Capital Guarantee Research Articles

Analysis of Fatwa DSN-MUI No.105 on Capital Guarantee Issues in a Mudharabah Contract

This study critically examines the Fatwa MUI No. 105 on sharia ruling of capital guarantee in a mudharabah contract in Islamic bank practices. Some opinions from sharia Fatwa which is issued by International Fatwa Issuing-Bodies and Classical Muslim Scholars were used to obtain the holistic view on mudharabah capital guarantee. This study employs qualitative approach to assess the opinion of sharia scholars and utilizes inductive approach to summarize the data or information that are collected. The main data of this study is fatwa MUI No.105, Muslim scholars’ opinion from Fiqh or Ushul Fiqh literature, and group of international fatwas that are issued by reputable fatwa-issuing body. The study found that the MUI Fatwa No.105 which is stated that mudharib can guarantee mudharabah capital voluntarily contradicts to majority of four mazaahib, International Islamic Fiqh Academy and AAOIFI that state the mudharib is not allowed to guarantee the capital of the mudharabah. In addition, the Fatwa was not included the aspect of Amanah in its stipulation. However, under sharia methodology of maslahah, mudharib is still allowed to provide capital guarantee in certain situations: first, if mudharib is doing negligently in business, second, mudharib willingly impose themselves to guarantee the mudharabah capital, third, afraid of loss of potential customer, and lastly, mudharib voluntarily guarantee only the capital not profit.

Poor Working Capital Management Remain Major Cause of Business Failure

Businesses must manage their working capital well since it affects their resilience and profitability. Liquidity and profitability must be balanced. Sustaining sufficient operating capital guarantees operational stability and on-time payment of debts. Shortening the cash conversion cycle and increasing efficiency maximizes cash flow. This approach provides advantageous lending terms and increases credibility with stakeholders. Conversely, poor working capital management can lead to cash flow issues, increased costs, and missed opportunities. Overtrading brought on by low liquidity might jeopardize financial stability. To secure a business’s long-term success in the face of changeable market conditions, regular assessments and adaptable plans are essential. Thus, this study focuses on the effects of poor working capital management resulting to business failure.

Risk sharing in equity-linked insurance products: Stackelberg equilibrium between an insurer and a reinsurer

AbstractWe study the optimal investment-reinsurance problem in the context of equity-linked insurance products. Such products often have a capital guarantee, which can motivate insurers to purchase reinsurance. Since a reinsurance contract implies an interaction between the insurer and the reinsurer, we model the optimization problem as a Stackelberg game. The reinsurer is the leader in the game and maximizes its expected utility by selecting its optimal investment strategy and a safety loading in the reinsurance contract it offers to the insurer. The reinsurer can assess how the insurer will rationally react on each action of the reinsurer. The insurance company is the follower and maximizes its expected utility by choosing its investment strategy and the amount of reinsurance the company purchases at the price offered by the reinsurer. In this game, we derive the Stackelberg equilibrium for general utility functions. For power utility functions, we calculate the equilibrium explicitly and find that the reinsurer selects the largest reinsurance premium such that the insurer may still buy the maximal amount of reinsurance. Since in the equilibrium the insurer is indifferent in the amount of reinsurance, in practice, the reinsurer should consider charging a smaller reinsurance premium than the equilibrium one. Therefore, we propose several criteria for choosing such a discount rate and investigate its wealth-equivalent impact on the expected utility of each party.

Can Security Design Foster Household Risk‐Taking?

ABSTRACTThis paper shows that securities with nonlinear payoff designs can foster household risk‐taking. We demonstrate this effect by exploiting the introduction of capital guarantee products in Sweden between 2002 and 2007. Their fast and broad adoption is associated with an increase in expected financial portfolio returns. The effect is especially strong for households with low‐risk appetite ex ante. These empirical facts are consistent with a life‐cycle model in which households have pessimistic beliefs or preferences combining loss aversion and narrow framing. Our results illustrate how security design can mitigate behavioral biases to increase mean household portfolio returns.

Applying Risk-Taking in Islamic Banking and Finance from the Perspective of Islamic Jurisprudence

Islamic financial Institutions are expected to take considerable business risks when earning from their financial dealings. The objective of this study is to clarify the concept of risk in Islamic commercial financial transactions from the fiqhi (or Islamic Jurisprudence) perspective and analytically evaluate the selected three issues having place in the practice of Islamic finance based on the concept of risk taking maintained by Islamic fiqh. This is desk-based research where data has been collected from various sources such as classical fiqh books, regulators’ policy documents and guidelines, and journal articles. This study employed mixed methods of literature review and qualitative content analysis to analyze the data critically in search of assertive findings. The study revealed the issues relating to risk-taking behaviour of Islamic financial institutions (IFIs) as, amongst others, charging the cost of the fund on defaulting customers, holding the lessee liable for the total loss of leased assets under Ijārah Thumma al-Bay’(AITAB) and capital guarantee under Mushārakah based instruments. This study suggests that Institutions facilitating Islamic financial instruments shall have to evaluate the business risk based on their subjects namely (i) property (māl) and (ii) work (ʿamal) in ensuring the fulfilment of Shariah principles and expected risk-taking concept embedded in contracts or instruments without diverting them. Analysis of the selected cases in this research identified that when risk-taking principle is breached, the prohibited elements, such as Ribā, Gharar and Maysir, do arise and that they impede the realization of the Maqāṣid al-Shariah intended for Islamic financial contracts. This research would allow the Shariah scholars and legal authorities in the Islamic financial industry to extend their knowledge on issues in the practice of Islamic finance pertaining to risk-taking behaviours that are expected by the IFIs.

Il Microcredito istituzionale. Un nuovo ruolo per l’azione pubblica

In a period of repeated economic crises, access to traditional credit channels for those unable to provide personal or capital guarantees has proved particularly complex. Among the possible ways to limit the damage of the crisis, the Region of Sardinia has identified support for entrepreneurship - and in particular micro-entrepreneurship - as the most important way to foster the creation of new jobs, both in traditional and innovative sectors. The authority has deemed it appropriate to change course in favour of business creation through a special form of interest-free microcredit, which replaces the traditional grant. At the time of its creation in 2009, the ESF Microcredit Fund constituted a radical policy innovation, which entailed a major discontinuity with previous practices. It was an important and courageous decision, taken in a context heavily marked by the unfavourable socio-economic situation. This article presents the main results of the analysis of the ESF Microcredit, describing the mechanisms of genesis and implementation of the policy and finally describing the main effects of the ESF Microcredit on the beneficiaries and the socio-economic context.

The Effect of Economic Policy Uncertainty on Green Technology Innovation: Evidence from China’s Enterprises

In some cases, enterprise fears uncertainty more than the policy itself, and this fear can impede innovation. However, this study finds that uncertainty is the source of enterprise’s innovation. We took Chinese A-share listed companies from 2010 to 2018 as the research sample and studied the impact of economic policy uncertainty (EPU) on green technology innovation (GTI). Based on China’s EPU index and green patent-application data of Chinese-listed enterprises, this study adopted a panel fixed regression model and found that EPU has a slightly promoting effect on GTI of Chinese-listed enterprises. This effect is also affected by enterprise ownership and industry characteristics. Among them, EPU has a stronger promoting effect on GTI activities of state-owned enterprises and high-tech enterprises than common enterprises. In particular, if EPU increases, the GTI of high-polluting enterprises is not as great as the incentive effect of ordinary enterprises. The reasons may be that state-owned enterprises have more implicit capital guarantees, high-tech enterprises have higher innovation motivation, and high-polluting enterprises have stronger dependence on traditional production equipment. These results can provide a reference for the debate on “uncertainty.” The conclusions of this paper contain unique policy implications.

An Agricultural Supply Chain Coordination Model: The Case of Trinity Comprehensive Cooperation Organization in China

Farmer cooperatives play a significant role in increasing farmers’ income, ensuring food security, and maintaining supply chain stability. While the number of cooperatives in China has increased rapidly in recent years, it is challenge for many small-scale cooperatives in China to achieve high performance due to resource and scale constraints. Taking Rui’an Meiyu’s Trinity Comprehensive Cooperation Organization as an example, this paper makes improvement to the original Trinity Comprehensive Cooperation Model and innovatively proposes a new practicable model called “three areas of cooperation with multiple bodies” for small-scale cooperatives to adopt. According to our research, the following features have been identified: first, the formation motivations of the new model include four different aspects, and the formation process of it includes three specific steps. Second, the resource integration mechanism of the new model is composed of production coordination optimization, supply and marketing platform restructuring, and credit capital guarantees. Third, the new cooperative model can increase economic benefits and simultaneously promote sustainable agricultural development. This study further complements the literature on the Trinity Comprehensive Cooperation Model and offers many managerial and academic implications for cooperative members and policy-makers.

Optimal HARA Investments with Terminal VaR Constraints

This paper studies the impact of Value at Risk (VaR) constraints on investors with hyperbolic absolute risk aversion (HARA) risk preferences. We derive closed-form representations for the “triplet”: optimal investment, terminal wealth, and value function, via extending the Bellman-based methodology from constant relative risk aversion (CRRA) utilities to HARA utilities. In the numerical part, we compare our solution (HARA-VaR) to three critical embedded cases, namely, CRRA, CRRA-VaR, and HARA, assessing the influence of key parameters like the VaR probability and floor on the optimal wealth distribution and allocations. The comparison highlights a stronger impact of VaR on a CRRA-VaR investor compared to a HARA-VaR (HV). This is in terms of not only lower Sharpe ratios but also higher tail risk and lower returns on wealth. The HV analysis demonstrates that combining both, capital guarantee and VaR, may lead to a correction of the partially adverse effects of the VaR constraint on the risk appetite. Moreover, the HV portfolio strategy also does not show the high kurtosis observed for the PV strategy. A wealth-equivalent loss (WEL) analysis is also implemented demonstrating that, for a HV investor, losses would be more serious if adopting a CRRA-VaR strategy as compared to a HARA strategy.

Decrease of capital guarantees in life insurance products: Can reinsurance stop it?

We analyze the potential of reinsurance for reversing the current trend of decreasing capital guarantees in life insurance products. Providing an insurer with an opportunity to shift part of the financial risk to a reinsurer, we solve the insurer's dynamic investment-reinsurance optimization problem under simultaneous Value-at-Risk and no-short-selling constraints. We introduce the concept of guarantee-equivalent utility gain and use it to compare life insurance products with and without reinsurance. Our numerical studies indicate that the optimally managed reinsurance allows the insurer to offer significantly higher capital guarantees to clients without any loss in the insurer's expected utility. The longer the investment horizon and the less risk-averse the insurer, the more prominent the reinsurance benefit.

Predicting future default on the Covid-19 bounce back loan scheme: The £46.5 billion question

The UK has had a commitment to loan guarantee schemes since 1981 when it introduced the Small Firms Loan Guarantee (SFLG) scheme to address access to debt finance issues for smaller firms. Over the last 40 years, its support has been unwavering, and in the Covid-19 crisis, it once again turned to loan guarantees as a means of supporting smaller firms through the crisis-induced slump in trading activities. Of its three core Covid-19 guarantee schemes, the Bounce Back Loan (BBL) scheme was the most numerous with 1,531,095 loans issued amounting to a total of £46.5bn in lending. The BBL scheme provided a 100% capital guarantee on loans between £2,000 and £50,000, and firms were allowed to borrow up to 25% of their trading income, with a fixed interest rate of 2.5% of which the first years interest was paid by the government to the lending bank. Our findings suggest that the government losses may range between £7bn and £12bn depending on the underlying assumptions; however, we estimate Covid-19 guarantee schemes may have protected 118,639 businesses and 1,117,849 jobs. Looking to the future, we suggest that a new loan guarantee is justified that more resembles the former SFLG than the restrictive Enterprise Finance Guarantee (EFG) as more than one million small businesses will be heavily indebted and unable to borrow to invest in future growth opportunities. This would support the ‘levelling-up’ agenda and help prevent a post-Covid-19 low investment–low growth scenario.

Transparent structured products for retail investors

Structured investment products (SPs) are derivative securities whose return is contingent on the return of their underlying assets, such as a certain stock market index. SPs have been criticized for being complex and costly on the inside, while attracting retail investors with emotionally appealing promises, on the surface, to provide tempting yields and protection for the capital invested. To circumvent such criticism, we consider transparent SPs (TSPs), which simply offer a lower and upper limit on annual return (after costs and fees) as well a transparent rule defining the return based on the return of the underlying asset. We study TSPs using both empirical and theoretical approaches. An empirical survey of real investors with best-worst scaling as well as theoretical analyses based on utility theory and multi-stage stochastic programming (MSSP) show that moderately priced TSPs are competitive in comparison with other investment products, such as index funds. Furthermore, retail investors actually exhibit substantial preference for TSPs with partial capital guarantees, over and above SPs with the superficially tempting, full capital guarantees. A theoretical, MSSP-based analysis similarly confirms that including TSPs in an investment portfolio can yield substantial gains in certainty equivalent annual return. The results further indicate that perceived gains from TSPs are sensitive to costs, market imperfections, and interest rates, as well as private preferences and stock market expectations of retail investors. This demonstrates how MSSP can be applied to financial engineering for successful implementation of TSPs in future financial markets.

Polynomial affine approach to HARA utility maximization with applications to OrnsteinUhlenbeck [formula omitted] models.

This paper designs a numerical methodology, named PAMH, to approximate an investor’s optimal portfolio strategy in the contexts of expected utility theory (EUT) and mean-variance theory (MVT). Thanks to the use of hyperbolic absolute risk aversion utilities (HARA), the approach produces optimal solutions for decreasing relative risk aversion (DRRA) investors, as well as for increasing relative risk aversion (IRRA) agents. The accuracy and efficiency of the approximation is examined in a comparison to known closed-form solutions for a one dimensional (n=1) geometric Brownian motion with a CIR stochastic volatility model (i.e. GBM 1/2 or Heston model), and a high dimensional (up to n=35) stochastic covariance model. The former confirms the method works even when the theoretical candidate is not well-defined, while the latter illustrates low errors (up to 8% in certainty equivalent rate (CER)) and feasible computational time (less than one hour in a PC).Given the potential of this method, we investigate a relevant practical setting with no closed-form solution, namely when assets follow an OrnsteinUhlenbeck 4/2 stochastic volatility (SV, i.e. OU 4/2) model. We conduct sensitivity analyses of the optimal strategies for DRRA and IRRA investors with respect to key parameters; (e.g. risk aversion, minimum capital guarantee and 4/2’s parameters). In particular, the efficient frontier for the IRRA case is presented. A comparison to important sub-optimal strategies in terms of CER is performed, indicating low CER performances due to ignorance of stochastic volatility for CRRA investors, i.e. a myopic strategy would be even better than ignoring SV. The analyses highlight the importance of efficient and precise numerical methods to obtain substantially higher CERs.

Geographical indication agricultural products, livelihood capital, and resilience to meteorological disasters: evidence from kiwifruit farmers in China.

Developing geographical indication agricultural products will help to expand regional characteristic industries by taking actions that suit local circumstances. Improving the adaptability of the kiwifruit farmers to cope with meteorological disasters is conducive to promoting the optimization of rural industrial structure and the implementation of rural revitalization strategy. Based on the field survey data of Shaanxi Province, this research uses the method of natural breaks to classify the resilience scores of meteorological disasters under the framework of Sustainable Livelihoods Approach. Finally, the ordinal logistic regression model is used to quantitatively research how livelihood capital contributes to the resilience of kiwifruit farmers to meteorological disasters during the phenological phases. The results show that the perception of meteorological disasters by farmers does not significantly affect their resilience, and the impacts of different livelihood capitals on the resilience strategies of farmers are quite distinct: physical capital, financial capital, social capital, and human capital have significant positive impact on the resilience strategies of farmers, while natural capital has a significant negative impact on the resilience strategies of farmers. The results extend the theoretical foundation of resilience strategies for meteorological disasters in kiwifruit phenological phases and bring quantitative evidence linkage of livelihood capital and resilience strategies. Furthermore, the study emphasizes that the agricultural activities of kiwifruit farmers during the phenological phases should be combined with the livelihood capital guarantee measures, as well as a better financial environment should be created by government intervention. Paying attention to science popularization work of middle-aged and elderly farmers, accelerating the linkages between the government and the mass, would help the government to obtain the best agricultural management methods.

The Support of Commercial Banks to Marine Shipping Financial Business Based on SWOT Analysis

Yu, Y., 2020. The support of commercial banks to marine shipping financial business based on SWOT analysis. In: Li, L. and Huang, X. (eds.), Sustainable Development in Coastal Regions: A Perspective of Environment, Economy, and Technology. Journal of Coastal Research, Special Issue No. 112, pp. 451-453. Coconut Creek (Florida), ISSN 0749-0208.The development of marine shipping financial business by commercial banks helps marine shipping enterprises cope with capital risks and provides capital guarantee for the development of shipping industry. Therefore, it has become an important part of high-end financial industry. Based on the SWOT analysis method, this paper studies the advantages, opportunities, threats and challenges faced by commercial banks in carrying out marine transportation financial business, introduces the relevant concepts of marine shipping finance, and gives suggestions for commercial banks to support marine shipping financial business.

Smart Sukuk Structure from Sharia Perspective and Financing Benefits: Proposed Application of Smart Sukuk through Blockchain Technology in Islamic Banks within Turkey

Smart Sukuk structure is the new generation of Sukuk issuances structures. It uses Blockchain technology to allow more investors in both retail and corporate sectors to participate in Sukuk issuances. Through this technology, all financial institutions can issue their Sukuk. All types of documents and information related to the issuance of Sukuk are kept with the issuer's chains and the chains of the Central Registration Institution. Limited research was conducted on the transactions of smart Sukuk structures, such as Sukuk issuance model, traded Sukuk transactions and committed transactions market, from the Sharia compliance perspective and its financing benefits. This paper presents an in-depth study of the AAOIFI Standards, the decisions of Islamic Jurisprudence Academies and Sharia Boards, that related the Sukuk structures, applied in the Islamic bank of the paper's study society and the transactions of smart contracts from Sharia compliance perspective. On the other hand, this paper presents how to apply proposed smart Sukuk structures models that use Blockchain technology and smart contracts, within the largest Islamic bank in Turkey, in order to find out its financing benefits. The research findings indicate that from the Sharia perspective there are some issues in some applicable Sukuk models, such as the issue of capital guarantees. The use of Blockchain technology in smart Sukuk structures reflects several benefits on the financing markets, as it gives more capacity to access to more investors and markets, faster processing capability, transparency, invariance, and low transaction cost.

Is sustainable development reasonable for tourism destinations? An empirical study of the relationship between environmental competitiveness and tourism growth

AbstractSustainable development is an important strategy promoted by the United Nations World Tourism Organization (UNWTO) and governments of many destinations. However, the seeming contradiction about the environment vis‐à‐vis business interests may result in noncompliant responses to the environmental policies and regulations and hinder implementation of strategies for improved sustainability. Using resource‐based theory, we empirically test the influence of environmental competitiveness on tourism growth. Using a biennial dataset from 130 destinations between 2009 and 2017, the current work applies the fixed effect (FE) and threshold models to identify a strong link for developed destinations but a weak link for less developed regions. Several indicators of environmental competitiveness significantly affect tourism demand for destinations with high GDP per capita; the effects are not significant, however, for low GDP per capita destinations. These findings demonstrate that environmental factors are important influencers of destination competitiveness and are positively linked to economic performance of developed destinations. The connection between environmental competitiveness and tourism growth in less developed destinations seems weak and insignificant. A possible reason could be that such destinations lack the capital guarantee to translate environmental competitiveness into tourism demand. This article extends the resource‐based theory from the corporate level into the destination level and theoretically contributes to the sustainable tourism literature. Our findings provide the UNWTO and destination governments with empirical evidence to support their sustainable strategies and with suggestions concerning how to strengthen the environment‐performance link for less developed destinations.

Inalienable Customer Capital, Corporate Liquidity, and Stock Returns

ABSTRACTWe develop a model in which customer capital depends on key talents' contribution and pure brand recognition. Customer capital guarantees stable demand but is fragile to financial constraints risk if retained mainly by talents, who tend to quit financially constrained firms, damaging customer capital. Using a proprietary, granular brand‐perception survey, we construct a firm‐level measure of the inalienability of customer capital (ICC) that captures the degree to which customer capital depends on talents. Firms with higher ICC have higher average returns, higher talent turnover, and more precautionary financial policies. The ICC‐sorted long‐short portfolio's spread comoves with financial constraints factor.

Can Security Design Solve Household Reluctance to Take Risk?

This paper shows that securities with a non-linear payoff design can foster household risk-taking. We demonstrate this effect empirically by exploiting the introduction of capital guarantee products in Sweden from 2002 to 2007. The fast and broad adoption of these products is associated with an increase in expected financial portfolio returns, which is especially strong for households with a low risk appetite ex ante. We explore possible economic explanations by developing a life-cycle model of consumption-portfolio decisions. The capital guarantee substantially increases risk-taking by households with pessimistic beliefs or preferences combining loss aversion and narrow framing. The welfare gains from financial innovation are stronger for households that are less willing to take risk ex ante. Our results illustrate how security design can mitigate behavioral biases and enhance economic well-being.

Prosperity level and fishermen income at Sadeng Beach fishery port, Gunung Kidul regency

Poverty is the main factor triggering the high level of exploitation of fisheries resources. Prosperity of fishermen becomes primary key in fisheries development. Fisherman income level is primary factor in improving fishermen prosperity. The existence of a famine season is primary fishermen problem in fulfill the main needs. Because of it, this research is done with the purpose to see the fishermen income level in fish season, famine season and the average income of fishermen to determine the level of welfare of fishermen based on the type of boat used. The method is using fisheries business analysis, fishermen welfare level based on the Indonesian Central Statistics Agency criteria descriptive analysis. The basic method used in this research is descriptive analysis, business analysis of fisheries, the level of welfare of fishermen based on the criteria of the Indonesian Central Statistics Agency. The results is the greater boat type, welfare level and income will increase, but the economic sustainability is lower because larger ship, loss risk, time and distance to sea also increases so that influence of the famine season will be greater, the average income of fishermen is above the regional minimum wage and the welfare level of fishermen is included in the moderate or well-being category. Thus, to increase the income and welfare of fishermen, it is necessary to increase education levels, subsidized housing programs, alternative work and increase boat type may be done if there is capital support and guarantees from the government.