 2015. Presentation.
'KEY ISSUES & CHALLENGES IN DEVELOPING ISLAMIC BANKING OPERATIONS'. 2011. Presentation.
Khediri, Karim Ben, and Hichem Ben Khedhiri. 'Determinants Of Islamic Bank Profitability In The MENA Region'. International Journal of Monetary Economics and Finance 2.3/4 (2009): 409. Web.
Moody's,. Moody's: Solid Growth Prospects Of Islamic Banking In Oman To Be Moderated By Industry Challenges. 2013. Print.
Morrison, Scott. 'Oman’S Islamic Banking Regulatory Framework: The Corporate Governance Of Sharīʿa Compliance In A New Jurisdiction'. Arab Law Quarterly 29.2 (2015): 101-137. Web. 30 June 2015.
Mubeen, Soofi Asra, Neelufer Aslam Kulkarni, and Yahya Khamis Al Hussaini. 'The Future Of Islamic Banking In Sultanate Of Oman'. International Journal of Economics and Finance 6.5 (2014): n. pag. Web.
Parker, Mustakh. 'Islamic Banking In 2007 Set For Massive Growth'. Le Journal de la Finance Islamique. N.p., 2007. Web. 30 June 2015.
Said, Ali. 'Risks And Efficiency In The Islamic Banking Systems: The Case Of Selected Islamic Banks In MENA Region'. International Journal of Economics and Financial Issues 3.1 (2013): 66-73. Print.
The Economist,. 'Sharia Calling'. N.p., 2009. Web. 30 June 2015.
Sassi, Seifallah, and Mohamed Goaied. 'Financial Development, ICT Diffusion And Economic Growth: Lessons From MENA Region'. Telecommunications Policy 37.4-5 (2013): 252-261. Web.
Siddiqui, Anjum. 'Financial Contracts, Risk And Performance Of Islamic Banking'. Managerial Finance 34.10 (2008): 680-694. Web. 30 June 2015.
Siraj, K.K., and P. Sudarsanan Pillai. 'Comparative Study On Performance Of Islamic Banks And Conventional Banks In GCC Region'. Journal of Applied Finance & Banking, 2.3 (2012): 123-161. Print.
Wilson, Rodney. 'Arab Government Responses To Islamic Finance: The Cases Of Egypt And Saudi Arabia'. Mediterranean Politics 7.3 (2002): 143-163. Web.
Wilson, Rodney. 'The Development Of Islamic Finance In The Gulf Cooperation Council States'. Kuwait Programme on Development, Governance, and Globalisation in the Gulf States (2009): n. pag. Print.