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What Islamic Finance Should Learn from the Recent Financial Crisis? Empirical Evidences from the GCC Banking and Stock Markets ( 2nd Public Discussion IAEI Chapter Malaysia)

Updated: Senin 11 Februari 2013 - 15:56 Kategori: Umum Posted by: Administrator

Kuala Lumpur – The 2007-2008 crises had significantly cracked down some financial institution around the globe. However, many experts said Islamic finance is quite resilient due to its nature. In addition, looking at Islamic finance development in The Gulf Cooperation Countries (GCC) is interesting sue to (1) the GCC countries encourage the development of Islamic banking and finance consistently, (2) it is home base to many large pioneers in Islamic Finance industry, (3) one of its members, Bahrain is the host to several Islamic Finance infrastructures or support organizations, such as AAOFI, IIFM, and LMC, (4) Islamic banks in the GCC controlled a market share close to 15% f the regional banking system’s assets, and (5) the GCC countries collectively account for around 41 percent of the total shariah-compliant assets worldwide at the end of 2007 (Wilson, 2009).

Some literatures have shown the relationship the impact of crises on GCC economy which showed mild impact as compared to the rest of the world. It is due to (1) the abundance of financial resources along with the initial macro intervention policies by the GCC government, and (2) GCC banks were not as much directly exposed to the securitized and structured financial products. However, according to Batini (2009) argue that the stock markets in the GCC may be affected by the crisis due to shortage in global liquidity.

In addition, during the presentation, Brother Sutan Emir described some utilized tools throughout the analysis, namely ratio analysis normality test, panel data, integration and ARCH and GARCH models. Referring to the ratios analysis, conventional banks in GCC have better asset quality than their Islamic counterparts during the period of study. They also reveal either conventional or Islamic bank in the region are affected somewhat by the 2008 financial crises.

According to normality test, the findings suggest that Islamic banks’ solvency and liquidity are less stable thank conventional banks’. Similarly, those are applied for Islamic bank’s profitability, efficiency, asset quality, and solvency which more stable in conventional banks’.

However, by utilizing panel and OLS approach, the paper tells us that global financial crises and after global financial crises give significant impacts towards GCC Islamic banking financial performance. The results also indicate that Islamic banking financial performance is negatively affected more after the global financial crises than during the crisis.

According to above findings, several lessons can be learnt by Islamic Finance in accordance with the practicality in industrial level, namely :

1. Financial interconnectivity needs to be put in a greater attention to avoid the impacts of the crisis into Islamic banking and stock markets in the GCC.

2. Islamic banks in the GCC are affected by the recent crisis is due to over reliance of Islamic banks to debt-based instruments such as murabaha and ijarah (Smolo and Mirakhor, 2010).

3. The relatively similar features of these contracts to conventional loans make Islamic banks be affected to some extent by the problems in the conventional loan market.

4. The most important lesson of the current financial crisis for IFIs is to reduce over reliance on debt-based instruments and to introduce more risk-sharing instruments (Smolo and Mirakhor, 2010).

5. The development of new product should focus on developing products that are equity based not only mimicking conventional products.

Finally, the journey for Islamic Finance to attaining an ideal level of maturity is a far process. Discussion and research hopefully could narrow the time so that could be universally used as alternative solution for the world economy. IAEI chapter Malaysia, InsyaAllah is continuously committed to further fertilize the academic tradition as one humble effort towards betterment of Islamic finance development (Dimas Kusuma-Kuala Lumpur, Malaysia (PR IAEI Malaysia)).