UvA-DARE (Digital Academic Repository) Financial intermediation and monetary transmission through conventional and Islamic channels Zaheer, S. Publication date 2013 Document Version Final published version Link to publication Citation for published version (APA): Zaheer, S. (2013). Financial intermediation and monetary transmission through conventional and Islamic channels. General rights It is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), other than for strictly personal, individual use, unless the work is under an open content license (like Creative Commons). Disclaimer/Complaints regulations If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library: https://uba.uva.nl/en/contact, or a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible. UvA-DARE is a service provided by the library of the University of Amsterdam (https://dare.uva.nl) Download date:25 Sep 2021 This thesis studies the salient features of Islamic Banking and Finance (IBF) and Islamic Channels Through Conventional Financial Intermediation and Monetary Transmission Financial Intermediation in comparison to Conventional Banking and Finance (CBF).The study explains the balance sheet products used by Islamic banks as well as analyzes the and Monetary Transmission proposed tools for monetary policy in IBF. Next, the dissertation empirically tests how the structure of Islamic banks is different from that of conventional Through Conventional and banks and whether or not Islamic banks are more stable than the conventional ones. The importance of last question has been increased especially after the Islamic Channels fi nancial crisis 2007-09. The dissertation also examines how the capital market instruments in IBF, called sukuk, are structured and, in case of defaults, restructured. The distress resolution mechanism in IBF is also discussed in this regard. Finally, the study provides an empirical analysis of whether the transmission of monetary policy through the so-called bank lending channel will be altered in strength when the Islamic segment of the banking sector becomes even more important. Sajjad Zaheer Sajjad Zaheer (1974) graduated from International Islamic University Islamabad and University of Amsterdam in Economics. He has been associated with the State Bank of Pakistan, the central bank, in various capacities since 2003. Between 2009 and 2013 he conducted PhD research at University of Amsterdam under the supervision of Professor Sweder van Wijnbergen and Professor Steven Ongena. During this period he also worked with the European Central Bank and the International Monetary Fund on a couple of projects. Sajjad Zaheer Financial Intermediation and Monetary Transmission Through Conventional and Islamic Channels Sajjad Zaheer The foreground of the front cover image, Grand Mosque in Abu Dhabi, is a symbol of religion (can also be a church). The background building is of ABN AMRO in Amsterdam and represents conventional finance. Taken together, the picture may be viewed as introducing religious principles and moralities (risk sharing, transparency, prohibition of shorting selling etc.) in conventional finance. Also, the image potentially represents the dissertation title. © Sajjad Zaheer, 2013 Thesis printed by Rozenberg Publishing Services, Amsterdam ISBN 9789 90 361 0367 1 Financial Intermediation and Monetary Transmission Through Conventional and Islamic Channels ACADEMISCH PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Universiteit van Amsterdam op gezag van de Rector Magnificus prof. dr. D.C. van den Boom ten overstaan van een door het college voor promoties ingestelde commissie, in het openbaar te verdedigen in de Agnietenkapel op vrijdag 4 oktober 2013, te 12:00 uur door Sajjad Zaheer geboren te Gujar Khan, Pakistan Promotiecommissie Promotor: Prof. dr. S.J.G. van Wijnbergen Co-promotor: Prof. dr. S.R.G. Ongena Overige Leden: Prof. dr. R.M.W.J. Beetsma Prof. dr. A.W.A. Boot Dr. L.T.M. Baele Dr. M. Giuliodori Faculteit Economie en Bedrijfskunde To my parents, wife & kids and brothers & sisters Acknowledgements All praise be to God who alone is the Creator, Master and Sovereign of the universe. He who has created man, endowed him with knowledge and reason, made him His vicegerent on earth, and has sent His Books and Messengers to guide him. May God bless all those righteous and noble servants of His who were appointed to teach man how to live as true human beings and who made man aware of the real purpose of his life, and showed him the right way to live in this world. During my work on thesis I have benefited from various organizations and many people whom I would like to thank. I am grateful to Higher Education Commission of Pakistan, State Bank of Pakistan and University of Amsterdam for providing me the opportunity to complete my PhD dissertation. I am especially thankful to my promoter Prof. Sweder van Wijnbergen and co-promoter Prof. Steven Ongena for supervising the thesis, sharing knowledge, and providing invaluable guidance and encouragement to complete my work. I am thankful to Sweder for providing me sufficient freedom in selecting the topics of my interest for research and for imparting theoretical understanding of the concepts in conventional Economics and Finance in relation to Islamic Finance. I am also indebted to Steven who helped me in empirical research and responded to my online queries promptly. I would also like to thank Frank Klaassen for helping me in issues related to Econometrics, showing great openness to my spontaneous visits and queries and, sometimes, letting me win ping pong! I must also express my thanks to Roel Beetsma, Massimo Giuliodori, Maurice Bun, Dirk Veestraeten, Christian Stoltenberg and Ward Romp from all of whom I have learned many concepts of Economics by attending their lectures. I really enjoyed the company of all my colleagues in the UvA and TI. I thank all of them: Zara, Markus, John, Naomi, Tim, Matija, Petr, Damiaan, Boele, Lucyna, Christiaan, Zina, Joris and Lin. I am also grateful to Wilma, Robert, Katja, Jose, Kees, Karin Ana and others in the faculty secretariat who always facilitated me in PhD procedures and administrative matters. I would also like to thank my co-author in couple of papers Moazzam for his cooperation in data and working jointly. There are also many friend who must not go unmentioned. Thank you Faisal, Nadeem, Azmat, Hannan, Ghaffar, Rashid and others for your help and support in many real life matters. I am also grateful to the Dutch community in general who provided me friendly atmosphere to live a very calm and peaceful life in the Netherlands. I felt free to follow rituals and values of my religion which provided me spiritual satisfaction and tranquility. Many thank also go to my friends in State Bank of Pakistan for their time to time help. Thank you Akmal, Riaz, Shamil, Jazil, Mukhtar, Zahid, Ishaq and others. Finally, and most importantly, I would like to give especial thanks to my wife, brothers and sisters, cousins and in-laws for their great support, encouragement and prayers during my PhD research. Amsterdam, August 2013 Contents 1 INTRODUCTION............................................................................................................... 1 2 ISLAMIC BANKING AND FINANCE: PRINCIPLES AND PRACTICE .................. 7 2.1 Introduction ................................................................................................................... 7 2.2 Origin of Islamic Banking ............................................................................................. 8 2.3 History and Evolution of Contemporary Islamic Banking .......................................... 12 2.4 Regulatory Framework for Islamic Banking in Pakistan ............................................ 13 2.4.1 Establishment of a Full-Fledged Islamic bank ..................................................... 13 2.4.2 Subsidiaries for Islamic Banking by Existing Commercial Banks ...................... 14 2.4.3 Stand-Alone Branches for Islamic banking in the Existing Commercial Banks ... 14 2.5 Structure of the Islamic Banks ..................................................................................... 15 2.5.1 The Liability Side of Islamic Banks’ Balance Sheet: Sources of Funds .............. 16 2.5.2 The Asset Side of The Balance Sheet: Uses of Funds ......................................... 20 2.5.3 Profit calculation of an Islamic bank.................................................................... 25 2.6 Central Banking and Monetary Policy in an Islamic Financial System ...................... 26 2.6.1 Statutory Reserve Requirement ............................................................................ 27 2.6.2 Open Market Operations ...................................................................................... 28 2.6.3 Discount Rate Policy ............................................................................................ 30 2.7 Practice with Regard to Interest-Free Central Banking ............................................... 32 2.8 Conclusion ..................................................................................................................