At the recently concluded World Islamic Finance Forum (2016) held at Karachi on 5th and 6th of September 2016, Dr. Saad Azmat, and Dr. Syed Aun R. Rizvi, two participating academics from LUMS were awarded the Best Academic Paper and Best Paper for Idea respectively.
Dr. Saad Azmat presented his coauthored paper titled Financial Innovation, Over-subscription and Financial Crises in Islamic Finance
Abstract
This paper aims to capture the movement of bond prices after fire sales which arise from the over reaction of shariah conscious investors on arrival of some news in the market. The model assumes that the investors are coarse thinkers as they co-categorize different situations and employ same model of inference to all situations within the category. It also assumes that they demand safe and shariah compliant investment opportunities. Intermediaries cater this high demand of safe Islamic securities out of risky assets. But investors, being coarse thinkers, neglect certain risks attached to Islamic bonds, for instance the uncertainty attached to the Sharia compliance of the product, and hence the issuance is excessive. When the bad news arrives in the market regarding Islamic nature of bonds, investors over react and initiate fire sales causing bond prices to drop sharply, making the market more fragile. An example of this narrative is AAOIFI’s announcement in 2008 regarding Shariah compliance of Islamic bonds which led to a significant decline in Islamic bond issuance. We argue that the collateralized issuance of Islamic bonds aids the intermediaries to bring the industry back to its stable state.
Dr. Syed Aun R. Rizvi presented his coauthored paper titled Stabilizing Economic Growth Through Risk Sharing Macro Instruments
Abstract:
The risk sharing principles of Islamic Finance has been studied and used extensively outside the Muslim World. The development of early European city-states was founded on the risk sharing principle. The risk sharing financing helped these city states to develop their infrastructure and rule the scientific and economic landscape of the west. The western financial system of today still carries traces of risk sharing in the form of venture capital financing, albeit the primary focus has diverted to risk-shifting based debt financing. Over the past decades much effort and research has gone into establishing a viable set of Islamic financial institutions. Most Muslim nations are heavily indebted with high reliance on multilateral financing primarily based on high interest rates. This vicious cycle of interest rates and debt have stunted the growth of these nations and worsened the conditions of the masses. This research brings to the forefront the concept of an equity in nature GDP linked paper, which allows for enhanced risk sharing based sovereign financing. It aims to present empirical proof of the stability this instrument offers in economic growth, for a large sample of developing economies, comprising the bulk of Islamic countries. While analyzing the empirical work, a strong favorable argument for this instrument is derived for its benefits in stability. Through this study, we endeavor to initiate a thought provoking and practical discussion for further development of these instruments for the betterment of the developing countries.
