Weathering the Global Crisis: Can the Traits of Islamic Banking System Make a Difference?

By Mohamad Azhar Nizam, Siti Zaleha Abdul Rasid and Wan Khairuzzaman Wan Ismail

This book is for those interested to know more about Islamic banking. In addition, it provides insights to both regulators and practitioners to focus their efforts in balancing their portfolio and improving the health of their Islamic banks for the future.

Past studies have shown that Islamic banks, unlike their conventional banking counterparts, were better able to weather the global financial crisis partly due to the nature of the Islamic finance which prohibits excessive risk taking. In this book, the authors review the Islamic finance in terms of governance and firms characteristics. We elaborate the relationships between corporate governance and firm characteristics with Risk Weighted Capital Adequacy Ratio (RWCAR) of full-fledged Islamic Banks in Malaysia. The motivation for the study is to seek whether the RWCAR of Islamic banks is influenced by the Corporate Governance and Firm Characteristics variables post 2008 global financial crisis. Descriptive statistics were presented and correlation using Pearsons Model Correlation Coefficient (PMCC) was observed and analyzed. The findings reveal that Corporate Governance has no direct relationship with the RWCAR of Islamic banks in Malaysia. Instead, firm characteristics variables such as Total Financing Assets and Effective Foreign Ownership have a strong relationship with RWCAR.

• Language: English
• Publisher: Partridge Publishing Singapore
• Release date: May 1, 2014
• ISBN: 9781482891447

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Copyright © 2014 by Wan Khairuzzaman Wan Ismail.

ISBN:         Hardcover                  978-1-4828-9143-0

                 Softcover                     978-1-4828-9142-3

                 eBook                          978-1-4828-9144-7

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CONTENTS

ISLAMIC BANKING AND GLOBALISATION

Overview

Why the Study?

Islamic Finance and Islamic Banking in Malaysia

Sources of Islamic Finance

The development of Islamic Banking in Malaysia

Main Tenets of Islamic Finance

Prohibition of Usury (Riba’) and The Permissibility of Trade

The Concept of Economic and Social Justice

No Reward Without Risk

The Concept of Separate Legal Entity and Agency Theory

Introduction to Corporate Governance

Introduction to Firms Characteristics

CORPORATE GOVERNANCE, CAPITAL ADEQUACY AND RISK CAPITAL

Agency Theory—Separation between Ownership and Management

The Case for Corporate Governance

Corporate Governance via Board Committees

Corporate Governance via Managerial Ownership

Corporate Governance in Malaysia and Emerging Markets

Corporate Governance in Islamic Banks

Capital Adequacy and Risk Capital Ratios

Basel Accord and Capital Adequacy Requirements

The Basel I Accord

Risk Weighted Assets (RWA)

Categorisation of Bank’s Capital

Capital Ratios

Subsequent Basel Accords (Basel II and Basel III)

Three Pillars of Basel II

Implementation of Basel III Accords in Malaysia

What do we know about Islamic Finance or Islamic Banking

Islamic Finance Mechanisms and Risk Behaviours

Relevance of Risk Based Capital Ratio for Islamic Banks

Capital Adequacy Framework for Islamic Banks (CAFIB)

CAFIB-Credit Risk

Islamic Bank Risk Based Capital Ratios

Conceptual Framework

Drivers of Corporate Governance

Firm Characteristics (FC)

Hypotheses Development

WEATHERING THE GLOBAL CRISIS

Overall Findings-Relationship Roadmap

Findings from Correlation Roadmap

Discussion on the findings

Implications

Directions for further research

BIBLIOGRAPHY

APPENDIX 1

APPENDIX 2

Islamic Banking and Globalisation

Overview

Globalisation has led to a systemic threat to the financial crisis that can cause chaos to financial systems and economies across the globe. The 2008 global financial crisis which started with the sub-prime mortgage has unveiled series of unscrupulous risk taking activities by financial institutions in the United States. Excessive risk taking, creative camouflaging of risks, creation of artificial demand through securitisation and speculative activities have been fuelling the ballooning real estate prices in the US since the 1990s which ran out of steam in 2007; posing systematic risk of widespread failures throughout the financial system in the US as well as other dependent economies such as Europe. Amongst the casualties of the 2008 global financial crisis includes big financial institutions such as AIG, Lehman Brothers and Northern Rock Building Society in the UK.

Since the 1980s, Regulators of the financial markets namely the Bank of International Settlements (BIS) based in Basel, Switzerland have been worried about the exponential growth of globalised banking and the interconnectivity of economies on global scale whilst at the same time, capital ratios of main international banks did not increase at the same pace. Subsequent to the 1974 collapse of Herstatt Bank in West Germany, The Basel Committee on Banking Supervision (the Basel Committee) was established as a forum for cooperation amongst its member countries on banking supervisory matters and the Basel Committee has issued a capital adequacy framework to ensure banks are well capitalised to weather any losses suffered due to the effects of globalisation. This capital adequacy framework often referred to as the Basel Accord has the objective to provide a common capital measurement system and acts as regulatory tool to ensure banks do not take excessive risk without having the minimum required capital to undertake such risks (History of the Basel Committee and its Membership, Bank of International Settlement, 2009).

The first Basel Accord was issued in 1988 and later revised in June 1999 and in 2010 in the wake of the 2008 global financial crisis. Under the 1988 Basel I Accord, banks are required to have a minimum Risk Weighted Capital Adequacy Ratio (RWCAR) of 8%. The RWCAR is important as it shows the level of healthiness of Banks across the globe. The Basel Accord is meant to be a regulatory tool as well as a mechanism for discipline and transparency reporting for banks. This is supported by the findings made by Mendoca, Galvao and Loure (2011) in their research on how the Brazilian banks are able to weather the subprime crisis in 2008.

Islamic banking is a form of banking based on the rules and regulation of Islamic Shariah laws which prohibited interest/usury or riba’ as it does not perceived money to have an intrinsic value but instead, Islamic finance or Islamic banking is based on asset (Alexakis and Tsikouras, 2009). In Malaysia, Islamic banking started with the establishment of Bank Islam Malaysia Berhad on July 1983 under the Islamic Banking Act 1983. The second Islamic Bank in Malaysia is Bank Muamalat