Table Of Content

Iqbal 00 prelims 9/11/01 3:09 pm Page i Islamic Banking and Finance Iqbal 00 prelims 9/11/01 3:09 pm Page ii To Dr Mohammad Omar Zubair, who is a source of inspiration for all those working in the field of Islamic economics and finance Iqbal 00 prelims 9/11/01 3:09 pm Page iii Islamic Banking and Finance New Perspectives on Profit-Sharing and Risk Edited by Munawar Iqbal Islamic Development Bank, Saudi Arabia David T. Llewellyn Loughborough University, UK Edward Elgar Cheltenham, UK • Northampton, MA, USA In association with: International Association Islamic The Islamic of Islamic Economics Development Bank Foundation Iqbal 00 prelims 9/11/01 3:09 pm Page iv ©Dr Munawar Iqbal and Professor David T. Llewellyn 2002 (on behalf of the Steering Committee for the Fourth International Conference on Islamic Economics and Banking held at Loughborough University, UK, August 13–15, 2000) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Islamic Banking and Finance: New Perspectives on Profit-Sharing and Risk / edited by Munawar Iqbal, David T. Llewellyn p. cm. “Some of the papers were presented at the Fourth International Conference on Islamic Economics and Banking, held at Loughborough University, UK, 13–15 August 2000” —Pref. Includes bibliographical references and index. 1. Banks and Banking—Islamic countries—Congresses. 2. Finance—Islamic countries—Congresses. I. Iqbal, Munawar. II. Llewellyn, David T. III. International Conference on Islamic Economics and Banking (4th: 2000: Loughborough University) HG3368.A6I852 2001 332.1'0917'671—dc21 2001053235 ISBN 1 84064 787 6 Printed and bound in Great Britain by Biddles Ltd, www.biddles.co.uk Iqbal 00 prelims 9/11/01 3:09 pm Page v Contents List of contributors vii List of tables ix Preface xi Glossary xii 1 Introduction 1 Munawar Iqbal and David T. Llewellyn 2 Decision-making under uncertainty: an Islamic perspective 15 Sami Ibrahim Al-Suwailem Comments Monzer Kahf; Mohamed Ali Elgari 3 Incentive-compatible profit-sharing contracts: a theoretical treatment 40 Habib Ahmed Comments Said Al Hallaq 4 Evidence on agency-contractual problems in mu∂arabah financing operations by Islamic banks 57 Abdel-Fattah A.A. Khalil, Colin Rickwood and Victor Murinde Comments Abdel-hameed Bashir 5 Incentive-compatible constraints for Islamic banking: some lessons from Bank Muamalat 95 Adiwarman A. Karim Comments Muhammad Nejatullah Siddiqi 6 How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts 111 Mohammad Abalkhail and John R. Presley Comments Sultan Abou-Ali 7 Choice between debt and equity contracts and asymmetrical information: some empirical evidence 139 Kazem Sadr and Zamir Iqbal v Iqbal 00 prelims 9/11/01 3:09 pm Page vi vi Contents Comments Abdul Azim Islahi 8 Islamic banking contracts as enforced in Iran 155 Ali Yasseri Comments Mohamed Ali Elgari 9 Islamic financial institutions of India: their nature, problems and prospects 169 M.I. Bagsiraj Comments Fazlur Rahman Faridi; Sule Ahmed Gusau 10 The interface between Islamic and conventional banking 196 Rodney Wilson Comments Muhammad Abdul Mannan; Abdurrahman Lahlou 11 Alternative visions of international monetary reform 219 M. Umer Chapra Comments John G. Sessions Index 241 Iqbal 00 prelims 9/11/01 3:09 pm Page vii Contributors Mohammad Abalkhail, Assistant Professor of Business Finance, Imam Mohammad Ibn Saud Islamic University, Dammam, Saudi Arabia Sultan Abou-Ali, Professor of Economics, Zagazig University, Zagazig, Egypt Habib Ahmed, Economist, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia Sami Ibrahim Al-Suwailem, Director, Research Centre, Al-Rajhi Banking and Investment Corporation, Riyadh, Saudi Arabia M.I. Bagsiraj, Director, Indian Institute of Islamic Financial Institutions, Bangalore, India Abdel-hameed Bashir, Professor, Department of Economics, Grambling State University, Grambling, LA 71245, USA M. Umer Chapra, Research Adviser, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia Mohamed Ali Elgari, Executive Manager, National Management Consultancy Centre, Jeddah, Saudi Arabia Fazlur Rahman Faridi, President, Indian Association for Islamic Economics, Aligarh, India Sule Ahmed Gusau, Department of Economics, Usmanu Danfodiyo University, Sokoto, Nigeria Said Al Hallaq, Vice Dean, School of Economics and Administrative Sciences, Yarmouk University, Jordan Munawar Iqbal, Chief of Research, Islamic Banking and Finance Division, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia vii Iqbal 00 prelims 9/11/01 3:09 pm Page viii viii Contributors Zamir lqbal, Senior Information Officer at the Treasury Operations Department of the World Bank, Washington DC, USA Abdul Azim Islahi, Associate Professor, Department of Economics, Aligarh Muslim University, Aligarh, India Monzer Kahf, Former Senior Economist at the Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia. Now retired Adiwarman A. Karim, Vice President, Muamalat Institute, Bank Muamalat, Indonesia Abdel-Fattah A.A. Khalil, University of Birmingham, Birmingham, UK Abdurrahman Lahlou, President, Moroccan Association of Islamic Economics, Morocco David T. Llewellyn, Professor of Money and Banking, and Chairman of the Loughborough University Banking Centre, Loughborough University, UK Muhammad Abdul Mannan, former Chairman, Social Investment Bank Limited, Dhaka, Bangladesh Victor Murinde, University of Birmingham, Birmingham, UK John R. Presley, Professsor of Economics, Loughborough University, UK Colin Rickwood, University of Birmingham, Birmingham, UK Kazem Sadr, Associate Professor, School of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran John G. Sessions, Reader, Department of Economics and Finance, Brunel University, UK Muhammad Nejatullah Siddiqi, Former Professor of Economics, King Abdulaziz University, Jeddah, Saudi Arabia. Now retired Rodney Wilson, Professor of Economics, University of Durham, Durham, UK Ali Yasseri, Vice President, Iran Banking Institute, Tehran, Iran Iqbal 00 prelims 9/11/01 3:09 pm Page ix List of tables 3.1 Payoff matrix of the firm and bank 49 4.1 Evidence based on univariate analysis 67 4.2 Contingency table for the relationship between the risk of misreporting by the agent and the incidence of agency problems in mu∂arabahcontracts 74 4.3 Contingency table for the relationship between lack of control rights by the agent and the incidence of agency problems in mu∂arabahcontracts 76 4.4 Contingency table for the relationship between high monitoring cost by the agent and the incidence of agency problems in mu∂arabahcontracts 78 4.5 Contingency table for the relationship between disadvantage in access to information by the agent and the incidence of agency problems in mu∂arabahcontracts 80 4.6 Spearman correlation matrix for the monitoring devices and the characteristics of the agent and the project in mu∂arabahcontracts 83 4.7 Spearman correlation coefficients for activities to be monitored and the characteristics of the agent and the project in mu∂arabah contracts 86 4.8 Evidence from chi-square (one-tailed) tests for hypotheses on project attributes, entrepreneur attributes and religious considerations 88 5.1 Incentive-compatible constraints introduced in profit-sharing contracts 105 5.2 Performance of incentive-compatible profit-sharing contracts 106 6.1 Friedman two-way ANOVA test to rank the importance of the information sources 117 6.2 Overall ranking of criteria 119 6.3 Rank factors affecting the investment decision 120 6.4 Friedman test to rank monitoring methods 122 6.5 Friedman test to rank criteria related to other attributes of the business 124 6.6 The use of co-investing 125 ix