Complex Financial Products Research Articles

Prinsip-Prinsip Akuntansi Syariah dalam Laporan Keuangan Bank Syariah

This study aims to analyze the application of sharia accounting principles in the financial statements of Islamic banks in Indonesia, focusing on the implementation of Sharia Financial Accounting Standards (SAK Syariah) and its impact on the transparency of financial statements. The Islamic banking industry in Indonesia has experienced rapid development, but the application of sharia accounting in financial statements still faces a number of challenges, such as differences in interpretation of sharia provisions, limited human resources, and difficulties in adapting accounting standards to the ever-evolving economic conditions. This study uses a qualitative descriptive approach with data collection techniques through in-depth interviews and documentation studies of the financial statements of leading Islamic banks. The results of the study indicate that although most Islamic banks in Indonesia have implemented sharia accounting principles in accordance with the SAK Syariah guidelines, there are still differences in their application, especially in more complex transactions. The main challenges faced are differences in interpretation of sharia provisions and the limited number of auditors and practitioners who are competent in the field of sharia accounting. The application of sharia accounting principles contributes to increasing the transparency of financial statements, although there are still obstacles in terms of the general public's understanding of the technical terms used. This study also found that although most banks have followed the SAK Syariah guidelines, there are gaps in the application of sharia principles to more innovative financial products. Therefore, it is necessary to update the SAK Syariah to accommodate the development of more complex financial products and instruments, in order to improve the consistency and credibility of the financial statements of Islamic banks in Indonesia.

Role of Financial Literacy in Household Investment Decisions in Iraq

Purpose: The aim of the study was to assess the role of financial literacy in household investment decisions in Iraq. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The study indicated that households with higher levels of financial literacy tend to make more informed and effective investment choices, which lead to better financial outcomes. These households are more likely to participate in financial markets, diversify their investments, and utilize a broader range of financial instruments, which helps in mitigating risks and enhancing returns. Financially literate individuals are also more adept at understanding complex financial products, assessing investment risks, and planning for long-term financial goals such as retirement. Conversely, a lack of financial literacy can result in poor financial decisions, leading to lower participation in the stock market, inadequate savings, and suboptimal investment portfolios. Thus, enhancing financial literacy is essential for empowering households to make sound investment decisions, ultimately contributing to greater financial stability and wealth accumulation. Implications to Theory, Practice and Policy: Behavioral finance theory, portfolio theory and agency theory may be used to anchor future studies on assessing the role of financial literacy in household investment decisions in Iraq. In terms of practical recommendations, developing and implementing targeted financial education programs is essential. These programs should focus on improving specific aspects of financial literacy relevant to investment decisions. From a policy perspective, advocating for policies that support the integration of financial literacy education into school curricula at all levels is essential.

The Role of European Supervisory Authorities in Consumer Protection Standard Setting on the Financial Services Market – Based on the Example of the European Banking Authority

The purpose of the article is to present the genesis of the emergence and the scope of powers of the European Supervisory Authorities (ESAs) (the EBA, ESMA, and EIOPA), with particular reference to the EBA as regards the building of its supervisory normative standard and the protection of the consumer of financial services. The authors will propose de lege ferenda postulates which, in their view, would allow for an improvement in the quality of the financial services offered to consumers and ensure a higher level of protection of their interests and, at the same time, legal certainty for their providers. Increasingly sophisticated and complex financial products cause interpretation difficulties for both the courts and consumer protection authorities, but above all for consumers themselves, which consequently poses a challenge for both sides of the market (supply and demand). It is also a challenge for the post-crisis ESAs as the EU bodies not only designated to monitor and manage both the stability and security of the financial market, along with the actual level of consumer protection within it. In the preparation of the article, the legal-dogmatic and legal-theoretical method, which is standard for such studies, was applied, which allows for an analysis of the provisions of EU law and the identification of the norms stemming from them using interpretation and the assessment of the content of the provisions through the prism of the principle of consumer protection from Articles 12 and 169 TFEU and the EBAs’ competence provisions. Due to the fact that, in principle, the powers and competences of all three ESAs are analogous and only differ in terms of the scope of their application (i.e., financial institutions operating in the relevant financial market sectors – banking, insurance, and pension and investment), the authors will present their considerations with reference to the European Banking Authority (EBA), which is an exemplification of the powers of the other supervisory authorities. Thus, the secondary piece of EU legislation to be considered in this article will be the Council and European Parliament Regulation, hereinafter known as “EBA Regulation” and the actions taken by the EBA on that basis.

Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment

In this paper, we present a hybrid Agent-Based Stock-Flow-Consistent (AB-SFC) model about the macroeconomic and distributional implications of central bank’s decision to leave a “Low(-for-long) Interest Rate Environment” (LIRE). Our goal is to study the non-linear effects of monetary tightening when implemented under LIRE than in an alternative “Higher Interest Rate” setting (HIRE). This way, we shed light over the interaction between monetary policy, inequality, and macro-financial fragility in a financialized economy characterized by the presence of securitization and the production of complex financial products, i.e., Asset-Backed Securities (ABSs). We obtain three main findings. First, consistent with existing empirical literature, LIRE may be sources of vulnerabilities in the financial industry (i.e., lower banks’ profitability and capital adequacy ratio). However, it may reduce systemic macro-financial risk by stimulating faster growth, lower unemployment and inequality records alongside with lower public and private indebtedness and lower-scale securitization. Second, central bank’s decision to raise interest rates improves financial sector’s performance indicators at the costs of harsh real-side consequences, i.e., permanently higher unemployment and inequality, when implemented under LIRE. Third, financialization structurally changes the functioning of the economy by feeding the creation of a debt-led economy in which monetary policy becomes less effective in its attempt of controlling inflation. Central bank’s reaction in the form of a permanently tighter monetary policy stance eventually prompts a more unequal and unstable rentier-friendly economy.

Demographic and Sociocultural Determinants of Financial Literacy in South Africa

Financial literacy is rapidly becoming more important as financial markets continue to evolve and new and more complex financial products are introduced. This study investigates the relationship between demographic and sociocultural variables and the level of financial literacy of individual investors in South Africa. This study is significant as it provides policymakers with target areas to provide incentives towards financial education programmes. Secondary data were obtained from a private domain where a private investment company collected primary data using an electronic quantitative survey. The sample consisted of 1, 059 individual investors. The study found that people over 50 years of age, men, whites, people with common-law spouses, and people who owned homes without a mortgage payment reported the highest degree of financial and investment knowledge. Groups that reported a low degree of financial and investment knowledge were individuals between the ages of 35 and 49, females, coloureds, divorced individuals, and individuals living with relatives. Health status and education were positively correlated with the financial and investment knowledge of individual investors. Policymakers should aim to target the groups identified by the study that show a low degree of financial literacy with financial education to promote wealth creation, which could benefit the economy by promoting investment and economic participation while simultaneously trying to address structural issues such as poverty and inequality.

Customized financial literacy: a boon for universal financial inclusion of PWDs post COVID-19 pandemic in developing countries

PurposeCurrently, consumers of financial products and services have become more vulnerable to predatory financial institutions, especially in the aftermath of Covid-19 pandemic. Therefore, financial consumers like the persons with disabilities (PWDs) should be equipped with knowledge and skills to help them to evaluate complex financial products on offer in financial markets, especially in developing countries to avoid being victims of fraudulent lending. The purpose of this study is to establish whether customized financial literacy mediates the relationship between financial consumer protection and financial inclusion of PWDs’ owned MSMEs in rural Uganda post Covid-19 pandemic.Design/methodology/approachSmartPLS 4.0 was used to construct the measurement and structural equation models to test whether customized financial literacy significantly mediates the relationship between financial consumer protection and financial inclusion of PWDs’ owned MSMEs in rural Uganda post Covid-19 pandemic.FindingsThe results revealed a partial mediating effect of customized financial literacy in the relationship between financial consumer protection and financial inclusion of PWDs’ owned MSMEs in rural Uganda post Covid-19 pandemic. Conducting customized financial literacy increases financial consumer protection by 12 percentage points to promote financial inclusion of PWDs’ owned MSMEs in rural Uganda post Covid-19 pandemic.Research limitations/implicationsThis study focused only on customized financial literacy and financial consumer protection to promote universal financial inclusion of PWDs’ owned MSMEs post Covid-19 pandemic. Future studies may use data collected from other vulnerable groups amongst the unbanked population in developing countries, Uganda inclusive. In addition, this study also collected only quantitative data from the selected population. Further studies can be conducted using key informant interviews and focused group discussion to get the perceptions of the PWDs on being protected from exploitation by unscrupulous financial institutions.Practical implicationsThe findings from this study can help policymakers in developing countries like Uganda to revise the existing consumer protection law to include strong clauses on protection of people with special needs like the PWDs. The law must ensure that they are not exploited by financial institutions because of their conditions. The law ought to make sure that the PWDs are educated about their rights in the financial market place and all information on financial products offered by financial institutions should be simplified and interpreted to them before they make consumption decisions.Originality/valueTo the best of the authors’ knowledge, the present study is amongst the first few studies to provide a meticulous and unique discourse on the ever increasing role of financial literacy combined with consumer protection to reduce consumption risks within the financial markets, especially in developing countries in the aftermath of global pandemic shocks. This study uses the social learning theory, theory of reasoned action and theory of planned behaviour to elucidate how customized financial literacy can enhance consumer protection to increase financial inclusion of groups with special needs like the PWDs who have become more susceptible to exploitation by unscrupulous financial institutions in under-developed financial markets, especially in post Covid-19 pandemic.

Adopting Digital Signatures for Complex Financial Products in the French Banking Sector: How Technology Acceptance and User Literacy Matter

Adopting Digital Signatures for Complex Financial Products in the French Banking Sector: How Technology Acceptance and User Literacy Matter

Tüketicilerin Demografik Özelliklerinin Finansal Okuryazarlık Düzeylerine Etkisi Üzerine Bir Araştırma

As financial markets have evolved, complex financial products and services have emerged that are difficult to understand for uninformed consumers. The liberalization of the market with such complex products and services and the increasing need for financial information due to increased competition have led researchers to focus on measuring the effects of financial literacy on financial decisions. In this measurement, researchers draw attention to the fact that many factors can be effective on financial literacy. Demographics are one of these factors, and there are many indications of its impact on financial literacy. In this study, it was aimed to determine the effects of demographic characteristics of undergraduate and associate degree students continuing their education at Konya Technical University on their financial literacy levels. Demographic characteristics such as gender, age, education level, and income status were discussed. Convenience sampling method, which is one of the non-random sampling techniques, was used in the study. 362 questionnaires were included in the study. As a result, it has been determined that demographic characteristics are effective on financial literacy.

Pricing equity-linked guaranteed minimum death benefits with surrender risk by complex Fourier series expansion method

This paper considers the pricing problem of an equity-linked guaranteed minimum death benefit product with an expiration time of T, under the assumption of allowing surrender. To model the dynamics of the underlying asset process, we employ several jump diffusion models with regime switching. As many exotic financial products exhibit path dependency, Monte Carlo simulation methods have commonly been used for their valuation. In this paper, we propose a novel and efficient Fourier-based numerical method that utilizes complex Fourier series expansion to value such products. Through both error analysis and numerical experiments, we demonstrate that our proposed method is more effective than the Monte Carlo method. Finally, we conduct a sensitivity analysis on the contract parameters. Our findings have significant implications for the pricing of complex financial products since our proposed method can be readily applied to a variety of derivative products with path dependency.

The Role of Financial Information Literacy in Strategic Decision-Making Effectiveness and Sustainable Performance among Agribusiness Entrepreneurs in Nigeria

The current financial environment is characterized by frequent innovations and complex financial products and services and this poses particular challenges for agribusiness entrepreneurs in rural areas. This study examined the sources of financial information available to agribusiness entrepreneurs in rural areas and how financial information literacy impacts performance sustainability and strategic decision-making effectiveness among agribusiness entrepreneurs amid complex and frequent innovations in financial environments in Nigeria. Utilizing a probability sampling approach, 397 respondents were drawn from the pool of agribusiness entrepreneurs registered with the Edo State Agricultural Development Programme for the Central Bank of Nigeria Anchored Borrower’s Programme (ABP) for farming businesses. The hypotheses were tested using linear regression analysis. The results from the demographic analysis suggest that agribusiness entrepreneurs have the highest access to radio adverts/programs on financial matters while television adverts/programs exert the highest persuasive influence on these agribusiness entrepreneurs. The outcomes from this analysis indicate that financial information literacy significantly impacts agribusiness performance sustainability among entrepreneurs. In addition, the proposed link between financial information literacy and strategic decision-making effectiveness among agribusiness entrepreneurs was confirmed. It is concluded that financial information literacy is needed for strategic decision-making effectiveness and performance sustainability among agribusiness entrepreneurs, particularly in rural areas, amid frequent innovative financial products and services.

The genre of banking financial product information: The characters, the setting, the plot and the story

Genre theory allows us to examine texts that are written for a specific purpose. A non-fictional genre is similar to other genres such as those for films and novels, and genre theory: (i) categorises the elements of the genre; and (ii) sets up conventions and expectations for readers (Bhatia, 1997). The four elements of a genre are the characters, the setting, the plot and the story. The banking financial product literature is a particular genre of non-fictional written communication, providing descriptions of complex financial products that can affect people's lives for many years come.We extracted excerpts from the banking financial product literature which were used to interview 100 older banking customers. We found that all four elements of the genre, the characters, the setting, the plot and the story, failed its audience. To remedy this situation we contribute to practice by designing a template that can be used by writers of the genre. We also suggest using metaphors and synonyms, and argue that readers of the genre should be asked to provide feedback on drafts as part of a quality assurance process. Only then will the genre meet its readers’ expectations and sound financial decisions will be made for a better financial future for us all.

Rethinking the Effectiveness of Consumer Protection Policies and Measures in the Financial Marketplace

This paper aims to identify and challenge the common practice among financial institutions of designing and selling complex financial products to consumers who lack full comprehension, thus preventing them from making informed decisions before consuming such financial products. This deceptive approach leads many consumers to experience financial losses, with significant negative consequences for society as a whole. The paper delves into the motivations behind financial institutions to produce and successfully sell complex financial products; they flourish, mainly because they often take advantage of the inadequate regulatory systems, amongst other things. Furthermore, it explores the enabling environment created by laissez-faire contract, which prioritizes principles like pacta sunt servanda and caveat emptor, resulting in regulators overlooking and undervaluing the abuse faced by financial consumers, leaving them largely responsible for resolving their own challenges. The paper exposes the shortcoming of policy measures aimed at preventing consumer exploitation, including the flawed disclosure rules that place the burden of comprehension on consumers while being manipulated to undermine their full understanding.
 Additionally, it critiques the use of complicated language and heavy use of financial jargon in financial information booklets, which, although meeting legal disclosure requirements, hinder the comprehension of consumers. To address these issues, the paper proposes a new disclosure rule grounded in the concepts of caveat venditor and contra proferentem. This rule would require financial institutions to present information against their own self-interest and provide an equal number of disadvantages alongside advantages for the products they offer. Furthermore, it suggests that regulators and courts should play a pivotal role in supervising and assessing compliance, issuing annual performance-rated certificates that financial institutions must prominently display in their establishments and incorporate into their product information leaflets. This approach would allow consumers to easily identify consumer-friendly financial institutions

Formulation of Effective Regulations to Protect Financial Consumers from the Sale of High-risk Financial Products

The DLF, Lime fund and Optimus fund scandals highlight the unethical management and sales behavior of financial companies as well as consumers’ lowered trust in them; this has raised awareness regarding high-risk financial products and the need for financial consumer protection in Korea. Financial authorities have devised various measures to prevent the recurrence of scandals. Examining the current state of high-risk financial product sales and the newly introduced regulatory measures, this study investigates whether there exists any lack in the financial consumer protection and regulatory measures. If financial companies play a responsible role in protecting financial consumers while manufacturing and selling risky and complex financial products and providing innovative investment opportunities and profit structures that cannot be found in the existing financial products, financial consumers’ trust may be restored in them. High-risk financial products should not be the means of exploiting financial consumers who lack financial literacy, but rather to enhance the dynamics of the capital market through efficient capital intermediation and risk diversification.

Using comics to improve financial behaviour

Key terms to complex financial products are generally poorly understood and this can lead to financial distress for consumers that can impact their long-term financial well-being. Comics represent a viable solution to simplifying the way in which these products are presented, thus improving the comprehension of these terms. This study serves as a proof of concept for the use of comics in the financial services industry within the context of a funeral policy. A mixed-method experimental approach was used to show that comics help with perception and usability of a complex text policy document, thereby leading to increased uptake of the insurance product. As such, policymakers and stakeholders should consider comics as a promising alternative for the presentation of the terms of their products.

Industrial Policy and Risk Sharing in Public Development Banks: Lessons for the Post- COVID Response from the EIB and EFSI

The European Investment Bank (EIB) and European Investment Fund (EIF) have been key partners in implementing the Juncker Plan (EFSI) (2015–2020; and going forward will play an important role in the EU’s post-COVID industrial policy response. In order to evaluate these initiatives, we: distinguish between “real economy risks” and “financial risks”; and outline the trade-off between increased leverage and policy steer and control over projects, due to the number of intermediaries involved, and the need to make projects attractive for private investors. We argue that EFSI has made significant achievements, including enabling the EIB and EIF to provide long-term finance in the post-crisis period and to take more “real economy risk”. However, incentives have been created for EFSI to focus excessively on increasing leverage, at the expense of policy steer. Furthermore, the use of complex financial products and opaque pricing methods with terms too generous for private investors has in some cases generated excessive “financial risk”. In order to increase investment in the real economy and play a role in structural transformation, the EIB’s post-COVID response must have a greater focus on the final beneficiaries of projects rather than on the private financial intermediaries themselves. In those cases where it is necessary to use intermediaries, performance related conditionalities should be strictly enforced to have greater control over projects.

Interest rate structured products: can they improve the risk–return profile?

In this paper, we investigate the contribution of interest rate structured bonds to portfolios of risk-averse retail investors. We conduct our analysis by simulating the term structure according to a multifactor no-arbitrage interest rate model and comparing the performance of a portfolio consisting of basic products (zero-coupon bonds, coupon bonds and floating rate notes) with a portfolio containing more sophisticated exotic products (like constant maturity swaps, collars, spread and volatility notes). Our analysis, performed under different market environments, as well as volatility and correlation levels, takes into account the combined effects of risk premiums required by investors and fees that they have to pay. Our results show that capital protected interest rate structured products allow investors to improve risk–return trade-off if no fees are considered. With fees, our simulations show that structured products add value to the basic portfolio in a very limited number of cases. We believe our paper contributes to understanding the role of structured products in investors portfolios also in light of the current regulatory debate on the use of complex financial products by retail investors.

ESMA as a Residual Lawmaker: The Political Economy and Constitutionality of ESMA\u2019s Product Intervention Measures on Complex Financial Products

This article proposes that product intervention constitutes a form of residual lawmaking by ESMA that allows it to tackle aspects of investor protection not addressed by EU incomplete financial laws. Whilst product intervention may bring about certain advantages and may contribute to mitigating regulatory arbitrage problems, it constitutes a highly intrusive regulatory mechanism that raises important questions concerning: (a) ESMA’s rationale and motivations for its use; (b) its compliance with the EU constitutional framework; and (c) its adequacy for the regulation of complex financial products. This article addresses these questions through an analysis of the rationale and consequences of ESMA’s product intervention measures on binary options and contracts for differences of May 2018–July 2019, and of recent reforms of ESMA’s powers. It offers three main contributions to the existing literature. First, it contributes to the literature on administrative discretion and agencies’ rulemaking through an analysis of the political economy of ESMA’s deployment of product intervention powers and, also, of what this reveals about the relationships between ESMA and the EU Institutions, on the one side, and ESMA and National Competent Authorities, on the other. Second, it contributes to the literature on the constitutionality of EU agencies through an examination of the compliance of ESMA’s product intervention measures with EU constitutional law and requirements. Third, it examines whether product intervention constitutes an adequate mechanism to address problems pertaining to investor protection in complex financial products markets and, in doing so, it contributes to the scholarly discussion on complex financial products’ regulation.

Unfair Acts and Practices: A Revisionist History

The Federal Trade Commission Act’s ban on “unfair . . . acts and practices” would, on its face, seem to give the FTC an awesome power to define proper treatment of consumers in changing conditions. But even in a world of widespread corporate surveillance, ongoing racial discrimination, impenetrably complex financial products, pyramid schemes, and more, the unfairness authority is used rarely, mostly in egregious cases of wrongdoing. Why? The standard explanation is that the more expansive notion of unfairness was tried in the 1970s, and it failed spectacularly. The FTC of this era was staffed by bureaucrats convinced of their own moral superiority and blind to the self-correcting dynamics of the market. When the FTC finally reached too far and tried to ban television advertising of sugary cereals to children, it undermined its own legitimacy, causing Congress to put pressure on the agency to narrow its definition of unfairness. This Article argues that this standard explanation gets the law and the history wrong, and, thus, that the FTC’s unfairness authority is more potent than commonly assumed. The regulatory initiatives of the 1970s were actually quite popular. The backlash against them was led by the businesses whose profit margins they threatened. Leaders of these businesses had become increasingly radicalized and well-organized and brought their new political clout to bear on an unsuspecting FTC. It was not the re-articulation of the unfairness standard in 1980 that narrowed unfairness to its current form, but rather the subsequent takeover of the FTC by neoliberal economists and lawyers who had been supported by these radicalized business leaders. The main limitation on the use of the unfairness authority since then has been the ideology of regulators charged with its enforcement. In fact, the conventional morality tale about the FTC’s efforts in the 1970s are part of what keeps this ideology dominant. A reconsideration of the meaning of unfairness requires situating the drama of the 1970s and 80s in a longer struggle over governance of consumer markets. Since the creation of the FTC, and even before, an evolving set of coalitions have battled over what makes markets fair. These coalitions can be divided roughly into those who favor norm setting by government agencies informed by experts held accountable to democratic publics and those who favor norm setting by business leaders made accountable via the profit motive. The meaning of “unfair . . . acts and practices” has been defined and redefined through these struggles, and it can and should be redefined again to reconstruct the state capacity to define standards of fair dealing.

Engineering lemons

Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: Financial innovation benefits its adopters. In my 2006–2015 sample of over 28,000 yield enhancement products (YEP), the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees. On average, YEPs charge 6–7% in annual fees and subsequently lose 6–7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often statewise dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

The Financial Consumer Protection Act and the Protection of Investors in Complex Financial Products

The Financial Consumer Protection Act and the Protection of Investors in Complex Financial Products