Journal of Money, Investment and Banking

Issue 28
September, 2013

Performance of Islamic Finance in Economy of Iran
Gholamreza Farsadamanollahi, Ahad Dehghanzadehlanbaran and Joriah Binti Muhammad

During the past four decades, Islamic Finance (IF), has grown rapidly in terms of size and the number of players. IF is currently practiced in more than 60 countries worldwide1. In Iran, Pakistan, and Sudan, only the IF practices are recognized. In other countries, such as Bangladesh, Egypt, Indonesia, Jordan and Malaysia, IF co-exists with Conventional Finance (CF). Three decades ago, the number of IF institutions throughout the world has risen from one in 1975 to above 300 institutions in more than 75 countries. The total property of the IF throughout the world is expected to exceed $250 billion, which shows a growth of 15% annually. Islamic IF institutions, like other financial institutions, are operating in a highly competitive environment, trying to improve their performance and profitability, Unlike their competitors, their operations must be in line with the Shariah principles, hence,IF is a profit-and-loss sharing (PLS) paradigm (Soon & Ming-Hua, 2009). An institution must be given authorization by the Shariah committee and Fiqh-that is, Islamic jurisprudence. Whereby, Shariah forbids giving or receiving any interest; meaning earning or giving profits of an exchange of money is immoral, This is called "Riba". In addition, it also forbids investments in such sectors such as gambling, alcohol, armaments, and tobacco. IF institutions are preparing an increasingly extensive financial service such as asset allocation, exchange settlement services, payment, fund mobilization, and risk transformation and mitigation. Nevertheless, all these activities must be compliant with the Sharia principles (Faisal, 2012). In Iran,after the 1979 revolution, the government of Iran played a primary role in converting CF into IF. In 1983, the law of usury-free finance was passed and in 1984, interest free finance started to implement Islamic banking based on the 1983 law. Most of the banks (28 out of 36) were nationalized. The government also managed to merge these nationalized banks("Central Bank of Iran," 2012). This paper discusses the growth of IF institutions and the performance of IF in the economy of Iran since its inception four decades ago.
Keywords: Islamic Finance, Riba, PLS, Iran.

Simulation Analysis of Retail Portfolio Profitability in the Context of Stress Testing
Pawel Siarka

The recent financial crisis has revealed weaknesses in risk management processes in banking. Traditional methods of risk measurement are often not able to estimate the risk resulting from adverse scenarios that take place during the crisis. Therefore, recent attention is paid to the development of methods based on stress tests. In this article the author refers to the problem of stress-test analysis in the context of the study of profitability of the loan portfolio. Author's concept was presented to evaluate the profitability of the portfolio that takes into account the real financial flows. This method as been used in the Monte Carlo simulation. The results enable to determine the level of reduction in the loan portfolio profitability and a consequent probability. Taking into account the correlation of variables that affect the lower profitability of the portfolio allows creating adverse scenarios that may occur during the next financial crisis.
Keywords: Credit Risk, Stress Test, Probability of Default, Loan Profitability.

Assessing the Efficiency of Commercial Banks in Greece during the Financial Crisis: A Linear Approach in Conjunction with Financial Analysis
Andreas G. Georgantopoulos and Anastasios D. Tsamis

This paper investigates the financial performance of commercial banks in Greece for the period 2007-2011, which is marked by the severe financial crisis. The efficiency assessment of Greek banks is based on financial figures and ratios. For this purpose a representative dataset of seven Greek commercial banking institutions is selected and exhaustive empirical research is employed based on financial, correlation and regression analyses in order to estimate the impact of selected independent variables (asset utilization, operational efficiency and bank size) on financial performance indicators (net interest margin and return on assets). The output of this research implies that during the tested period large banks in terms of deposits, credits, assets and shareholders' equity under-perform in comparison with small banks. Moreover, significant correlations are reported between efficiency indicators and independent variables, remarks that are also confirmed from regression analysis results. However, the statistically significant impact of independent variables on the Greek banks' financial performance is weaker than expected as compared to the pre-crisis period (2002-2007), condition which could be attributed to the distortion of financial linkages in the wake of the severe financial crisis that plagued the Greek banking system and Greek economy as a whole during the last six years.
Keywords: Banking Efficiency, Financial Analysis, Financial Crisis, Bank Size, Asset Management.
JEL Classification Codes: G200, G210

Examining the Intraday Interaction between Order Imbalance, Return and Volatility: Evidence from Jump Gainer Stocks
Han-Ching Huang, Yong-Chern Su and Ching-Wan Wen

This paper explores the intraday dynamics between order imbalance, volatility and return of jump gainers, whose daily returns are higher than 35%. It is interesting to derive the reason why these attractive high return stocks win such a remarkable positive profit within a short period of one day. We find that contemporaneous order imbalance has a significantly positive impact on price movement. Buyer-initiated order imbalance generates a significantly positive return. Nevertheless, past order imbalance shows a negative or insignificant price impact. In addition, we investigate whether firm-specific characteristics can alter the intense of relation between return and order imbalance. However, our finding suggests that market capitalization, an important proxy of information asymmetry suggested by previous studies, is not a significant explanatory variable to the degree of price impact caused by order imbalance. We also document that order imbalances have a significant influence on return volatility. According to the causal relationship between return and order imbalance, we find that order imbalance is a good indicator for predicting future returns. Moreover, order imbalance is a better indicator for predicting returns in large firm size quartile.
Keywords: Order imbalance; volatility; jump gainers; information asymmetry; multiple hypotheses nested causality testing method
JEL Classification Codes: G12, G14

Determinants of Commercial Banks' Profitability- Evidence from Lebanon
Rim El Khoury

Motivated by the important role that banks play in the Lebanese economy, this study will investigate the impact of bank-specific characteristics, macroeconomic conditions, and financial structure variables on Lebanese banks' net interest margin and profitability. Using an unbalanced panel data of 175 observations between 2003 and 2011, regression results reveal that equity to asset ratio is positively related to banks' profitability supporting the bankruptcy cost hypothesis. The other significant bank specific variables are liquidity and expenses management with a positive impact; the significance of loans, taxes, and interest activities depends on the model used. Besides, findings suggest that profit persistence still exists in the banking sector, with a higher speed of adjustment for domestic banks. However, the relationship between bank size and profitability is inconclusive. These bank specific variables are robust to the inclusion of additional macroeconomic and financial market measures. Second, turning to macroeconomic indicators, the results indicate that only the growth rate of the previous year exhibits a significant positive relationship with bank performance. Third, the paper finds that the financial structure variables have no impact on bank's interest margins and profitability with the exception of the size of the banking sector. However, when only domestic banks are included, credit risk has a negative coefficient, suggesting that domestic banks are exposed to high level of doubtful accounts. As for macroeconomic indicators, inflation displays a positive coefficient. Moving to financial structure variables, stock market development has a positive effect on bank profitability, reflecting the complementarities between bank and stock market growth. However, such relationship is not conclusive since its significance depends on the model applied. The importance of internal factors provides further implication on the strength of risk management practice in banks. The results suggest that policies of imposing higher capital requirements and better credit screening policies can improve banks' profitability and strengthen the financial stability.
Keywords: Bank Interest margin; Profitability; Panel data, Lebanon
JEL Classification Numbers: C33, E44, G21

A Hybrid Decision Support System for Equity Portfolio Management
Dinesh K. Sharma, R. K. Jana and Hari P. Sharma

Investments in securities of stocks, bonds and mutual funds, have attracted increasingly diverse groups of investors depending on their individual or institutions' goals and objectives. The complexity of available investment choices requires investment decision support systems (DSS) to help investors make optimal investment decisions given the level of risk and return opportunities. Through this research paper, we present how to design a DSS for constructing an efficient portfolio of securities. We applied goal programming (GP) as the mathematical formulation of the DSS and integrated fuzzy set theory for accommodating the lack of precision in the model. The system provides flexibility for the decision-maker to refine tolerances around targets for goals to find a feasible solution based on current market conditions and predictions of economic and financial variables. We have demonstrated the effectiveness and applicability of the model via a set of selected securities.
Keywords: Decision Support System, Goal Programming, Fuzzy Set, Stock Portfolio.

The Impacts of Change in Currency Demand Function, Transmission Mechanism and Substitution Effect on Monetary Policy during the Process of RMB Internationalization

Cheng W.W., Andy

Monetary policy is an important tool in macro-economic control. Country that has closed economy, its monetary policy only affects domestic economy and is only being affected by change of domestic economic metrics. However, in open economy, especially whose currency is undergoing a process of internationalization, currency demand and effectiveness of monetary policy will be affected by foreign economic factors such as capital flow as well as currency substitution. In the process of RMB internationalization, setting of monetary policy does not only need to consider the effectiveness of policy execution, it also need to consider other factors including the development of offshore RMB as well as speculation from smart money. Under the premises of RMB becoming the popular regional currency in Asia and marching towards being freely convertible allowing free flow of capital under a market driven exchange regime, by what and how the effectiveness of China's monetary policy will be influenced will be critical subjects.
Keywords: Money and Interest Rate Monetary Policy Central Banking Supply of Money
JEL Classification Codes: E410 E500 E590

Foreign Bank Entry, Stock Market Size and Credit Access: A Research on Central Asian Turkish States
Hasan Ayaydin

The Dissolution of the Union of Soviet Socialist Republics and the efforts of the countries in the decomposed union in order to pass to the free market economy attracted the attention of the scientific communities. The interests of the foreign banks to the Central Asia Turkish states which are some of above mentioned states has occurred after the liberalization works of those countries about their own financial markets. The aim of this study is examining the relationship between the entry of the bank to a foreign country and credit access. For that purpose, the effects of entry of foreign banks in the period of 1992-2011 over the credit access has been examined for six Central Asian Turkish States by using the Dynamic Panel Data Model (GMM). In this study, it has been determined that the increase on the share of foreign bank assets increases the net domestic credits but there has not been seen any significant relationship statistically between the share of foreign bank assets and the domestic credits provided by the banking sector and the credits provided for the private sector .This finding has been attributed to increasing on the domestic credits provided by the banking sector and the domestic credits provided for the private sector due to the economic and structural transformation in Central Asian Turkish States. In the study, there has also been determined that there is a positive correlation between the three dependent variables and the variables of inflation, stock market size and the growth on the money supply and , there is a negative statistically significant relationship between the variables of interest rate on deposits and foreign direct investments.
Keywords: Foreign Bank, Credit access, Stock Market Size, Dynamic Panel Data, Central Asian Turkish States.