Islamic Banking and Finance Review

Impact of the Islamic Modes of Finance on the Profitability of Islamic Banking Sector in Pakistan

Mudeeba Gul — 2023-05-27

The persistence of Islamic finance in any economy is arguably essential to
address the economic needs of the society. The golden principles of Islam
that is, profit and loss sharing, honesty, and doing business keeping in view
the welfare of the people can play a vital role in alleviating poverty. The
primary objective of the current study is to investigate empirically the impact
of the Islamic modes of finance and their contribution in enhancing
profitability. For this purpose, time series quarterly data ranging from
2014Q1-2020Q4 of the Islamic modes of finance (including Sukuk) were
used to find their impact on the profitability of the Islamic banking sector as
measured by Return on Asset (ROA). The ARDL and bounds cointegration
approach were used to examine the level relationship among the underlying
variables. The results provided strong evidence of a long-run equilibrium
relationship. The results also showed that Murabaha, Musharaka, Istisnaa,
and Diminishing Partnership have a prominent positive and significant
impact on ROA. However, the impact of Murabaha on profitability remains
significantly higher as compared to the other modes of finance. The second
most important determinant of profitability is Musharaka, followed by
Istisnaa. The estimated value of error correction term showed a significant
adjustment towards the long-run equilibrium. These findings may help the
managers of Islamic banks in allocating funds to different modes and
portfolios for optimal returns. They may also have a big impact on the ability
of policymakers to create policies appropriate for interest-free windows and
branches. Moreover, they would allow Islamic banks to retain their
competitive edge and improve the quality of their services.

Corporate Cash Holdings and Speed of Adjustment: Does Shariah Compliance Matter?

Affaf Asghar Butt — 2023-05-25

This study examines the impact of the shariah complaint status on corporate cash holdings, the speed of adjustment towards its target cash holdings, and the effect of firm-specific factors on corporate cash holdings. The data of non-financial firms listed on the Pakistan Stock Exchange from 2015 to 2020 has been collected. The panel data methodology is used. The findings imply that shariah-compliant firms hold more cash than non-shariah-compliant firms. The adjustment speed toward its target cash holdings is faster in shariah compliant firms. The financial leverage and cash flows show a negatively significant effect on corporate cash holdings. The working capital, dividend, and profitability exert a significant positive change on cash holdings. Explaining the cash-holding determinants reveals that trade-off and pecking order theories play a central role. This study is beneficial for policymakers, managers, and investors.

The Determinants of Growth In Banking Sector: Time Series Analysis of Conventional And Islamic Banking In Pakistan

Muhammad Saeed Iqbal — 2023-05-28

A well-developed financial and banking system efficiently transforms
savings into investments. The banking system of Pakistan is based on a dual
structure of conventional and Islamic banking. The current study aims to
identify the factors that determine growth in the banking industry of
Pakistan, keeping in view both conventional and Islamic banking. For this
purpose, the ARDL model was applied on the time series data of Pakistan
for the period 2007-2022. The data was taken from the State Bank of
Pakistan (SBP). The variable ‘investment’ was used as a proxy to measure
growth in the banking sector, comprising both conventional and Islamic
banking sectors. The results of the empirical analysis indicated that growth
in deposit, growth in GDP, and population growth are the main
determinants of growth in the banking sector of Pakistan. Based on the
findings of the study it is suggested that measures must be taken to increase
deposits in both systems of banking by giving various incentives to
households.

Financial Development and Firm Leverage in Pakistan: Conventional and Islamic perspective

Irfan Ahmed — 2023-05-29

The purpose of this study is to examine the impact of Islamic finance vs conventional finance development on firms’ leverage and debt maturity in Pakistan.

We extract the annual data for the period 2010 to 2020. The final sample comprises 325 firms, after excluding financial firms, listed in Pakistan Stock Exchange (PSE). We use OLS and Fixed-Effects regression to estimate the impact of Islamic and conventional finance development on firm leverage and debt maturity. Our findings hold using battery of robustness check.

We demonstrate that stock market development has a negative impact on leverage while conventional bank development is positively linked with leverage. Further, we find that overall Islamic finance development (Islamic bank and Sukuk market) is positively associated with leverage and debt maturity, in contrast, conventional finance development is inversely linked with debt maturity. Collectively, our results support the importance of Islamic finance supply-side factors on firms’ capital structure decisions. Our findings require the attention of regulatory bodies for financial development in Pakistan.

Financial Stability and Monetary Framework under Interest-Free DSGE Settings for Pakistan

Rao Javaid Iqbal — 2023-05-26

Various small and large, conventional and interest-free, DSGE models have
been developed, simulated, and compared. After a large conventional
model, an interest-free NK model was prepared with household preferences,
retail firms, and capital-producing firms. The deduction of zakat was
suggested with appropriate incidence. The model was estimated using
quarterly data for Pakistan between 1990 and 2009, a period characterized
by the consolidation of monetary and macro-prudential policies besides the
opening up of the banking sector. This large-scale model included financial
accelerator, systemic risk, the inter-bank market, macro-prudential policy,
and monetary policy. Both types, that is, interest-based conventional models
and interest-free models, were estimated and compared. The welfare loss of
four conventional and three interest-free models was computed and
compared, where loss decreased with monetary policy and increased with
money in utility. The lower value of welfare loss for the large conventional
model exhibited effective financial stability policies in Pakistan, as
compared to the basic model. It was found that interest-free monetary
models couldn’t reduce welfare loss, when compared with conventional
models. The study also evaluated three interest-free rates of return as
alternatives to interest rates theorized by Khan and Mirakhor (1989). It was
found that the shift towards an interest-free regime for entrepreneurs,
banking, inter-bank operations, central banking, and policies can be
simulated with Pakistan’s data. The Islamic model showed lesser
convergence, so the fit of the model was reduced.