Can trade credit rejuvenate Islamic banking?
Can trade credit rejuvenate Islamic banking?
This study proposes a renewal of the contemporary Islamic banking Murabaha financing model as it aggravates financial fragility with waning economic efficiency. We adapt the working capital framework of successful US companies like Amazon and Walmart and model an innovative Murabaha facility as trade credit within the real sector of the economy. We then test its robustness in a range of simulation tests. Our approach is novel and stands in contrast to the familiar financial sector fixed-income facilities, characteristic of Western economies, stealthily mimicked as mark-up (interest rate based) Murabaha by Islamic banks. We argue that this is neither appropriate nor effective for Islamic economies, making them fragile under monetary pressures in crises like the current coronavirus and energy ones. Our simulation results indicate that the trade credit Murabaha not only transforms debt into a risk-sharing one but also offers more competitive financing rates, reduces systemic risk, and improves financial stability. Furthermore, our results imply that the trade credit Murabaha can increase the efficiency of Islamic financial systems and make them more resilient to shocks. Consequently, this paper discusses the integration of our novel Murabaha within a recreated architecture of Universal Banking. As an implication, this should promote business activity and contribute to global growth. Finally, we recommend how to deploy our novel Murabaha based on trade credit (as opposed to the currently deployed fixed-income-mimicked Murabaha) to alleviate twin agency debt costs (risk shifting, underinvestment) and solve the ownership transfer problem of modern Islamic banking.
Crisis, Islamic banking, Mark-up (Murabaha) financing, Trade credit, Universal banking
111-146
Jatmiko, Wahyu
77c12c27-492a-4683-802a-a02a89025ce7
Ebrahim, M. Shahid
67bf5403-62fd-4be9-864a-4025febdb087
Iqbal, Abdullah
dbd092a7-da6b-4387-a9b4-d81390a639ae
Wojakowski, Rafal M.
0ae9fdae-9db2-4d8e-b80a-1a3a87677378
15 September 2022
Jatmiko, Wahyu
77c12c27-492a-4683-802a-a02a89025ce7
Ebrahim, M. Shahid
67bf5403-62fd-4be9-864a-4025febdb087
Iqbal, Abdullah
dbd092a7-da6b-4387-a9b4-d81390a639ae
Wojakowski, Rafal M.
0ae9fdae-9db2-4d8e-b80a-1a3a87677378
Jatmiko, Wahyu, Ebrahim, M. Shahid, Iqbal, Abdullah and Wojakowski, Rafal M.
(2022)
Can trade credit rejuvenate Islamic banking?
Review of Quantitative Finance and Accounting, 60 (1), .
(doi:10.1007/s11156-022-01092-6).
Abstract
This study proposes a renewal of the contemporary Islamic banking Murabaha financing model as it aggravates financial fragility with waning economic efficiency. We adapt the working capital framework of successful US companies like Amazon and Walmart and model an innovative Murabaha facility as trade credit within the real sector of the economy. We then test its robustness in a range of simulation tests. Our approach is novel and stands in contrast to the familiar financial sector fixed-income facilities, characteristic of Western economies, stealthily mimicked as mark-up (interest rate based) Murabaha by Islamic banks. We argue that this is neither appropriate nor effective for Islamic economies, making them fragile under monetary pressures in crises like the current coronavirus and energy ones. Our simulation results indicate that the trade credit Murabaha not only transforms debt into a risk-sharing one but also offers more competitive financing rates, reduces systemic risk, and improves financial stability. Furthermore, our results imply that the trade credit Murabaha can increase the efficiency of Islamic financial systems and make them more resilient to shocks. Consequently, this paper discusses the integration of our novel Murabaha within a recreated architecture of Universal Banking. As an implication, this should promote business activity and contribute to global growth. Finally, we recommend how to deploy our novel Murabaha based on trade credit (as opposed to the currently deployed fixed-income-mimicked Murabaha) to alleviate twin agency debt costs (risk shifting, underinvestment) and solve the ownership transfer problem of modern Islamic banking.
Text
s11156-022-01092-6
- Version of Record
More information
Accepted/In Press date: 23 July 2022
Published date: 15 September 2022
Additional Information:
Funding Information:
We are grateful to Dalal Aassouli, Chris Adcock, Habib Ahmed, Nigar Hashimzade, Andreas Jobst, Anthony Miller, Sabur Mollah, Victor Murinde, Bibhas Saha, Mustapha Sheikh, Marti G. Subrahmanyam, Abderrahim Taamouti, and participants at the Econometric Society Africa Meeting in Rabat, Morocco; King Fahd University of Petroleum and Minerals Conference in Dhahran, Saudi Arabia; Paris Financial Management Conference in Paris, France; Oxford Centre for Islamic Studies Workshop in Oxford, UK; and Western Economic Association International Conference in San Diego, USA for their critical comments on an earlier draft of this paper. We also appreciate the insightful comments and constructive suggestions of C.F. Lee, the Editor-in-Chief of Review of Quantitative Finance and Accounting, and two anonymous referees.
Publisher Copyright:
© 2022, The Author(s).
Keywords:
Crisis, Islamic banking, Mark-up (Murabaha) financing, Trade credit, Universal banking
Identifiers
Local EPrints ID: 486291
URI: http://eprints.soton.ac.uk/id/eprint/486291
ISSN: 0924-865X
PURE UUID: c411bb79-84d3-4381-a8ee-90a300abf3e1
Catalogue record
Date deposited: 16 Jan 2024 17:51
Last modified: 06 Jun 2024 02:20
Export record
Altmetrics
Contributors
Author:
Wahyu Jatmiko
Author:
M. Shahid Ebrahim
Author:
Abdullah Iqbal
Author:
Rafal M. Wojakowski
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics