Working Paper Series

The Centre for Islamic Finance seeks to conduct high quality rigorous research to produce academic and intellectual material on issues pertinent to the Islamic finance industry. The Centre is working on both research papers and case studies to create indigenous knowledge for the area. 

  • Risk in Stock Markets: A Comparative Analysis of Systematic Risk in Islamic and Conventional Sectoral Indices

    In lieu of the scant research on systematic risk on Islamic stock markets, this paper aims to analysis the nature of time-varying systematic risk for both Islamic and non-Islamic sectoral indices. This study is novel in its analysis of behavioural changes of beta according to global economic state and whether Islamic sectors are less risky over a continuous basis beta. Taking daily returns of 10 global sectors spanning from 1996 to 2015, we firstly apply wavelet decomposition to divide the sectorial indices of both markets, into short-term and long-term horizons. Next, the beta value is estimated by running the regression of each sector’s daily return on the respective global index over a rolling window of 36 months. The analysis revealed both Islamic and conventional indices to follow a similar pattern over time. The Islamic sectorial beta tends to be smaller than conventional, which implies a damper reaction to stock market changes. A lower systematic risk of Islamic equities can prove to be a diversification opportunity for optimization of portfolios. Four robustness tests are applied to reaffirm the empirical analysis, throughout which our results hold.

  • Musharakah-based Microfinance contracts for Microenterprises

    Small businesses rely upon loans as a form of capital for the smooth running, growth and expansion of their businesses. However, Muslim owners are reluctant to take up traditional loans because of religious and social norms, which are seen as a hindrance for the running of these small-scale businesses.

    This case infers how incorporating a new equity-based financing contract (referred to as Musharakah-based financing) will increase the flexibility of providing capital as a form of investment for these businesses. A modification in the investment behaviour is productive as it stimulates transformational entrepreneurship and leads to not only the growth of microenterprises but also in the overall employment levels. Various research questions are addressed in the case to see the effect of Musharakah-based financing on the Islamic Perspectives like Decision-Making, Organizational-Development and Product-Structure. A Randomized Control Trial methodology is used in this study. The sample is taken from the microenterprises (that have passed screening from the partner institution Akhuwat), who are purchasing the asset to expand their business. The concept of  ‘Diminishing Musharakah’ is used to structure this contract in order to meet the Islamic Financial foundation. The purpose of this case is to alter the traditional loaning procedures for the poor people of Pakistan, so that they can see their businesses function smoothly.”

  • Identity Conflicts and Religious Compliance in Financial Markets

    During the last few years, Islamic banking products have registered rapid growth with a double-digit compound annual growth rate of 17% during 2009 and 2013. The assets of Islamic banking industry assets were estimated to be worth around USD1.9 trillion in 2014. The growth of industry reflects the decisions made by the customers. What motivates customers to buy an Islamic banking product and under what conditions customers prefer Islamic banking products over the conventional banking products? We argue that multiple identities of individuals are operative while making purchasing decisions. We examine the role of religious identity and the market identity of individuals while making decisions regarding the purchase of Islamic Banking products instead of conventional banking products. In particular, we examine the conflicts between religious and market identities and associated intrinsic and extrinsic motivations, the context of decision-making, and the nature of decision-making on outcomes related to the selection of banking products.

    Extant research has examined the role of risk and return from a financial point of view, documenting the role of extrinsic motivation and consumption utility derived from the monetary gains realized through decisions involving assessment of risks and returns, from a market-identity perspective. The research on religious identity has examined the effects on preferences for prosocial behavior, risk taking, and work ethic. The current research examines the role of Islamic religious identity in pro-market behavior and how the context and identity conflicts influence choices. We argue that in addition to the extrinsic consumption utility derived from the consumption of a financial product from a market identity perspective, consumers also derive intrinsic utility from the consumption of a financial product conforming to the expectations of a religious identity. Consumers may be willing to pay a ‘premium’ to obtain intrinsic religious utility. The two identities and the utilities derived therefrom may come in conflict and a tradeoff may be reached.