Fiat money: from the current Islamic finance scholars’ perspective

Purpose This paper aims to identify and analyze the similarities and differences of the liquidity risk determinants within conventional and Islamic banks. Design/methodology/approach This study uses a dynamic panel data approach to examine the relationship between liquidity risk and a set of bank-specific and macroeconomic factors during 2005–2015, by selecting 27 Islamic banks and 49 conventional ones operating in the MENA region. More specifically, the dynamic two-step generalized method of moment estimator technique introduced by Arellano and Bond (1991) is applied. Findings The results suggest that the set of bank-specific variables influences the liquidity risk of both banking systems, while macroeconomic factors determine the liquidity risk of conventional banks. Islamic banks are not affected by macroeconomic determinants. Practical implications The research facilitates to the academicians, practitioners and bankers to have an alluded picture about liquidity risk determinants and their management. The findings can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management in both banking systems. Indeed, the study makes them aware to manage liquidity risk differently between conventional and Islamic banks, as the results reveal different liquidity risk determinants. Originality/value Compared to the abundant studies on the determinants of credit risk, researchers have not sufficiently addressed the factors influencing liquidity risk. Moreover, none of these few research studies has discussed and compared liquidity risk determinants within both banking systems operating in the Middle East and North Africa (MENA) region. This leads us to identify the similarities and differences between conventional and Islamic banks in the MENA region in respect of systematic and unsystematic determinants of the liquidity risk. The value is attributed to the increasing differentiation between Islamic and conventional banks. Islamic banks are characterized with a different liquidity structure distinguishing them from their conventional counterparts.

PurposeThe purpose of this paper is to show that fractional reserve banking (FRB) has implications for the ownership structure of assets in the economy that violates the Islamic principles of ownership.Design/methodology/approachThis is a theoretical paper that looks into the works of Islamic scholars on the issue of ownership that are based on Qur'an principles and the traditions of the Prophet, and evaluates the FRB from that perspective.FindingsThe conclusion of the paper is that money creation through FRB is creation of purchasing power out of nothing which brings about unjust ownership transfers of assets, from the economy to the bank effectively paid for by the whole economy through inflation. This transfer of ownership is not based on human effort by taking on legitimate risks and neither with the knowledge nor the consent of the initial owners. This violates the ownership principles in Islam and is tantamount to theft. It also has the elements of riba. Islamic governments should therefore not create fiat money since this is equivalent to taking assets of the people, rich and poor alike, forcefully without compensation.Research limitations/implicationsEmpirical investigations into how bank loans along the years have changed the asset ownership structure in economies may shed further light.Practical implicationsIt is, therefore, important that Shariah scholars render a fatwa on both the fiat money and the FRB system. Such a fatwa is urgent and pertinent before Islamic banking and finance, that operate under these systems, takes a course that may prove difficult to reverse later. The Islamic economics and finance cannot be founded upon a money system that is fundamentally equivalent to theft and riba.Originality/valueThe paper shows how the operations of Islamic banking and finance within the fiat money, FRB system are invalid from the Islamic perspective.

Purpose Islamic finance growth depends on factors that are crucial for fostering positive perceptions and increasing acceptance, particularly in Muslim countries. This study aims to investigate the influence of awareness, knowledge, religion and the advantages on perceptions of Shariah scholars toward Islamic banks in Pakistan and the mediating role of attitude. Design/methodology/approach The study collected data through a questionnaire from 200 Shariah scholars in Pakistan who have completed or are currently enrolled in Islamic banking and finance courses. It employed exploratory and confirmatory factor analyses using SPSS and AMOS software to analyze the data to evaluate measurement and structural models, ensuring the validity and reliability of the constructs and testing hypotheses to examine the relationships among factors and perception. Findings The study identified a significant influence of knowledge and attitude on perception, thus supporting H3 and H9. H2, H6 and H8 indicate an insignificant impact of awareness, religious motivation and advantage on perception. This highlights the need for Islamic banks to bridge academic and industry gaps, ensuring that their promotional efforts emphasize monitoring by Sharia committees. The research revealed significant impacts of factors on attitude, confirming H1, H3, H5 and H7. Importantly, attitude was found to play a pivotal role as a mediator between factors and Shariah scholars’ perceptions of Islamic banking in Pakistan. Research limitations/implications By investigating the perspectives of Shariah scholars, this research seeks to provide insights into enhancing the understanding and development of Islamic banking practices within the context of Islamic principles and global financial landscapes. Originality/value This research contributes to the field by uniquely focusing on Shariah scholars’ perceptions of Islamic banking, addressing a significant gap in literature because little research has been conducted to address these issues from the Shariah scholars’ perspectives.

The notion behind Islamic finance is providing alternative Shariah-compliant financial services and products for those who do not willing to access conventional finance as it contravenes Shariah principles. Currently, Islamic finance is expanding throughout Muslim and non-Muslim countries. One of the most critical challenges of the Islamic financial sector is the extent of the compliance of Islamic finance practices with Shariah principles. Therefore, there should be a control mechanism for ensuring the compliance of the products and services provided by Islamic financial institutions with Shariah principles. Scholars argue that a Shariah governance framework should be applied by institutions engaged in Islamic finance in countries where Islamic finance is being practiced. Shariah governance framework is mainly categorized into two approaches centralized and decentralized Shariah governance framework. The availability of a centralized Shariah governance framework is essential in ensuring the application of Islamic finance in accordance with Shariah principles. Ethiopia is one of the countries that accommodated the application of Islamic finance through exclusively interest-free banking windows by conventional banks in 2011 and fully-fledged interest-free banks in late 2019. However, the National Bank of Ethiopia (NBE) did not specify any Shariah governance framework in any of its legislations. The unavailability of an established Shariah governance framework may expose the sector to Shariah non-compliance risk. This study investigates how to ensure Ethiopia's Islamic finance applications' compliance with the Shariah principles. Semi-structured interviews and document studies were conducted with 15 respondents, including experts in Islamic finance, Shariah scholars, and Islamic finance practitioners, to collect the needed data for this endeavor. The findings indicate that interest-free banks, especially interest-free banking windows, do not give the necessary attention to the issue of the Shariah governance framework. The presumed manifestations of Shariah compliance in Ethiopia are having Shariah advisory committee, using Arabic words and names for their products and services, declaring they are following the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board (IFSB) standards, and participating in corporate social activities. However, these claims are insufficient to argue that their products and services are Shariah-compliant, as long as an external authorized body should oversight and control their application. In addition, the results indicate that adapting the AAOIFI standards to the extent of industry development is recommended to ensure Shariah compliance in Ethiopia. Besides, considering responsible stakeholders in ensuring Shariah compliance, government/NBE and financial institutions engaged in Islamic finance are identified as primary stakeholders. On the other hand, the Ethiopian Islamic Affairs Supreme Council (EIASC), religious scholars and institutional Shariah advisors, interest-free professional associations, academicians in Islamic economics and finance, and educational institutions are considered secondary stakeholders. In addition, the findings also indicate that the policymakers' approaches of Türkiye, Malaysia, Kenya, and South Africa to the Islamic finance industry could be the best model for policymakers in Ethiopia. Establishing a centralized Shariah advisory committee under the NBE is recommended to ensure the compliance of interest-free finance applications with Shariah principles in Ethiopia. To this endeavor, all stakeholders such as government/NBE, financial institutions engaged in the Islamic finance industry, EIASC, religious scholars and institutional Shariah advisors, interest-free professional associations, academicians in Islamic economics and finance, and educational institutions should play a significant role by fulfilling their respective responsibilities.

This paper investigates the effect of income diversification on the performance of Islamic banks in Malaysia, Saudi Arabia, Kuwait, United Arab Emirates, Bahrain and Qatar where they operate alongside conventional banks in a dual banking system. Accounting data was drawn from 68 conventional and 42 Islamic banks from 1997 to 2009. The main focus was to see whether a greater reliance on non-financing income impacts on earnings quality and if so, how this may vary between Islamic and conventional banks. Commission and fee income, trading income and other non-financing income constitute non-financing income. For conventional banks, this is known as non-interest income, but in Islamic banking the payment and receipt of interest is prohibited so this 'other income' is referred to as non-financing income (that is, income unrelated to deposit-taking and loan granting). Islamic banks operate as universal banks and offer retail and wholesale financing plus investment banking services. Using various empirical approaches, we find that non-financing income positively influences banks' risk-adjusted performance on a net overall impact basis. Greater income diversification on its own, increases income volatility and this negatively impacts bank's risk-adjusted performance. Islamic banks are found to be more focused on deposit/loan financing and less diversified in terms of non-financing income activities compared to conventional banks. We find that Islamic banks appear to be less susceptible to earnings volatility given their lower diversified income source. Islamic banks have lower profitability (on average) on a risk-adjusted basis when compared to their conventional counterparts.

Banking is one of the essential elements of economic sustainability. Indonesia has two banking systems: banking with conventional principles and banking with sharia principles. Differences in the regulation of the system can affect the results of the bank's performance. So, it is necessary to analyze the comparison of bank performance to determine the significance of the differences. This research aims to present the findings of a financial performance analysis carried out on Islamic and conventional banks' financial statements in 2016-2020. This study analyzes by looking at financial performance ratios consisting of Capital Adequacy Ratio (CAR), Return on Assets (ROA), Return on Equity (ROE), Operating Costs, and Operating Income (BOPO), and Financing Deposit Ratio (FDR). ) using SPSS. 36. The results obtained are significant differences between CAR, ROA, ROE, BOPO, and FDR of conventional and Islamic banks. Islamic banks' CAR, ROE, BOPO, and FDR values are better than conventional banks, while conventional banks' ROA is better than Islamic banks.
 Keywords: Conventional Banks, Financial Performance, Islamic Banks

This study aimed at identifying the impact of the reserves of Islamic and conventional banks whose shares are listed on the Amman Stock Exchange on the book and market value of these shares for the period (2010-2018). The study included thirteen conventional banks and two Islamic banks. The study found that there is a statistically significant effect of reserves held by Islamic and conventional banks on the market price, an effect of 73.6% for Islamic banks and 16.5% for conventional banks. Also, the study found that a statistically significant effect appeared between the reserves of Islamic banks and their stocks’ book value; this effect did not appear with conventional banks. The study also found that there was no statistically significant effect between the change in the reserves of conventional and Islamic banks and the change in the market price, and there was no statistically significant effect between the change in the reserves and the change in the book value of both conventional and Islamic banks.

Financial crises have highlighted the fragility of the banking system, especially for the case of conventional and Islamic banks. So, the objective of this paper is to verify the existence of the contagion effect between Islamic and conventional banks in Kuwait. Then, we use the dynamic conditional correlation-generalised autoregressive conditional heteroscedasticity (DCC-GARCH) model to estimate the conditional dynamic correlation to assess the financial contagion for a sample composed of three Islamic banks and five conventional banks during the period of study from 31 March, 2004 to 18 March, 2014. The empirical results show that the correlation between the returns of Islamic and conventional banks in Kuwait increased between the period of calm and crisis. This finding implies the existence of a contagion effect between Islamic and conventional banks in Kuwait. Also, thus result implies that financial contagion represents a major source for the spread of the crisis between the Islamic and conventional banks in Kuwait.

Purpose This study aims to present insights for the preparation of ethical practices in the banking industry of gulf cooperation council (GCC) countries for profit maximization. This study presented information regarding ethical banking practices to determine to which extent banks in GCC countries practiced ethics. Design/methodology/approach This study followed a mixed-method approach, including both qualitative and quantitative data. For quantitative, data were collected from senior managers employed in 52 leading Islamic and conventional banks across the GCC countries, including the banks in the Kingdom of Bahrain and also from the banks in Kuwait. However, for qualitative analysis, an interview with an Islamic banking specialist was conducted. Findings The findings of both, qualitative and results from answer of respondents and quantitative results, that is, 91% of respondents strongly agreed that Islamic banks are more committed to ethical investments of projects, revealed that Islamic banks follow more ethical practices than conventional banks. Therefore, the mean score for EBP4 is 4.55 with moderate SD of 1.267. This statistical evidence is in favor that Islamic banks follow more ethical principles. Research limitations/implications Respondents were recruited randomly, and the samples consisted of only senior executives and not customers. Because of time and resource limitations, these executives were a sample of conventional and Islamic banks in the GCC only and not from other regions. Practical implications The results of this study provided valuable insights to conventional financial institutions, enabling them to enhance their operations as Islamic banks align with more ethical standards. Originality/value The research originality lies in its contribution for GCC countries by presenting a comparative view. This study defined and compared similarities and differences of Islamic and conventional banks to indicate how Islamic banks particularly implement more ethical standards than conventional banks.

Performance Analysis of Indonesian Islamic and Conventional Banks

Customer satisfaction is critically important for banks to stay competitive as the customer is the ultimate source of income for any organization. Islamic banking system and conventional banking system are considered as rival systems working in the same banking industry. In order for Islamic banks to compete successfully with conventional banks, Islamic banks must give extremely high consideration to their primary customers. Whenever either Islamic banks or conventional banks offer any product or service, its success depends upon the customer satisfaction towards that product or service. This study examines the level of customer satisfaction on Islamic banks as well as conventional banks in Malaysia. It also investigates the relationship between different demographic variables and the satisfaction of customers. A sample of 1,153 respondents from various cities representing different states in Malaysia was selected. The results in this study suggest that customers are mostly satisfied with the quality of services which include competency, friendliness, and efficiency of the staff of the Islamic and conventional banks.

PurposeThe purpose of this study is to investigate the value relevance of accounting information for Islamic, conventional and hybrid banks. It also investigates the moderation impact of IFRS adoption and AAOIFI mandatory adoption on value relevance of accounting information.Design/methodology/approachUsing value relevance models, The authors run panel data regressions on 47 Islamic banks, 112 conventional banks and 42 hybrid banks (conventional banks with Islamic windows). The study covers listed banks from 14 countries over the period 2010–2018.Findingspaper offers three empirical evidences. First, the authors find that value relevance of accounting information is higher for Islamic banks, compared to conventional banks. Second, the authors find that IFRS framework strengthens the relevance of accounting information in Islamic banks, but the authors did not find the same for hybrid banks. Third, the authors find that the mandatory adoption of AAOIFI accounting standards has a moderation effect on value relevance of accounting information for both Islamic banks and hybrid banks. The robustness analysis shows that there is a significant contribution of compliance with Islamic Finance rules in IBs and HBs, which substantially reduces managers' opportunistic behavior to manage accounting information.Research limitations/implicationsOne limit of this research is the reduced number of sampled listed IBs since the authors deleted countries that do not have both listed Islamic and conventional banks.Practical implicationsThe study is useful for investors that consider the Islamic ethical practices to make their investment decisions as well as for the standards-setting bodies that focus on establishing accounting standards for the Islamic banking industry.Originality/valueThe authors contribute to the value relevance literature by providing novel evidence on the value relevance in fully-fledged Islamic, fully-fledged conventional and hybrid Banks. The authors also provide new evidence on the moderating role of International Financial Reporting Standards (IFRS) and Auditing Organization for Islamic Financial Institutions standard (AAOIFI) for the value relevance of accounting information.

Purpose: To investigate the impact of the Islamic and conventional banks on the financial performance (ROA) of some OIC countries through ESG disclosures. Methodology/approach: This research uses a quantitative methodology based on panel data from annual and sustainability reports for banks in OIC member states, covering the years 2020–2023. Findings: Due to higher compliance costs, ESG disclosure negatively affects ROA in Islamic banks, whereas large banks overcome this through economies of scale. On the other hand, ESG improves ROA in conventional banks, but this advantage decreases with larger bank size. Practical implications: Islamic banks might leverage their scale to manage ESG expenditures, while conventional banks are better off pursuing the best ESG strategy until the point of diminishing returns. OIC regulators should design ESG frameworks to be compatible with the operational models of both banking systems. Originality/value: This study examines the approach it takes to compare the methods by which ESG values are transmitted through two different banking systems in the OIC region. It highlights that bank asset size moderates these relationships in opposite directions for Islamic versus conventional banks.

PurposeThe purpose of this study is to evaluate the global developments in the area of fintech solutions by analyzing Islamic and Conventional banks core accounting and market analysis IFIs and their impact on financial inclusion within its core markets.Design/methodology/approachThe authors collect and analyze annual accounting and market Data of the top ten largest Islamic banks and the top ten US Conventional banks, in terms of Total Asset and Market Capitalization, from Bloomberg Data.FindingsThe analysis of Bloomberg data shows higher risk-return for Islamic banks–except ROE Market measure that we suggest-than US conventional banks. Nonetheless, Islamic banking grew faster than conventional banking over the period 2006–2021. As a business model, we find that Islamic banks take more credit with more than seventy percent of their profit from loans, while US conventional banks struggle to reach seventy percent interest rate ratio. The authors’ research documents that Fintech and digitalization are driving Islamic finance growth during financial and economic downturns.Research limitations/implicationsFinTech data is not available for banks, further insights of analysis on FinTech and Innovations in the banking sectors.Practical implicationsIslamic banks continuously innovate to satisfy the users of their services and Fintech is opportune to innovation. This study could be interesting for both practitioners and academics wishing to understand and compare Islamic and conventional banking futures.Social implicationsThe authors compared two banking systems, the US and Islamic Banks, which could be useful for users to differentiate between those banking operations.Originality/valueThe authors collected accounting and market data from Bloomberg of top 10 Islamic and top 10 US Conventional banks from 2006 to 2021 to examine Risk-Return, Growth and Business Model of those banks. The authors propose a new Risk-Return measure ROE-Market and its volatility.

Comparison of Islamic Banks with Conventional Banks: Evidence from an Emerging Market