Islamic Banking and Finance Review

Macroeconomic Conditions as Determinants of Profitability and Risk: A Comparison of Islamic and Conventional Banks in Pakistan

Khalid Hussain — 2024-06-27

The current study aims to investigate the association between macroeconomic factors and Islamic and conventional banks’ profitability, technical efficiency, and credit risk in the context of Pakistan. The sample size comprised four (4) Islamic banks and four (4) conventional banks in Pakistan. Data was collected for a period of ten (10) years (2009-2018). To calculate technical efficiency, Data Envelopment Analysis (DEA) method was employed. Profitability was measured through Return on Assets (ROA) and credit risk through Debt to Asset Ratio (DAR). The results of regression estimation showed that generally, all economic variables had the same impact on both Islamic and conventional banks’ profitability, efficiency, and credit risk. However, interest rate showed an opposite impact on both bank types. It was found that interest rate improves the profitability of conventional banks, while it has an adverse impact on Islamic banks’ profitability. Moreover, interest rate improves the efficiency and increases the risk incurred by conventional banks, whereas its impact on the efficiency and risk of Islamic banks is not significant. The current study reveals certain differences in how these institutions respond to macroeconomic conditions. It helps to highlight the resilience or vulnerability of each banking system to economic fluctuations, providing practical implications for policymakers and practitioners both in Pakistan and in other Islamic finance markets.

The Role of Akhwuat Islamic Microfinance in Fulfillment of Basic Needs, Improving Living Standard and Promoting Self-Employment in Pakistan

Dr. Zahid Iqbal — 2024-06-08

Purpose – This study examined Akhuwat Islamic Microfinance's (AIM) important contribution to resolving Pakistan's issues with basic needs (BN), living standards (LS), and self-employment (SE).

Design/methodology/approach – In this study, 250 Akhuwat Islamic Microfinance borrowers' primary data were collected using the stratified sample technique. The population was divided into four groups: manufacturing concerns, trading worries, services concerns, and non-trading concerns. Additionally, a two-stage structural modelling technique was used for further data analysis. The measurement model was used to assess the reliability and validity, while the structural model was used to gauge the link between the underlying variables.

Findings – The study discovered that Akhuwat Islamic Microfinance (AIM) had a favorable and significant impact on meeting borrowers' basic requirements (BN), raising their standard of living (LS), and enabling them to become self-employed (SE). Therefore, with the lending facility of Akhuwat Islamic Microfinance, the lending practices of Akhuwat help the borrowers to lower their poverty level.

Originality/value – The impact of Akhuwat Islamic Microfinance on poverty in the area by meeting clients' basic needs, raising their standard of living, and enabling them to become self-employed by utilizing Maslow's Hierarchy of Needs theory is hardly investigated in the context of developing countries like Pakistan.

Federal Shariat Court’s Judgment on Ribā-Free Economy of Pakistan: Challenges in Implementation and the Way Forward

Rafiullah Sheikh — 2024-09-25

This paper explores the challenges in implementing the Federal Shariat Court (FSC) judgment on the Ribā-free economy of Pakistan. This study employs the Qualitative Content Analysis (QCA) method to analyze the data gathered through semi-structured interviews with various stakeholders, including Shariah scholars, Islamic economics and finance researchers, Islamic bankers, and central bankers. The findings suggest that the conversion of the existing large public sector debt (higher than the current GDP of Pakistan) to Shariah-compliant modes of financing is the most significant challenge ahead of Pakistan’s government. The next potential challenge to the government is what it would do in case international donors (IMF, World Bank, Paris Club) do not lend money through Islamic modes of financing. Moreover, monetary policy management by the State Bank of Pakistan (SBP) in the Islamic banking system also remains a challenge. All these challenges can be addressed if the Pakistani government issues Sukūk instead of issuing T-Bills more frequently and in large quantums. Additionally, the government can get funding through the capital market. An alternative strategy might be to issue project-linked, equity Sukūk that generate new assets, rather than using existing assets to issue Sukūk. The findings may help the Government of Pakistan in the smooth transition of its current economy to a Ribā-free economy. Once Pakistan’s economy is completely Islamized, then other Muslim countries may follow Pakistan in transitioning their economies as well. To the best of the authors’ knowledge, this study is the first of its kind, which has identified the main challenges that may arise in implementing the FSC judgment. Moreover, few suggestions have been made to address such challenges.

Short-Term and Long-Term Analyses of Islamic House Financing by Islamic Banks of Pakistan

Muhammad Saeed Iqbal — 2024-06-29

Islamic banks provide house financing in accordance with Islamic principles. There has been an increase in the popularity of Islamic house financing in Pakistan over the past few years. In this regard, the current study attempts to examine both short-term and long-term relationships between the variables associated with Islamic house financing. Several variables contribute to Islamic house financing. The current research incorporated four (4) variables, namely deposits, liabilities, Gross Domestic Product (GDP), and government expenditures. The macroeconomic variables included GDP and government expenditures, while the microeconomic variables included deposits and liabilities. The study also examines the causal effects of the variables on Islamic house financing in Pakistan. Additional information was collected from Meezan Bank through documentation review and measurements. Data was collected over the period 2018-2022. The Autoregressive Distributed Lag (ARDL) test and Granger causality test were the two econometric methods used to analyze time series data. It was determined that both macroeconomic factors and microeconomic factors play a significant role in Islamic house finance. Thus, with the help of this study, Islamic banks in Pakistan would be able to offer and expand Islamic house finance in the future.

The Measurement of Efficiency : Study Case LQ45 Companies in Indonesia

Abdullah Haidar — 2024-10-10

During the five-year observation period, this study intends to assess the efficiency of LQ45 companies published between August 2021 and January 2022 during five years (2016-2020). Using Data Envelopment Analysis (DEA), this study employs the Constant Return to Scale (CRS) and Variable Return to Scale (VRS) method to assess the efficiency and productivity of an organization. According to the findings of this study, the average efficiency of each LQ45 companies in Indonesia has not yet attained maximum efficiency, and the trend varies from year to year. Variable output, including Net Income After Tax, is the primary reason for the LQ45 company's inefficiency. Other findings from this study reveal that sharia LQ45 companies are more efficient than non sharia LQ45 companies. In addition, this study evaluates the efficiency of LQ45 companies during the Covid-19 epidemic, which demonstrates a drop in efficiency as evidenced by the majority of companies having a substantial decline in output.