Mohamed Ariff

GFC: Origin, consequence and cost

Mohamed Ariff et al. — Mon, 08 Nov 2010 17:47:21 PST

Worldwide comparison of financial efficiency of Islamic banks and conventional banks

Mohamed Ariff — Wed, 03 Nov 2010 19:05:10 PDT

This paper reports policy-relevant findings from a major study on the financial performance of conventional and Islamic banks across the world to assess if the latter has performed as best as the former. This inquiry is timely and important to validate if ethical banking after 45 years of experience based on the twin-principles of risk-share-profit-share lending is at least as good as pre-fixed-interest-based banking. Using a world-wide matched sample of both bank types, tests on three sets of financial performance ratios reveal Islamic bank performance match those of conventional banks. If any, return to shareholders is a mere 2 percent higher in Islamic banks. This similarity is found to hold when controlled for size, age and region. Thus, it appears that the new form of bank lending has not led to any inferior performance to that of conventional practice. This helps to validate the relevance of Islamic banking as an alternative lending institution for those clients wanting ethics in lending. Islamic banking is no less welfare promoting.

Financial performance of Islamic banks versus conventional banks: International evidence

Mohamed Ariff et al. — Wed, 03 Nov 2010 17:43:18 PDT

Corporate governance: The case of Australian banks

Mohamed Ariff et al. — Wed, 03 Nov 2010 17:13:41 PDT

Extract: This chapter attempts to provide a summary report on the status of corporate governance in the banking sector of Australia. A historical fact often vaunted in Australia is that no depositor has lost his deposit in a bank run for over 100 years. Although there were bank failures depositors were paid off despite there being no deposit insurance! Nevertheless, since governance is a much broader issue than that of depositor protection, bank governance has emerged even in Australia as a key public issue with significant movements in the industry on self-regulation and , at the regulatory level, this interest has spawned significant regulatory changes.

Fixed income markets: Malaysia and Singapore

Mohamed Ariff et al. — Wed, 03 Nov 2010 00:02:33 PDT

The foundations of Islamic banking: Theory, practice and education

Mohamed Ariff — Tue, 02 Nov 2010 20:54:05 PDT

This comprehensive book brings together eminent Islamic finance scholars to explore the theory, principles and practices underpinning the rapidly expanding field of Islamic banking. They examine the roots of ethical Islamic financial transactions that have evolved over several millennia, including usury, interest rates and financial contracting and transactions. Regulatory and governance issues are discussed, and the practice and operation of Islamic financial institutions are related via case studies of three different types of financial institutions. Importantly, the final chapter looks at what investment is being made to provide professional accreditation to Islamic banking personnel, and prescribes requirements for training in this key and growing industry.

Examining foreign exchange behaviour in Asia Pacific and Eastern European emerging countries

Catherine S. F. Ho et al. — Tue, 02 Nov 2010 18:39:36 PDT

This paper reports new findings on exchange rate dynamics concerning whether non-parity fundamentals and parity factors affect exchange rates within a group of trade-related emerging countries: non-parity fundamentals suggested by economic theories have yet been systematically related to exchange rates. We use high- and low-frequency multi-country pooled time series panel data approach. The evidence that emerges from this paper is that non-parity factors are significant contributors to exchange rates. These new findings on other-than-parity fundamentals add to a richer understanding of exchange rate behaviour as well as clarifying why existing findings are mixed.

Stock index futures prices and the Asian financial crisis

Taufiq Hassan et al. — Tue, 02 Nov 2010 18:39:33 PDT

This study reports new findings on the behavior of index futures (FKLI: code name of Kuala Lumpur Index Futures contract) prices and also records the effect of a major financial crisis on the prices. Since the inception of trading in 1995, the FKLI has been selling at a discount, which gradually increased till early 1997; further, at the onset of the financial crisis in July 1997, FKLI prices were at a high premium relative to its theoretical values. This significant mispricing of the contract declined after the initial overreaction to the crisis. Herding behavior during crisis, liquidity constraint and imposition of trading restrictions are some plausible explanations for the mispricing. This study also investigates whether trades by foreign investors had any impact when compared with prices by domestic investors. We find that foreign investors had a negative influence on permanent price changes while the domestic investors had a positive effect.

Sticky prices and time to equilibrium: Evidence from Asia-Pacific trade-related economies

Catherine S. F. Ho et al. — Mon, 01 Nov 2010 23:40:31 PDT

The theoretical relation between exchange rate and prices has been a difficult proposition to find supporting evidence despite many studies of developed economies using standard research methods. The exchange rate to price relation appears to hold in the long run only, a result consistent with sticky price hypothesis. There is a need to add to this sticky price literature by examining more yet-studied economies to this area of research. This article presents results to support long-run equilibrium in the Asia-Pacific economies as being 5 years. The methodology is used to group countries with high-trade intensity within a region and value-weight the resulting variables to test the theory in a regional context. Our positive finding on the long-run equilibrium, we believe, helps in some ways to enrich the literature on the exchange rate behaviour of an important region for world trade.

The role of non-parity fundamentals in exchange rate determination: Australia and the Asia Pacific region

Mohamed Ariff et al. — Mon, 01 Nov 2010 23:40:30 PDT

This paper extends the literature by looking at the contribution of non-parity variables after extracting the impact of parity variables on exchange rates of Australia and the Asia Pacific countries. Exchange rates are examined using high- and low-frequency multi-country panel time series data for a group of trade-related nations in the Asia Pacific, including Japan. Our findings suggest that exchange rate is affected by growth rate, and trade and capital flows: other less significant variables include sovereign debt; balance of payments; money supply; and trade openness. It also confirms that interest rate has significant effect on exchange rates while price effect is not significant in short run regressions. These key findings are robust across different time intervals, thus showing new findings on the exchange rate dynamics consistent with theories.

Cost, revenue and profit efficiency of Islamic versus conventional banks: International evidence using data envelopment analysis

Mohammed K. I. Bader et al. — Mon, 01 Nov 2010 22:00:40 PDT

This paper measures and compares the cost, revenue and profit efficiency of 43 Islamic and 37 conventional banks over the period 1990-2005 in 21 countries using Data Envelopment Analysis. It assesses the average and overtime efficiency of those banks based on their size, age, and region using static and dynamic panels. The findings suggest that there are no significant differences between the overall efficiency results of conventional versus Islamic banks. Overall, the results in this paper are favorable with the ‘new’ banking system.

Cost and profit efficiency of Chinese banks: A non-parametric analysis

Mohamed Ariff et al. — Mon, 01 Nov 2010 18:56:20 PDT

Using a non-parametric technique for data from 1995 to 2004, we investigate the cost and profit efficiency of 28 Chinese commercial banks. We examine the influence of ownership type, size, risk profile, profitability and key environmental changes on the bank efficiency using a Tobit regression. Consistent with the existing literature, we find that profit efficiency levels are well below those of cost efficiency. This suggests that the most important inefficiencies are on the revenue side. Our findings are also consistent with prior evidence on ownership and efficiency: joint-stock banks (national and city-based), on average, appear to be more cost- and profit-efficient than state-owned banks while medium-sized banks are significantly more efficient than small and large banks. These and other results suggest the need for speedier reforms to open the banking market, improving risk management, minimizing the government's capital subsidy and diversifying ownership of Chinese banks.

Factors correlated with equity market risk premiums in developed and emerging markets

Vijaya B. Marisetty et al. — Wed, 27 Oct 2010 22:28:11 PDT

Traditional time series or cross-sectional regression procedures yield mixed evidence on maintained hypotheses about the determinants of international equity returns. This paper re-examines how three theory-suggested factors affect equity returns and how the test results may differ between developed and the Asian emerging markets. However, on pooling observations, our estimated coefficients are much more accurate, and yield theory-consistent results. Using the panel data method, we find that the equity returns, specified as risk premiums of developed and emerging markets, appear to be determined by variations within the equity markets using all three theory-suggested factors. In the emerging Asian markets, the risk premiums are affected more by the variation over time in income growth while the variations in the other two factors affect the equity premiums as within market variation effects.

Ho, C. S. F., & Ariff, M. (2010). Sticky prices and time to equilibrium: Evidence from Asia-Pacific trade-related economies

Catherine S. F. Ho et al. — Wed, 27 Oct 2010 21:36:18 PDT

A test of purchasing power parity: Asia Pacific and Latin America

Catherine S. F. Ho et al. — Wed, 27 Oct 2010 19:07:35 PDT

Finding evidence of the theoretical relationship between exchange rate and inflation has been a difficult proposition in an exchange rate market, despite many studies in developed markets. Three recent papers employing a new research design, Theil’s Divisia index method, found that this relationship holds only in the long run, given the sticky price hypothesis. However, this relationship has not yet been tested for economic regions with close trading networks. The use of this method enables us to resolve a longstanding issue as to the veracity of Purchasing Power Parity (PPP). This paper presents results that suggest long-run equilibria in two close trading regions, within both developed and emerging economies. We believe that these findings on long-run equilibrium and the length of time to equilibrium will enrich the literature on exchange rate market behaviour in both developed and emerging markets.

Are stock splits credible signals? Evidence from the Singapore market

Mohamed Ariff et al. — Wed, 27 Oct 2010 17:58:14 PDT

This paper studies the effects of stock splits on returns using daily data from the Singapore Stock Exchange over the period 1983-2000. Specifically, it examines whether stock split announcements provide credible signals due to asymmetry of information. We find that the market, on average, responds positively and significantly to announcements of stock splits. We then partition the sample into sub-samples: one with dividends (earnings) increasing firms and another with dividends (earnings) decreasing firms the 12 month period after the stock split. Both groups respond positively to stock split announcements on the event period, which initially casts doubt on the signaling hypothesis. Additional tests show that the difference between the cumulative average returns of the two sub-samples is significantly positive during the post-event and/or full-test period. An implication of this finding is that the market can differentiate ex ante between the two sub-samples, which lends support to the hypothesis that stock split announcements generally provide credible signals of future prospects.

Corporate spin-offs, their price reactions and determinants in Malaysia

Chung-Sin Yoon et al. — Tue, 26 Oct 2010 21:27:32 PDT

Spin-off as a form of financial restructuring has been examined in the US and the UK but not in other markets. This is a first study outside those markets. The evidence from a sample of 85 spin-off cases in Malaysia reveals that both the parent and the spin-off company stocks gain significant positive abnormal returns: parent firms earn smaller value while the spin-off firm gains substantially, much greater than is documented in other markets. Examining the factors correlated with the size of the spin-off effect, we find the abnormal returns are positively correlated with market capitalization and negatively correlated with age. The larger is the company or the newer is the company the greater is the magnitude of the positive abnormal returns.

Corporate governance: The case of Australian banks

Mohamed Ariff et al. — Tue, 26 Oct 2010 18:58:07 PDT

Extract: This chapter attempts to provide a summary report on the status of corporate governance in the banking sector of Australia. A historical fact often vaunted in Australia is that no depositor has lost his deposit in a bank for over over 100 years. Although there were bank failures depositors were paid off despite there being no deposit insurance! Nevertheless, since governance is a much broader issue than that of depositor protection, bank governance has emerged even in Australia as a key public issue with significant movements in the industry on self-regulation and, at the regulatory level, this interest has spawned significant regulatory changes.

The effect of interest rate changes on bank stocks

John J. Vaz et al. — Tue, 26 Oct 2010 18:04:34 PDT

This study examines the effect of publicly announced changes in official interest rates on the stock returns of the major banks in Australia during the period from 1990 to 2005. Previous studies of such effects have reported inconclusive and mixed results. US evidence suggests that banking stocks are generally negatively (positively) impacted by increases (decreases) in official interest rates. We find, somewhat unexpectedly, that Australian bank stock returns are not negatively impacted by the announced increases in official interest rates. Furthermore, banks apparently experience net-positive abnormal returns when cash rates are increased, which is consistent with dividend valuation theory that suggests if income effects dominate, then stock returns need not be negatively impacted. We explain our findings by the fact that Australian banks, which operate in a less competitive and concentrated banking environment compared to the US, are able to advantageously manage earnings impacts when cash rate changes are announced.

Do accounting and finance tools serve governance?

Mohamed Ariff et al. — Tue, 26 Oct 2010 16:54:05 PDT

A brief review of recent literature on corporate governance is provided, which is then concluded with a proposed corporate governance framework as a starting point for further development. We propose that it is stakeholder concentration that determines the quality of corporate governance. Next objective of this paper is the more ambitious one of addressing the role of accounting and finance disciplines to serve corporate governance. We test empirically if the use of some accounting and finance tools would have alerted management, auditors and regulators as well as investors to the impending collapse of failed firms ahead of time. If performance deterioration is not verifiable by using such acclaimed tools of these disciplines, then the advocacy of these disciplines is untenable and their contribution is overstated. Careful application of accounting-cum-finance tools, it appears, would have pre-identified the financial weakening of troubled firms, well ahead of time to catastrophic failures.