ISRA International Journal of Islamic Finance

Contribution of Islamic Finance to Inclusive Growth: A Comparative Study of the West African Economic and Monetary Union (WAEMU) and North African Countries

Ali Bamba Youssouf — 2024-03-29

ABSTRACT

Purpose — In recent years, economic growth in the West African Economic and Monetary Union (WAEMU) has been positive, but the precariousness of the population has remained virtually unchanged. Thus, the search for inclusive growth should be considered, and that is the subject of this comparative study to determine the contribution of Islamic finance to inclusive growth.

Design/Methodology/Approach — First, this paper sets up an inclusive growth index to undertake a comparative study between WAEMU countries and North African countries before and after the integration of Islamic finance in order to examine the impact of Islamic finance in these countries. The paper then compares these two areas, WAEMU countries and North African countries, variable-by-variable, using a Student’s t-test over the period 2010–2023. The group of North African countries included in this study is found to have a high Islamic finance development indicator compared to the WAEMU zone.

Findings — The results show that growth is more inclusive in North African countries. However, the lack of data on Islamic financial institutions operating in the countries examined makes it impossible to determine the extent of their contribution to the economies of these countries.

Originality/Value — The studies that have dealt with this topic have been limited to the relationship between finance and the components of inclusive growth. Others have chosen the quality of economic growth as the variable for inclusive growth. However, this study goes beyond that by showing the influence of Islamic finance on an index of inclusive growth that takes into account eight components. This adds value to the existing literature.

Sustainable Islamic Financial Engineering with Special Reference to Gulf Cooperation Council’s Economies

Imene Tabet — 2024-03-29

ABSTRACT

Purpose — This paper explores how Islamic economics and finance, when developed as an embedded framework for regenerative development in line with maqāṣid al-Sharīʿah (the objectives of Islamic law), can facilitate the design of sustainable contracts and Islamic financial engineering. This framework provides a mechanism to achieve the paradigm shift advocated by Islamic finance scholars to accommodate the sustainability agenda into the practical applications of Islamic economics and finance. The paper specifically focuses on the Gulf Cooperation Council’s (GCC) economies.

Design/Methodology/Approach — This study employs an analytical research approach to evaluate the compatibility of Islamic social and commercial finance with sustainability objectives. The analysis is primarily qualitative and relies on the One Earth Framework proposed by Simpson et al. (2021) to structure the assessment of opportunities and challenges related to sustainability that Islamic economics and finance in the GCC region can help address.

Findings — The paper highlights the potential of Islamic economics and finance as an embedded framework to address sustainability challenges in the GCC countries. By examining the capacity of Islamic finance to accommodate sustainability pathways, it elucidates avenues for integrating sustainable practices within Islamic financial contracts and institutions.

Originality/Value — One of the key contributions of this paper is the introduction and development of Islamic economics and finance as an embedded framework. This pioneering concept not only lays the groundwork for a practical mechanism but also signifies a fundamental step in realising the paradigm shift within Islamic finance. This transformative approach enhances the relevance and effectiveness of Islamic finance in fostering sustainability, marking a significant advancement in the field.

Research Limitations — While the study provides valuable insights, it primarily follows an analytical approach and does not involve quantitative analysis. It serves as a starting point for further research on the integration of sustainability objectives in Islamic finance.

Practical Implications — The paper suggests practical implications for Islamic finance stakeholders, highlighting the potential for sustainable contract design and financial engineering.

Keywords — Islamic finance, Islamic financial engineering, Natural capital, Regenerative development, Sustainable contract design

Article Classification — Conceptual paper

Sustainable Investing and Islamic Finance: Evidence from the Organisation of Islamic Cooperation (OIC) Countries

Yuwen Dai — 2024-03-29

Sustainable investing and Islamic finance have been two of the fastest-growing areas of finance. In Islamic finance, equity markets play an important role. In the literature on Islamic equities, there are relatively few studies that have integrated sustainability factors into Islamic finance. In this paper, our objective is to contribute to the line of research on the integration of sustainable investing into Islamic finance. To that end, we first examine the comparative performance of investing in the sustainability indices from those Organization of Islamic Cooperation (OIC) countries that are partners of the Sustainable Stock Exchanges (SSE) initiative. We then conduct a case study of Borsa Istanbul in Turkey, which has the best-performing sustainability index from OIC countries. Overall, our findings reveal the heterogeneity in sustainable investment performance, and suggest the potential of obtaining superior risk-adjusted returns in certain economies from OIC countries. This study draws implication on how sustainable investing can help bridge the gap between Islamic and conventional financial markets.

Assessing Libya’s First Ṣukūk: Sharīʿah Compliance and Financial Viability

Mohamed Faraj Lemhishi — 2024-03-29

ABSTRACT

Purpose — This study aims to assess the first ṣukūk issuance in Libya from two main perspectives: the compliance of the ṣukūk with the Sharīʿah and its compliance with the Libyan legal system. Further, the study evaluates the adequacy of the provided financial disclosures to assess the feasibility of the ṣukūk issuance.

Design/Methodology/Approach — A qualitative case study methodology was used to assess the ṣukūk issuance in question. For the assessment of disclosure adequacy, a tailored model was devised featuring main and subsidiary points of interest.

Findings — The Sharīʿah assessment findings suggest potential non-compliance issues within the ṣukūk issuance. Additionally, there are significant gaps in the disclosure of key financial aspects related to both the ṣukūk originator and the project, potentially hindering stakeholders from gaining a comprehensive understanding of the issuance’s feasibility.

Originality/Value — One unique advantage of this paper is that it is the first to gain access to the actual documentation of ṣukūk issuances in Libya.

Research Limitations/Implications — The study’s scope was constrained by a scarcity of data and documents from Libyan parties.

Practical Implications — After analysing the ṣukūk issuance, a framework of Sharīʿah and financial disclosures was developed. The application of the proposed framework can be extended to effectively assess other comparable ṣukūk offerings within the Libyan legal system.

Social Implications — Libyan policymakers are recommended to strengthen the regulations governing forthcoming ṣukūk issuances. The proposed improvements should include mandating comprehensive disclosures regarding the financial viability of the ṣukūk issuance and ensuring ample disclosures to guarantee full adherence to Sharīʿah principles.

Analytical Study of the Implementation of AAOIFI’s Ethical Standards in the Algerian Islamic Banking System: Assessment and Recommendations

Abdelhak Boudjelida — 2024-03-29

Purpose ‒ The application of ethical requirements is a key way for all stakeholders in the Islamic financial industry to build trust and promote integrity. This study aims to assess the extent to which the Algerian banking system has adopted the ethical standards for Islamic financial transactions issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Design/Methodology/Approach ‒ This study conducted an analytical reading. It utilised the descriptive approach to present the study's variables and employed the analytical approach to discuss the various concepts and legal regulations that govern the banking sector and to provide recommendations that would help to build a solid foundation for the banking system.

Findings ‒ The findings revealed that the Algerian monetary authority is committed to gradually promoting Islamic banking regulations in a thoughtful manner. However, the study also found that there is a lack of clarity regarding the adoption of regulatory laws in Algeria for the ethical standards issued by AAOIFI, even within the 2023 Monetary and Banking Act.

Originality/Value ‒ To the best of the authors’ knowledge, this paper is the first study to assess the extent to which the Algerian banking system has adopted the ethical standards for Islamic financial transactions issued by AAOIFI.

Research Limitations/Implications ‒ The primary limitation of this research is its exclusive focus on the Algerian banking system and its reliance on secondary data.

Practical Implications ‒ This research offers valuable insights for those in decision-making roles. It recommends the establishment of a committee of experts to develop standards tailored to the Algerian Islamic banking environment. The committee should be financially independent and under the supervision of the monetary authority. Additionally, the study suggests the issuance of a code of ethics to govern the professional conduct of Islamic banks (IBs) and Islamic financial institutions (IFIs) in accordance with Sharīʿah.

Blockchain Use Case in Islamic Social Finance

Dr Sherin Kunhibava — 2024-03-29

Purpose: This research explains and reviews two innovative solutions based on blockchain that were used for Islamic social finance projects by two separate companies namely Finterra and Blossom Finance. Policy implications are suggested for the future use of blockchain in innovative financial products for the Islamic financial industry.

Design/methodology/approach: This is qualitative research conducted through library research and semi-structured interviews with experts and founders of Finterra and Blossom Finance. Data obtained from published literature and the interviews were accordingly examined and interpreted through content analysis and the results are presented in this research.

Findings: There is rising interest in Islamic social finance for economic revival post COVID-19 pandemic. Innovation through technology seems to be the future of Islamic social finance. Innovation through blockchain technology would see a renaissance in Islamic social finance, hence the need for relevant stakeholders to understand the technology. However, there is a regulatory gap in terms of proper legal framework to support blockchain related innovations in Islamic social finance and a policy gap to manage Shariah and legal risks involved in Islamic social finance transactions.

Originality: This research is original because it explains unique case studies from the source of innovation itself, and analyses the hurdles that were present and offers recommendations for future use of innovative technology in the Islamic financial sector.

Keywords: Blockchain technology, Blossom Finance, Finterra, Islamic Social Finance, Regulatory and Policy Issues

AI Applications for Fiqh Rulings in Islamic Banks – Shariah Committee Acceptance

Othman Abdullah — 2024-03-29

Purpose ‒ The objective of this paper is to study the acceptance of applications of AI in the fiqh ruling process of Islamic banking, among Shariah committees (SC) members of Islamic banks

Design/Methodology/Approach ‒ This is a qualitative study using focus group interviews with ten SC members from different Islamic banks. Following the interviews, a thematic analysis of the transcribed data was conducted using computer-assisted qualitative data analysis software (CAQDAS).

Findings ‒ The participants were generally receptive towards the utilization of AI tools in the fiqh ruling process at Islamic banks. The participants recognize the potential of AI smart assistants for improving the efficiency and effectiveness of the fiqh ruling process. However, they raised some concerns and expectations that need to be addressed.

Originality/Value ‒ The novelty of this research comes from sourcing first-hand perspectives of SC members of Islamic banks in Malaysia. Being the end users of AI systems for the fiqh ruling of Islamic banking, it is important to understand their perceptions, concerns, and expectations

Research Limitations/Implications ‒ The size of focus group was limited to ten participants to optimize group size and composition in order to allow adequate participation by each group member. Further sampling from more SC members may elicit additional findings

Practical Implications ‒ The first-hand views from the target users provides valuable input for initiatives developing AI systems for the fiqh ruling process of Islamic banking

ESG and ESG controversies on firm risks in the emerging markets: The moderating roles of Shariah screening and legal origins

Siew-Peng Lee — 2024-03-31

Purpose – This study examines the impact of environmental, social and governance (ESG) and ESG controversies on firm risk, and proposes the moderating roles of Shariah screening and legal systems over the relationship.

Design/Methodology – The research data were 522 firms from 16 emerging markets over the period 2013-2021 (4689 observations). The data (i.e., ESG, financial data, etc.) obtained from the Refinitiv Eikon database. The panel regression model was used to examine the relationships of variables studies.

Findings – We find that ESG is negatively related to risks while ESG controversy is positively related to risks. This suggests that when firms engage in more ESG activities, stakeholders’ relationships are reinforced, and lead to reduced firm risks. Further, this study also finds that both Shariah screening and legal environment play significant moderating roles in reducing risks via their influence on ESG and ESG controversies. The evidence is consistent with the stipulation that Shariah-compliant firms are more inclined to engage in ESG activities.

Originality/Value – This study is unique as it is an attempt to examine the moderating role of Shariah screening and legal system in influencing the impact of ESG and ESG controversies on firm risk.

Practical Implications – The findings suggest engaging more aggressively in ESG activities can benefit from their risk mitigating effect. Further, the present evidence of the positive impact of Shariah screening in mitigating risk via ESG and corporate controversies. This evidence lends credibility for firms to be considered as Shariah-compliant.

Editorial

Dr Salma Sairally — 2024-03-31

بسم الله الرحمن الرحيم

In the Name of Allah, Most Gracious, Most Merciful

RESEARCH QUALITY AND IMPACT

Excellence in research quality and consideration of the practical and social impact as well as the original contributions to the field of knowledge are important determinants in the evaluation of a manuscript for publication. Journals seek to publish manuscripts of high quality to increase their readership, attract high calibre authors, and importantly, increase their impact through more citations, thus getting them to be included in high-ranking index databases.

A study by Margherita et al. (2022) specifically examined what represents quality in research practice and what are its characteristics. The authors proposed a multi-dimensional understanding of research quality and found 66 quality attributes that can be grouped into three aspects in the conduct of research:

the research design: this relates to the conceptualisation of the research, its aims, methodology and assumptions, and would include attributes such as objectivity, interdisciplinarity, stringent argumentation, etc.
the research process: this relates to the execution of the research activities, and would include attributes such as clarity, coherence, rigourousness, thoroughness, originality, conformance to ethics, etc.
the research impact: this relates to the influence on academia, practitioners and the society, and would include attributes such as usefulness, novelty, generalizability, dissemination potential, social/political/educational/practical significance, etc.

While the above study presents a comprehensive framework for determining research quality, historically, quantitative evaluation of academic research quality (and productivity of authors) has been based on an analysis of the number of publications and their received citations, measured by an author’s H-index. The H-index, short for Hirsch index, was developed by J.E.Hirsch as a quantitative metric to provide ‘an estimate of the importance, significance, and broad impact of a scientist’s cumulative research contributions’ (Hirsch, 2005, p. 16569). It includes an assessment of both the quantity of publications (by taking into account the number of papers published) and an approximation of the quality of those papers (by assessing their impact on the target audience, measured by the number of citations to these articles).