Foreign Islamic Banks Research Articles

Efficiency in Islamic Banks: Some Empirical Evidences in Indonesian Finance Market

Purpose: The aim of the present paper is to examine the revenue efficiency of the Indonesian Islamic banking sector. The study also seeks to investigate the potential internal (bank specific) and external (macroeconomic) determinants that influence the revenue efficiency of Indonesian domestic Islamic banks. Method/design/approach: We employ the whole gamut of domestic and foreign Islamic banks operating in the Indonesian Islamic banking sector during the period of 2009 to 2018. The level of revenue efficiency is computed by using the Data Envelopment Analysis (DEA) method. Furthermore, we employ a panel regression analysis framework based on the Ordinary Least Square (OLS) method to examine the potential determinants of revenue efficiency. The results indicate that the level of revenue efficiency of Indonesian domestic Islamic banks is lower compared to their foreign Islamic bank counterparts. Results and conclusion: We find that bank market power, liquidity, and management quality significantly influence the improvement in revenue efficiency of the Indonesian domestic Islamic banks during the period under study. Research implications: By calculating these efficiency concepts, we can observe the efficiency levels of the domestic and foreign Islamic banks. In addition, by comparing both cost and profit efficiency, we can identify the influence of the revenue efficiency on the banks’ profitability. Orinalitty/value: The preferred method allows us to distinguish between three different types of efficiency, namely cost, revenue, and profit efficiencies. Furthermore, we perform a series of parametric (t-test) and non-parametric (Mann- Whitney [Wilcoxon] and Kruskall-Wallis) tests to examine whether the domestic and foreign Islamic banks are drawn from the same population.

Bank Ownership and Non-Performing Loans of Islamic and Conventional Banks in An Emerging Economy

This study assesses the non-performing loans of conventional and Islamic banks as well as the influence of ownership on the non-performing loans of conventional and Islamic banks. Due to fundamental differences in Islamic and conventional bank such as funding, non-performing loans might have differing effects on Islamic and conventional banks. This study utilised data of 26 conventional banks and 16 Islamic banks from Malaysia from 2012 to 2020. A Random Effect model was used to investigate the difference between conventional and Islamic banks’ non-performing loans as well as the influence of ownership on non-performing loans of conventional and Islamic banks. Results showed no significant differences for non-performing loans of conventional and Islamic banks. This result implies that despite the fact that Islamic banks may benefit from lower agency costs, this does not considerably decrease the likelihood of non-performing loans. Foreign Islamic banks shows higher non-performing loans in comparison to domestic Islamic banks. However, there were no significant differences for non-performing loans between foreign conventional and domestic conventional banks. This study suggests that Islamic bankers, particularly those intending to expand into other countries, investigate nonperforming loans, which can impact the risk of a foreign Islamic bank.

Private credit in dual banking countries: Does bank ownership type matter?

AbstractThis study investigates how the effects of government and foreign bank ownership on private credit vary in the cases of Islamic and conventional banks using data extended from Claessens and van Horen (2014) of 29 dual banking countries from 1995 to 2017. In support of the political view of financial development, we find that the presence of state‐owned Islamic banks seem to be slightly less harmful to private credit flows than their conventional peers, particularly in the period after the global financial crisis. We also document evidence showing that countries with a larger foreign Islamic bank presence tend to have deeper credit markets postcrisis. However, such advantages may often be outweighed by the costs associated with increased penetration by foreign conventional banks.

Islamic finance in the post-Soviet Central Asia and Transcaucasia: the evidence from Kyrgyzstan

PurposeOver the past decades, Islamic finance has expanded its presence to many countries including Muslim-majority post-Soviet Central Asian and Transcaucasian region. Undoubtedly, this expansion has aroused keen interest among the representatives of a range of areas such as science, politics and business. The purpose of this paper is to describe the scope, the key players and the main investment strategies of the Islamic finance market based on the evidence obtained from Kyrgyzstan.Design/methodology/approachThe main empirical corpus was formed from Bureau van Dijk’s databases (Zephyr and Orbis) and includes approximately 80 deals involving Shariah-compliant investments in Kyrgyzstan from 1991 to 2020. The initial corpus was then significantly expanded by means of content analysis of open media sources. Being still insufficient for deeper generalization, these data were further complemented by the analysis of an array of corporate information (press releases, presentations and financial reports) related to the identified deals. To ensure the credibility of the conclusions to be made on the nature of Islamic finance in Kyrgyzstan, the desk analysis was also complemented with field research using qualitative method of in-depth expert interviews.FindingsThis paper has shown that despite the yet modest market volumes represented by Islamic bank, Islamic windows, Islamic leasing company and microfinance companies, Islamic finance in Kyrgyz Republic has further growth prospects, which are associated with the arrival of large foreign Islamic banks that bring innovative financial products, the issuance of Islamic securities (sukuk) and launch of Islamic insurance (takaful). Being more open and consistent in the development of Islamic finance industry, the authorities of Kyrgyzstan understand the need for the initial development of the market by their own forces.Originality/valueThis paper is original and up-to-date, as it contains new and significant information. Suggesting a new approach to studying Islamic finance in post-Soviet area, this paper identifies the most active Islamic investors in Kyrgyzstan, classifies them, reveals their investment strategies and assesses the financial performance of Islamic investors as well as the total volume of Shariah-compliant capital in Kyrgyzstan. The findings of this paper can contribute to shaping policies toward Islamic finance in the post-Soviet region and, therefore, may be beneficial to the development of Islamic finance industry.

Ownership in Islamic banks: how home country development influences the performance of foreign Islamic banks

PurposeThis study aims to assess the performance of domestic and foreign Islamic banks as well as the influence of foreign banks’ home country development influence on the performance of foreign banks.Design/methodology/approachThis study uses data of 17 domestic Islamic banks and 11 foreign Islamic banks from Bahrain, Malaysia and Pakistan from 2010 to 2018. Pooled ordinary least square is used to investigate the relationship between home country development and performance of foreign Islamic banks.FindingsResults from this paper suggest domestic Islamic banks in Malaysia have higher performance than their foreign counterparts while foreign Islamic banks from Pakistan have higher performance than their domestic counterparts. However, as a whole, the performance of domestic and foreign Islamic banks is not significantly different from one another. Development of foreign banks’ home country measured by gross national income per capita and gross domestic product per capita show significant positive influence on the performance of foreign Islamic banks.Originality/valueHigher level of development of the home country of foreign banks appears to influence the performance of foreign banks in the host country.

Domestic versus Foreign Islamic Banks: Do they have the same Profitability Determinants?

The liberalisation of the Islamic banking industry in Malaysia has given rise to the emergence of many foreign Islamic banks in the country, raising a major concern regarding its impact. This study investigates the impact of bank-specific and macroeconomic factors on bank profitability from 2005 to 2017. Unbalanced panel data of eleven domestic and six foreign Islamic banks have been employed to achieve the study's objective. The findings show that different factors influence the profitability of domestic Islamic banks and foreign Islamic banks. While internal factors significantly affect the profitability of domestic Islamic banks, the profitability of the foreign Islamic banks is more stable and less affected by internal and external factors. The findings provide insights to domestic Islamic banks to improve their operations, profitability, and competitiveness. These banks' better operational efficiency and performance will consequently improve the overall Islamic banking industry.

Corporate social responsibility disclosure and Islamic banks: a case study of Pakistan

PurposeThis paper aims to gauge the level of corporate social responsibility (CSR) disclosure of Islamic banks of Pakistan.Design/methodology/approachThe annual reports of Islamic banks of Pakistan from the year 2003 to 2017 were considered as the source of data. The content analysis method was used to gauge the level of CSR disclosure with the help of the CSR disclosure index. Islamic banks proclaim religiously motivated and ethical institutions; hence, full disclosure was expected from Islamic banks in the domain of CSR.FindingsThe average level of CSR disclosure of Islamic banks after a one-and-a-half decade of Islamic banking in Pakistan is 31.23%, which is far below the expected level of CSR disclosure and even below the mean level. The mean comparison analyzes show that the level of CSR disclosure differs among the Islamic banks, old and large Islamic banks are disclosing more information, in addition, the local Islamic banks have a relatively high level of CSR disclosure as compare to the foreign Islamic banks.Research limitations/implicationsThe current CSR disclosure policy of the government regarding corporations in Pakistan is insufficient. There is a need to revise this policy which may result in higher CSR disclosure. The results indicate, that there is a difference in CSR disclosure among local and foreign Islamic banks, so this policy must address this aspect as well.Originality/valueIslamic banking proclaims a new wave of the corporate that has higher social objectives, but a contradiction exists among the ideology and reality of social responsibility of Islamic banks. Then, this study also supports that the same dilemma of low CSR disclosure also prevails in the Islamic banks of Pakistan.

PENGARUH NPF DAN FDR TERHADAP PROFITABILITAS (ROA) BANK UMUM SYARIAH DI INDONESIA (Studi Pada Bank Umum Syariah Yang Terdaftar Di Indonesia Periode 2010- 2019)

The purpose of this study was to axamine the effect of Non Perfoming Financing (NPF) and Financing to Deposit Ratio (FDR) on profitability (ROA) islamic commercial bank in Indonesia. The sample in this study was 4 banks including the foreign Islamic banks in Indonesia. Teh analysis tehcnique used in this study is the multiple linier regression analysis. The results of this study indicate that the NPF and FDR simultaneous influance on ROA. Parsian NPF has a significant negative effect on ROA and FDR has no effect on the ROA.

Behavioural intention and adoption of internet banking among clients’ of Islamic banks in Malaysia: an analysis using UTAUT2

PurposeThis study aims to investigate the behavioural intention and adoption of internet banking (IB) among clients of local and foreign Islamic banks in Malaysia.Design/methodology/approachSurvey questionnaires were distributed among the Islamic banks’ clients at two main states, namely, Kuala Lumpur and Selangor. The number of clients involved is 319 (n = 319). The data was analysed using the partial least square (PLS) and theoretically, the research framework in this study is guided by the unified theory of acceptance and use of technology 2 (UTAUT2).FindingsThe smart PLS analysis yielded three main outcomes, namely, the variables such as performance expectancy, effort expectancy, price value, facilitating conditions and habit have a positive influence over the behavioural intention and subsequently lead to the adoption of IB. The other two variables, namely, social influence and hedonic motivation were negatively-related and insignificant for behavioural intention. Third, this paper also noticed that facilitating conditions and habits have a direct relationship with the adoption of IB.Practical implicationsBased on the findings, Islamic banks can take necessary action to design a better policy to further accelerate the usage of IB among their client. By identifying those factors, this, perhaps, can allow Islamic banks to invest more ideas on those significant factors that influence their interest, and subsequently leads to good business to Islamic banks as the clients nowadays are looking for simplicity and convenience factors when using IB.Originality/valueThis research is expected to enhance existing literature on internet banking, especially in Islamic banking research on the technological edge. Limited research has been done in Malaysia, particularly on the intention and continuous adoption of IB in Islamic banks using the UTAUT2 framework. This would be breakthrough research in identifying factors that influence customers’ continuous adoption of IB.

Shariah Governance Characteristics and Risk-Taking of Local and Foreign Islamic Banks in Malaysia: A Conceptual Model

Purpose: In Malaysia, since the global financial crisis in 2007 and 2008, the low level of stability, excessive risk-taking and weak governance structure in the dual banking system has become essential for deliberation. The purpose of this research is to develop a conceptual model on the effect of Shariah governance characteristics on risk-taking between local and foreign of Islamic banks in Malaysia.
 Design/Methodology/Approach: Based on prior review of indicators and findings, this research proposes a conceptual model of effective Shariah governance characteristics and its effect on risk-taking of Islamic banks. A self-develop of Shariah board index (SB-Index) based on SB size, education background, membership with IFSB and attendance in meeting. Insolvency risk, credit risk and liquidity risk are the proxy used for risk-taking measurement. The theory of stewardship and resource dependency theory are used as examples of the theories of corporate governance to support the conceptual framework suggested.
 Findings: The Islamic banks in Malaysia are assumed to have effective Shariah governance and there will be low impact on risk-taking.
 Implications/Originality/Value: The regulators of Islamic banks must prepare for the need to improve the current standards for corporate governance in Malaysia.

Assessing Shariah Disclosure in Pakistan: The Case of Islamic Banks

The foundation of Islamic banking and finance is based on the Islamic law of business transactions/ muamlat, which also confines to the moral and ethical codes of Islam. Also, the involvement of Shariah and Islamic ethics in the governance structure of Islamic banks gives rise to a special kind of disclosure issue called Shariah disclosure. The literature suggests, that stakeholders, including customers and shareholders, use Shariah disclose as core criteria to direct their transactions with Islamic Banking Institutions (IBIs). However, the available disclosure indices in the established literature are not insufficient for assessing Shariah disclosure of the IBIs. The present research study attempts to assess the level of Shariah disclosure of five full-fledged Islamic banks in Pakistan. For this purpose, the study developed Shariah Disclosure Index (ShDI). ShDI will be used as the basis upon the disclosure requirements of State Bank of Pakistan (SBP), Accounting and Auditing Organizations for Islamic Financial Institutions (AAOIFI), and Islamic business reporting literature. A survey design is used to collect the data for ShDI constructs by utilizing annual reports of the five full-fledged banks from the year of 2015 until 2017. The findings disclosed that the Shariah disclosure in Pakistani Islamic banks is satisfactory i.e., near 70% compared 30% Shariah disclosure of the foreign Islamic banks operating in Pakistan. It is appreciable that all the Islamic banks, particularly Pakistani Islamic banks, disclosing about 80%-90% of the SBP mandatory and AAOIFI recommended Shariah disclosure items. While, disclosure of the voluntary Shariah disclosure items are still very low i.e. 15%. It is also noted that the Shariah disclosure level was gradually improving which portrays in the increment of the average Shariah disclosure level in 2017 compared to2015. The research provides a benchmark and indicator for all stakeholders who are making their investment and business decisions In addition, the study is equally important for IBIs to comply with ShDI to ensure full Shariah disclosure in order to attract new investors, religiously excluded investors, and protect the ideological stance and religious commitments of the existing customers as well.

A Reconsideration of Middle Eastern Islamic Bank Practices in Malaysia

Middle Eastern Islamic banks’ contributions to product development in Malaysia have been frequently highlighted; nonetheless, there has been a research gap on the adaptation of foreign Islamic banks to the Malaysian market. This study examines this aspect through a case study of the practices of Kuwait Finance House Malaysia Berhad (KFHMB) among these foreign banks. The results of this exploration highlight the impact of Malaysian business customs and culture on KFHMB’s banking product selection, especially on the retail banking side. The findings herein imply that regional differences in products between Malaysia and the Middle East derive from differences in market environments rather than from mere differences in Islamic jurisprudence, as previous studies claim. Ultimately, this study asserts the value of an ethnographic approach to studying Islamic banks’ adaptation to foreign markets, especially considering the KFHMB’s dilemma of facing religious ideals versus market realities.

Competition and market structure of the Malaysian Islamic banking industry

PurposeThis paper aims to investigate the impact of competition in the Malaysian Islamic banking industry and the market structure of the industry by focusing on the particular impact created by the entrance of fully fledged foreign Islamic banks plus the introduction of Islamic subsidiaries of existing conventional banks in the country (domestic and foreign ownership).Design/methodology/approachUsing a sample of 16 Islamic banks in the country that operated between 2008 and 2015, this paper measures the competition among the Islamic banks using the Panzar-Rosse Model and by looking at the market structure of the industry using the k-bank concentration ratio and the Herfindahl-Hirschman Index.FindingsThe study found that between 2008 and 2015, the Malaysian Islamic banking industry operated in monopolistic competition conditions with a moderately concentrated market structure. The introduction of foreign Islamic banks caused the market structure to become more competitive and less concentrated by comparing the results that include foreign Islamic banks against the results generated with a subsample of domestic Islamic banks only. Bank Negara Malaysia’s (BNM’s) financial reform and the liberalisation of the financial system were proven to induce competition making the financial system more resilient, competitive and dynamic. The Islamic banks have recorded consistently increased annual performance with the under-performing Islamic banks catching up on the top performers.Originality/valueVery few research studies have focused on the market structure and competition of the Islamic banking industry in Malaysia, especially using recent financial data; this study will contribute to filling the existing gap.

Shariah Governance Characteristics and Risk-taking of Local and Foreign Islamic Banks in Malaysia: A Conceptual Model

Purpose: In Malaysia, since the global financial crisis in 2007 and 2008, the low level of stability, excessive risk-taking and weak governance structure in the dual banking system has become essential for deliberation. The purpose of this research is to develop a conceptual model on the effect of Shariah governance characteristics on risk-taking between local and foreign of Islamic banks in Malaysia.
 Design/Methodology/Approach: Based on prior review of indicators and findings, this research proposes a conceptual model of effective Shariah governance characteristics and its effect on risk-taking of Islamic banks. A self-develop of Shariah board index (SB-Index) based on SB size, education background, membership with IFSB and attendance in meeting. Insolvency risk, credit risk and liquidity risk are the proxy used for risk-taking measurement. The theory of stewardship and resource dependency theory are used as examples of the theories of corporate governance to support the conceptual framework suggested.
 Findings: The Islamic banks in Malaysia are assumed to have effective Shariah governance and there will be low impact on risk-taking.
 Implications/Originality/Value: The regulators of Islamic banks must prepare for the need to improve the current standards for corporate governance in Malaysia.

The Impact of Ownership Risk in True Sale-Based Financing on Profit Charges: A Structural Equation Modelling (SEM) Approach

The fundamental principle of true sale is based on the ownership state of the subject matter of sale where the selling party must own the asset legally and keep full ownership of the goods before making the sale. In the riba-free system, the Islamic bank assumes a role of a trading entity. It undertakes a trading position and exposes itself to business risk as the asset is booked on its balance sheet. It follows that the profit rate it charges the customer will reflect an additional risk-premium to account for the business risk exposure. Due to business risk exposure, this study introduces the financial infrastructural constraints on the use of true sale-based Islamic financing namely 1) economic capital requirement for the on-balance sheet holding of tradable assets and 2) the tax charges by the fiscal authority on the purchase of tradable assets by the bank. Thus, based on this premise, the objective of this study was formulated to empirically investigate the impact of these constructs (cost of fund, overhead, default risk, capital charges, tax burden and profit rate) on profit rate of true sale-based financing. A Survey questionnaire and a semi structured interview were the tools used for data collection. The analysis was done by using Structural Equation Modelling (SEM) technique and the findings revealed that all independent variables except for cost of fund, have positive and significant impacts towards profit rate charged. Given the findings of this study, it is recommended that the true sale-based Islamic financing is to be funded by investment fund rather than deposit fund. Hence, the additional capital and tax charges will be absorbed by the investors. From this study, we hope that future research could be expanded further by investigating cross border Islamic banking practices in terms of the pricing of true sale model and closer comparison can be made between Malaysian Islamic banks and Foreign Islamic banks.

THE RELATIONSHIP OF RISK MANAGEMENT AND BANK PROFITABILITY PERFORMANCE BETWEEN DOMESTIC AND FOREIGN ISLAMIC BANKS IN MALAYSIA

Purpose: This study is to determine the effects of risk management towards the domestic and foreign Islamic bank’s financial performance in Malaysia. The ten Islamic banks in Malaysia have been chosen as the sample bank in which domestic and foreign banks were equally divided. The credit risk, liquidity risk as well as solvency risk acted as the independent variables to determine the effects towards the bank’s profitability as measured by return on equity.
 Methodology: The panel data analysis has employed fixed effect and random effect regression models and the Hausman test in this study. Furthermore, the independent sample T-test was conducted to examine the significant difference between domestic and foreign Islamic banks.
 Result: The finding of this study showed that liquidity risk and insolvency risk would have a greater impact towards the Islamic bank’s profitability while the credit risk has no significant influence on Islamic bank’s financial performance in Malaysia. The study concludes that domestic Islamic banks had better financial performance as compared to foreign Islamic banks in Malaysia.
 Applications: This research can be used for universities, teachers, and students.
 Novelty/Originality: In this research, the model of The Relationship of Risk Management and Bank Profitability Performance between Domestic and Foreign Islamic Banks in Malaysia is presented in a comprehensive and complete manner.

Do bankruptcy profiles of Islamic banks differ across organizational structure? evidence from Malaysia

Malaysian Islamic banks operate in different organizational structures, namely domestic, locally foreign incorporated, and development financial institutions which may have an influence on their stability. This research evaluates the bankruptcy profiles of 19 selected Malaysian Islamic banks from 2010 to 2017 and analyses the insolvency risk associated with the three different organizational structures. Using the Altman’s Z-Score Model (2000), a stability test was conducted. Finding s /Originality: the paper finds that, on average, the development financial institutions were the most stable banks, followed by foreign Islamic banks. It also finds that bigger domestic Islamic banks were situated in the safe zone as they had high Z-score values. Furthermore, asset quality ratio contributed to higher Z-score values. An appropriate asset-liability management therefore helps ensure the stability of Islamic banks in Malaysia. An effective macroprudential supervisory regime must also be in place to increase the resilience of the financial system.

ANALISIS PERBANDINGAN BANK SYARIAH NON DEVISA DAN BANK SYARIAH DEVISA DITINJAU DARI KINERJA FUNGSI BISNIS DAN FUNGSI SOSIAL DENGAN METODE RGEC DAN SHARIA CONFORMITY INDIACTOR PERIODE 2011 – 20151)

This study aims to compare and see the differences between foreign Islamic bank and non-foreign Islamic bank using method RGEC (Risk Profile, Good Corporate Governance, Earnings, and Capital). This study examines the comparison in business and social performance of four foreign Islamic banks and six non-foreign Islamic banks. The collection of data in this study was done by collecting all the annual reports of banks that has been created as a sample over the period 2011-2015.The test result of the Independent Samples T-test and Mann Whitney Test showed there was no differences in the business performance of foreign Islamic banks exchange with Non-foreign Islamic Bank exchange as seen from the aspect of Risk profile (FDR), GCG, and Earnings (ROA). While there were differences of business and social performance as seen from Earnings (ROE), capital (CAR), and Sharia Conformity Indicator (PSR and ZR) aspects

A Descriptive Study on Bank Performance in Malaysia: Domestic vs. Foreign Islamic Banks

Malaysia’s determination to become a hub for Islamic banking in Southeast Asia has led the Central Bank of Malaysia to grant licenses to foreign Islamic banks to operate in the country. Due to the intense competition among Islamic banks, the introduction of more innovative products is projected to tap investment opportunities not only for Malaysia but also for the rapidly growing Southeast Asian region. This paper assesses the performance of Malaysian Islamic banking industry since the introduction of the first Islamic bank two decades ago by using financial ratios. The ratios are divided into four categories; profitability, liquidity, risk and solvency, and commitment to economy and Muslim community. All 16 Islamic banks as listed by Bank Negara Malaysia were selected in the sample and to get the maximum number of observations, the period of 2005 to 2012 is selected. The chosen financial ratios indicated that domestic Islamic banks performed better during the 2005 to 2012 period in terms of profitability, but the foreign Islamic banks excelled in terms of liquidity, risk, and solvency ratios.

Bank Efficiency in Malaysia a DEA Approach

Abstract The purpose of the present paper is to examine the revenue efficiency of the Malaysian Islamic banking sector. The study also seeks to investigate the potential internal (bank specific) and external (macroeconomic) determinants that influence the revenue efficiency of Malaysian domestic Islamic banks. We employ the whole gamut of domestic and foreign Islamic banks operating in the Malaysian Islamic banking sector during the period of 2006 – 2015. The level of revenue efficiency is computed by using the Data Envelopment Analysis (DEA) method. Furthermore, we employ a panel regression analysis framework based on the Ordinary Least Square (OLS) method to examine the potential determinants of revenue efficiency. The results indicate that the level of revenue efficiency of Malaysian domestic Islamic banks is lower compared to their foreign Islamic bank counterparts. We find that bank market power, liquidity, and management quality significantly influence the improvement in revenue efficiency of the Malaysian domestic Islamic banks during the period under study. This study provides for the first time empirical evidence that covering all three efficiency concepts, namely cost, revenue, and profit efficiency is completely missing from the literature. By calculating these efficiency concepts, we can observe the efficiency levels of the domestic and foreign Islamic banks. In addition, by comparing both cost and profit efficiency, we can identify the influence of the revenue efficiency on the banks’ profitability.