Journal of Money, Investment and Banking

Issue 27
March, 2013

The Banking System of MENA Countries: An Empirical Analysis of Islamic Banks
Maria Grazia Starita

This paper analyzes the main characteristics of MENA financial system, with a focus on banking system, and on the solvency of MENA Islamic banks. The results point out that the MENA’s banking system is dynamic, although the gap with the banking system of the advanced economies is still very relevant. Moreover, the MENA banking system is less competitive and composed of medium-large banks, but with high levels of efficiency, performance and solvency. The issue of solvency, in particular, has been detailed with reference to Islamic banks by using a Panel data fixed effects model. Evidence suggests that Islamic banks in these countries have a higher level of solvency. Moreover, the findings identify in the size, the weight of banking book and the level of diversification of income sources the main determinants of banks’ probability of default.
Keywords: MENA countries, Islamic banking

Determinants of Banking Competition in Morocco and Evaluation of the Structural Reforms

Afifa Hakam, Filali Adib Fatine and Firano Zakaria

The empirical results of this paper indicate that the degree of competition in the banking system is determined by several macroeconomic aggregates that describe the relevance of the policies implemented in financial Morocco. Thus, the result says that there is a positive relationship between the index of competition and concentration there by verifies our theoretical perception. On another note, economic growth is negatively correlated with the competition, which unfortunately indicates that when there are sustained economic growth banks does not behave concurrently and try to retain their market share stimulated by a high concentration sector. This is also dependent on conditions in the credit market, which indicates that when the demand is constant, banks tend to have fewer competing behaviors. In addition, the development of positive market impact of competition which is consistent with liberal theory. Thus, the use of financial market intensifies competition between banks to produce services being able to attract more customers to compensate for those who chose the stock market. Finally, in the implementation of monetary policy, the indicator of interbank interest rate has a positive impact on competition.
Keywords: Competition, Concentration, Financial Stability, Public policy, Economic Growth
JEL Classification: D41, G21

Analysis and Forecasting of Foreign Direct Investment (FDI) in Laos

Phoukeo Vongvichith

In the past, the major source of capital came from domestic investment. However, in recent decades, Foreign Direct Investment (FDI) has been playing a prominent role in capital market. In this paper, the inward foreign direct investment of Laos will be analyzed.
Time series model may exhibit non-stationery behavior caused by the presence of unit roots, structural breaks, seasonal influences etc. If nonlinear dynamics are concerned, linear models are not sufficient. This situation arises if, for instance, the strength of economic relationships depends on the state of the business cycle or if the adjustment speed toward long-run equilibrium relationships is not proportional to the deviation from the long-run equilibrium. Thus, we need a nonlinear modeling technique which can cope with the nonlinearity of time series data. That is why the Seasonal Nonlinear Autoregressive Model will be used to analyze the inward FDI in Laos. Empirical result suggests that previous increasing amount of inward FDI would be favorable to future FDI. FDI in Laos is expected to grow steadily.
Keywords: FDI Capital Stock Laos SNAR (Seasonal Nonlinear Autoregressive Model)

Capital Expenditures and Working Capital Management: Empirical Evidence from Non-Financial Firms Listed at Karachi Stock Exchange

Mian Sajid Nazir, Umair Iqbal and Hashim Awais Butt

The objective of this research is to find the relationship between capital expenditure and working capital management. For this purpose the data was collected from the non-financial firms listed at the Karachi stock exchange. Data analysis is performed in two steps; first for all the firms that are selected and then for the textile firms. The study uses the working capital requirement as a proxy measure of working capital management. The results indicate that the capital expenditure can significantly impact the working capital management, which is consistent with the previous researches. The leverage which is used as a control variable also has a significant impact on working capital management, while other two variables operating cash flow and growth have insignificant impact on working capital management. The findings of the current study will help companies to manage their working capital efficiently when they have growth opportunities and incurring capital expenditures.
Keywords: Working Capital Requirement, Capital Expenditures, Operating Cash Flow

The Application of GARCH Methods in Modeling Volatility using Sector Indices from the Egyptian Exchange
Hassan Ezzat

This paper examines sector specific volatility in order to determine how different sectors respond to volatility shocks within the same equity market. The Egyptian Exchange sector indices are used where firms are disaggregated and classified into twelve different sectors. Volatility is modeled using GARCH, EGARCH and TGARCH in order to examine the temporal volatility dynamics of each specific industry. Stylized facts such as volatility clustering, long memory and the leverage effect are investigated for each sector. Furthermore, the data is divided into two periods. The first period includes sector returns prior to the Egyptian revolution of January 25th 2011. This period was characterized by tranquil volatility. The second period includes the period of the revolution extending one and a half years after the revolution till June 30th 2012. This period was characterized by turbulent volatility. The findings indicate that TGARCH is the preferred model providing successful model specification for all sector indices during both periods. Although the stylized facts where apparent for most sectors for both periods, there was strong evidence of heterogeneous response of sector volatility due to the exogenous shocks of the revolution.
Keywords: The Egyptian Exchange, EGARCH, TGARCH, Idiosyncratic Risk, Revolution.
JEL Classification Code: C32, C58, C140, D53, G17

Choosing the Appropriate E-Business Solution when doing E-Trade – An Application of Fuzzy Logic
Kemal Yaman

Companies have to choose appropriate e-business software to offer their products and services online because such solutions have different features (i.e. flexibility or costs) whereby the aim is to fulfill the objectives and the requirements of the company.
This study deals with a selection problem which can be classified as a multi-attributive decision. This type of a problem often involves many vague and imprecise initial situations. In this paper, a possible fuzzy decision making model which is worked on by J.J. Buckley is examined. This method has proven itself as a valuable and applicable method for decision makers in real issues. In case of Analytical Hierarchy Process (AHP) model of Saaty, experts provide exact ratios which they personally judge as true. However, as this determination is a subjective approach, it may provide incomplete information (subjective method).
Due to the situation of unclear information, the use of fuzzy logic is crucial. So, the model of Saaty has been extended by Buckley to a case in which experts propose fuzzy ratios on which a good result is supported. This method can help companies to choose the most suitable solution for them in order to meet the challenges related e-business.
Keywords: Software solution, Selection problem, Multi-attributive decision, Analytical Hierarchy Process (AHP), Fuzzy AHP

Investigating the Relationship between Corporate Growth and Debt Policy: The Nigerian Evidence

Amah Peter Ngozi and Ezike John Emeka

Although some studies have tried to show that bankruptcy penalties related to capital structure decisions cannot be of sufficient magnitude to act as an offset to ‘tax subsidy’, the balance of theory and evidence in corporate finance literature weighs heavily in favor of the balancing school. But beyond the problems of specification associated with this and other conventional models, a wide gap still existed in explaining cross sectional variation of debt-equity relation of firms in practice. In this paper we tried to explain certain observable debt issuance behaviors of Nigerian firms within the context of the growth-adjusted model
Using time-series-average cross sectional regression, it was found that firm’s growth status influences the choice to either increase or reduce leverage as well as maturity of debt in a fundamentally discriminating manner. Negative relation was observed for high growth firms while positive relation was observed for the low growth sample in a manner that suggests that growth opportunities provides an important missing link in the traditional explanations of optimal debt policy.
Keywords: Debt Policy, Capital Structure, Growth, Firm Value

A Study of the Spillover Effect in Commodities Markets
Feng Jui Hsu, Hao Cheng Hsu and Tsai Yi Wang

The purpose of this study is to consider the interaction among commodities markets and focuses on daily spillover effects from returns and volatility. The spillover index has dynamic characteristics that change over time and we find that Dynamic effects exit and Spillover effect is more intense in the index movements. Besides, the reaction of index volatility will be greater than index returns. This paper developed an alternative measure of co-movement of macroeconomic aggregates across major commodity market. Forecast-error variance decompositions from a VEC model are used to calculate the business cycle spillover index across commodities. Furthermore, by using the rolling windows method, we draw the dynamic spillover index to compare major international financial events. These research methods will be used to compare and analyze spillover effects. There is evidence for various information spillovers across the markets from returns as well as from news sentiments. The results presented in this work confirm that there is an interconnection between the commodity and the stock market.
Keywords: Spillover, commodity market, volatility

Testing Fundraising against Market Timing Hypotheses for SEO Motives

Yih-Bey Lin, Jian-Fa Li and Cheng-Yih Hong

This paper develops the market timing and the fundraising hypotheses, respectively, to explore the motives of the firms conducting the seasoned equity offerings (SEOs). The explanatory ability and power tests are employed to verify which hypothesis suits the motives of the firms conducting SEOs. The empirical results find when stock price is over-estimated, managers of firms would earn capital gain or reduce capital cost by issuing stocks. It shows that the market timing hypothesis is verified, whereas the results are not enough to support the fundraising hypothesis. Therefore, investors might decrease the investment in the companies which conducted just SEOs.
Keywords: SEO, Market timing hypothesis, Fundraising hypothesis, Panel regression

Analysis of Social Solidarity System Activities in Islamic Banking

Mohammad SuliemanJaradat and NaderaNofan Mryan

The study aims to state the movement of Islamic banking and how to develop them, where Islamic banks managed to mobilize substantial financial resources, the reason that enabled these banks to increase all types of deposits is a sense of the role of Islamic religion in economic, social and political life, the second factor is the concept of social marketing which is adopted by these banks, in addition to the high yield distributed on the clients.The Islamic banking activities, as well as, investing the financial assets of insurance cooperative companies and opening a converted accounts to the revenue endowment allow it to reinvest it in economic, social, and scientific fields, as a result this lead to broaden the base of social solidarity.The statistical results shows that Jordan Islamic Bank achieved the social solidarity in the center province community through the existence of Social Development Fund, Zakat Fund, Housing Loans, as well as Free-loan activity.
Keywords: Islamic, banking, solidarity, zakat-fund, housing-loans, free-loan.
JEL Classification Numbers: G24, G21
UDC Number: 808.5 - 81`34; 821.91-3

Determinants of Deposits in Lebanese Commercial Banks-Evidence from Non-resident Depositors
Rim El Khoury and Olga Kanj

Motivated by the continuous increase of non-residents deposits in Lebanon, this paper will try to investigate the determinants of these inflows from the perspective of foreign depositors. Through the use of 65 questionnaires filled by non-resident depositors, this study found that there are some internal, external, bank related, social and behavioral factors that might affect non-resident deposits in Lebanese banks. More specifically, non-resident deposits respond positively to social factors such as abundance of relatives and frequent visits, positively to bank related factors such as the availability of e-banking, more international branches, and high interest rate, but negatively to external factors such as war. However, there was no support that bad political situation in Lebanon affected non-resident deposits. The findings suggest that banks should improve the convenience of access to funds of depositors and adopt more international standards to have better ratings in order to attract more deposits.
Keywords: Banks; Non-resident Deposits; Lebanon
JEL Classification Numbers: C42, E41, E44, G21

The Evolution of Credit Risk of Greek Bank Business Loan Portfolios of Listed and Unlisted Companies and its Impact on the Capital Requirements of Banks
Constantinos Lefcaditis, Anastasios Tsamis and John Leventides

In this study, we examined the fundamentals of credit risk and the impact on the banking system, in terms of loans to medium and large companies active in the Greek market, Since exposure to credit risk remains the main source of problems in banks worldwide, banks and supervisory authorities should be in a position to draw useful lessons from past experiences. Banks should now realize the need to identify measure, monitor and control credit risk and to determine that they have sufficient funds to cover these risks. For this reason, in this paper, we calculated the impact on bank capital requirements by the ongoing credit risk of banks’ business portfolios for the period 2002-2009. The companies were grouped further into listed and unlisted, and we monitored the evolution / change in their credit risk by calculating their capital requirements by using the IRB Approach of Basel II for the above period. On the basis of the previous results, it is analysed if the index ‘capital requirements / total debt’ among listed and unlisted companies would significantly change.
Keywords: Credit Risk; Basel III; Capital Requirements; Internal Ratings Based Approach (IRB); Probability of Default (PD); Expected Loss (EL)
JEL Classification: G21, G24, G32

Can Risk-Based Portfolio Optimization Strategies Protect Investors when the Economy is in Downturn?

Chun-Pin Hsu

Since the advent of Markowitz’s portfolio theory in the 1950s, the issue of portfolio optimization has gained much attention, with many sophisticated models being developed accordingly. However, whether such models outperform the naive 1/N strategy in portfolio management has been the subject of debate for several decades. To clarify this ambiguity, we tested the out-of-sample performance of portfolios formed via four popular models—the maximized Sharpe ratio, the minimized variance, the minimized Conditional VaR, and the naive 1/N models—on the daily data of the Dow Jones 30 blue-chip stocks. We also classified our data period into expansion and recession periods to evaluate how the models perform during different economic states. The empirical results showed that in general the CVaR model consistently outperformed the other three models. Among the three, the maximized Sharpe ratio and the 1/N models outperformed the minimized variance model during the expansion period. However, during the recession period, the minimized variance model performed better than the other two models.
Keywords: Portfolio Optimization, Markowitz, Conditional Value-at-Risk, Naive Strategy
JEL Code: G11, C02

Nonlinearly Smooth Transition in Russell Index Futures Basis
Yi-Hsi Lee and Yu-Fen Chiu

Because the movements of futures basis are important to all market participants, this paper fills in the gap in the empirical literature by describing the behaviours and changes of futures basis. By examining the dynamic adjustments between Russell 2000 index futures and spots, and applying the logistic smooth transition auto-regression model based on non-linear error correction, this paper finds that factors such as transaction costs lead the adjustments of futures basis to equilibrium in a non-linear mean reversion mode. Secondly, this paper also finds that in terms of out-of-sample predictability, non-linear models are superior to both linear models and random walk models.
Keywords: Smooth Transition, Nonlinear, Russell 2000, Basis, Futures

Empirical Analysis on Direction of Time Series in Stock Market and Its Economic Meaning
Hui Gong and Liqing Wang

We consider the concept of time arrow to support the existence of rules which guide direction of time in reality. Then we establish the criteria to judge the inevitability of time series by AR and GARCH models. With stochastic behaviour assumption of stock return and e?cient market hypothesis, we conclude that stock return should not exhibit the arrow of time. In other words, the existence of time arrow indicates risk factors such as price manipulation. The reversibility of time series has interesting economic meanings. We construct appropriate statistical models and carry out independent test for data of FTSE100, SP500, HSI, Nikkei225 and HS300, covering from 4/2005 to 9/2012. By comparing the residuals and variances, we obtain an interesting characterization of these financial markets. The conclusion is that neither FTSE100 nor SP500 displays direction of time arrow, while HS300 displays a remarkable difference between its positive direction time series and its reversed time series.
Keywords: Direction of Time Series, Inversion, No Inversion, GARCH Model