Islamic finance: instruments, risks and institutions

The recent global financial crises have adversely affected the financial world with the closure of more than 160 financial institutions. Consequently, the disparaging series of events (such as Global financial crisis 2007/2008 and European debt crisis 2009/2010) have raised serious concerns about current financial practices for policymakers and academicians and call for new reforms in the financial system or to find alternative medium of conducting financial affairs. In this regard, Islamic finance has emerged as an alternative robust system to provide financial intermediation services based on mutual risk-sharing without involvement in interest payment and toxic financial products. The global Islamic finance industry is increasing in an upward direction witnessed by its positive growth rate of 10% over the last 10 years around the globe, with total assets of USD 2.19 trillion as on 1H2018 (IFSB Report, 2019). Being an emerging and quite hot topic in the field of banking and finance, this dissertation deals mainly the topics on Islamic finance and follow the structure of three essays for gaining insight to the different aspects of Islamic finance such as Islamic banking, Islamic insurance and Bond (sukuk), and a viable role this can play in financial development of an economy. The first essay is related to the comparative analysis of risk management practices in Islamic and Conventional banking and also investigates the impact of the liquidity risk on bank stability. We first, investigate the relationship between liquidity and credit risk. Employing a simultaneous structural equation approach, on a comprehensive dataset of 52 IBs and CBs, from selected Organization of Islamic Cooperation Countries for the period of 2007-2015, a negative relationship is found between credit risk and liquidity risk. We then investigate the relationship between liquidity risk and stability, finding a negative relationship just for the Islamic banks. We finally show that Islamic banks are better than conventional in managing risks. This essay is already published in Research in International Buisness and Financa, Volume 48, pages 17-31. The second chapter follows a thorough bibliometric review of the literature on Takaful (Islamic Insurance). Takaful represents a growing financial segment addressing the insurance needs of Islamic societies and economies. We provide a thorough analysis of existing contributions on Takaful, by adopting a meta-literature methodology that encompasses both a bibliometric (quantitative) and content (qualitative) analysis. By reviewing 65 articles, we aim to provide a rigorous background for the Islamic finance industry, its societies and economies, academic research and policymakers. We identify and review three leading research streams on Takaful: its overview, growth paths and models; governance mechanism; products/services and customer perception. Finally, We derive and summarize 16 leading future research questions based on meta-literature review. The third and final essay is related to the role of trade and financial openness in financial development and the real economy through the channel of Islamic banks. In this paper, we analyze the impact of trade and financial openness on financial development in the Gulf Cooperation Council (GCC) region by using a comprehensive dataset of 44 Islamic and 48 conventional banks for the period of 2007-2015. We find that trade and financial openness have a positive impact on Islamic bank profitability but simultaneous openness to both trade and capital markets will reduce the profitability of Islamic banks.Moreover, we find that trade and financial openness increase the loan volume but reduce the stability of Islamic banks.