Islam offers a sustainable and comprehensive development model for humanity that can be systematically categorised as the means as well as the ideal outcome of achieving Maqasid (objectives) of Shari'ah (Islamic law). As a rule-based religion, Islam's prescription for development goes well beyond market regulations and includes rules necessary to maintain a dignified life; in order that the faithful can maximise their intellectual capacity, preserve and promote their health and education, and have equal opportunity for employment and partnership in the economic and social development of society, and unhampered by practices of fraud, cheating, corruption, or property abuse, among others. In practice, however, there is dichotomy between Islam's prescription and the current state of affairs in Muslim countries. In order to develop a better understanding of the factors contributing to this divergence, this paper provides the design of a benchmark for the monitoring of adherence to and compliance with Maqasid al-Shari'ah. This benchmark is intended to serve as a self-inspection tool for policy makers to monitor economic, social and policy development within the scope of Maqasid, and to serve as a benchmark for the progress and performance of OIC member countries

The purpose of this paper is to test the growing converging views regarding the destabilizing and growth-halting impact of interest-based debt financial system. The views are as advocated by the followers of Keynes and Hyman Minsky and those of Islam. Islam discourages interest rate based debt financing as it considers it not very conducive to productive activities and human solidarity. Likewise, since the onset of the crisis of 2007/2008, calls by skeptics of mainstream capitalism have been renewed. The paper applies a threshold regression model to Malaysian data and finds that the relationship between growth and financial development is non-linear. A threshold is estimated, after which credit expansion negatively impacts GDP growth. While the post-threshold negative relationship is found to be statistically significant, the estimated positive relationship at lower levels of financial development is insignificant. The findings provide support to the above views and are hoped to guide monetary authorities to better growth-promoting policy-making.

In the last five decades, advances in information technology and in financial innovations have made possible the emergence of an immense capacity for banks to switch regimes from risk transfer to risk shifting. The devastating power of this capacity was amply pronounced in the financial crisis of 2007/2008. The fallout of which has intensified calls for a re-examination of current banking model and its risk management (or rather mismanagement). Risk shifting is, axiomatically, absent in an ideal Islamic financial system. The Islamic banking model, thus, provides unique paradigm with risk sharing at its core, potentially fostering financial inclusion and reducing the incidence of bank failures and the size of losses incurred by depositors and tax payers. However, the present formation of Islamic banking has grown out of conventional banking and reverse engineers many of its techniques and instruments. The main objective of this paper is to empirically investigate risk management in Islamic banks in dual banking systems in member states of the Organization of Islamic Countries. The two-step dynamic difference GMM is applied to cater for the nature of Islamic banking data, which is characterized by a larger dynamic panel and a smaller timeframe. Findings tend to indicate that Islamic banking has a limiting effect on risk shifting. The effect however is not sufficient to fully nullify the overall risk shifting incentives. The evidence supports strengthening risk sharing and reforming Islamic banking configuration as the way forward.

The original intent of conventional banking was to serve as pure intermediary between surplus fund holders and deficit units in the economy. In this role banks transferred risk from depositors to borrowers. An edifice of deposit insurance system and supervisory/regulatory structure was erected to protect the creditor at the expense of the debtor. In the last five decades, however, advances in information technology and in financial innovations have made possible the emergence of an immense capacity for rapid regime switching from risk transfer by risk shifting was amply pronounced in the financial crisis of 2007/2008. The fallout from the crisis has intensified calls for a re-examination of current banking model. Banks' tendency to shift the risk of losses to external parties, while internalizing gains through debt-based contracts (Sheng, 2009), creates a minority class (equity holders and financiers) that benefits from economic and financial growth and excludes a majority (depositors and tax payers) from sharing in the prosperity. Worse still, the majority stands to bear the brunt of recurrent risk-shifting induced crises.

Risk shifting is, axiomatically, absent in an ideal Islamic banking system, where equity holders are expected to share assets' upside and downside potential with investment account holders (depositors). The Islamic banking model, thus, provides unique paradigm with risk sharing at its core. However, the present formation of Islamic banking has grown out of conventional banking and uses many of its techniques and instruments. Whereas significant research has delineated the theoretical foundations of Islamic banking and its axiomatic characteristics, empirical assessment of the implications of present form Islamic banking is relatively limited and often focused on issues of efficiency, profitability and stability. The main objective of this dissertation is to make the initial attempt to empirically investigate the risk shifting behaviour in Islamic banks in dual banking systems of OIC member states1, using Merton (1977) and Duan et al. (1992) models. Also, unlike existing literature, this study controls for dynamic bias by applying the two-step dynamic difference GMM to an unbalanced panel of 272 conventional banks and 75 Islamic banks from 2002 to 2013 ...

In theory, Risk Sharing-based Financing (RSF) is considered a corner stone of Islamic finance. It is argued to render Islamic banks more resilient to shocks. In practice, however, this feature of Islamic financial products is almost negligible. Instead, debt based instruments, with conventional like features, have overwhelmed the nascent industry. In addition, the framework of present-day economic, regulatory and financial reality inevitably exposes Islamic banks in dual banking systems to problems of conventional banks. This includes, but is not limited to, interest rate risk. Empirical evidence has, thus far, confirmed such exposures, despite Islamic banks' interest free operations. This study applies system GMM in modeling the determinants of RSF, and finds that RSF is insensitive to changes in interest rates. Hence, our results provide support to the "stability" view of risk sharing- based financing. This suggests RSF as the way forward for risk management at Islamic banks, in the absence of widely acceptable Shariah compliant hedging instruments. Further support to the stability view is given by evidence of counter cyclicality. Unlike debt-based lending that inflates artificial asset bubbles through credit expansion during the upswing of business cycles, RSF is negatively related to GDP growth. Our results also imply a significantly strong relationship between risk-sharing deposits and RSF. However, the pass-through of these deposits to RSF is economically low. Only about 40 percent of risk-sharing deposits are channeled to risk-sharing financing. This raises questions on the validity of the industry's claim that depositors accustomed to conventional banking shun away from risk sharing and signals potential for better balance sheet management at Islamic banks. Overall, our findings suggest that, on the one hand, Islamic banks can gain "independence" from conventional banks and interest rates through risk-sharing products, the potential for which is enormous. On the other hand, RSF could enable policy makers to improve systemic stability and restrain excessive credit expansion through its counter cyclical features.

Despite the rapid growth of Islamic finance in recent years, there has been relatively little work done on the emerging Islamic mutual fund industry within the broad field of Islamic finance. As far as the authors' knowledge, this paper is the first attempt dedicated to understanding the correlation between different sizes of the young and rapidly growing Islamic mutual fund industry at different investment horizons. Major part of economic time series analysis is done in time or frequency domain separately. Wavelet analysis can combine these two fundamental approaches, so we can work in the time-frequency domain. Using wavelet coherence, we have gained valuable insights into the continuous dynamics of correlation between small, medium and large size Islamic mutual funds at different investment horizons for reaping the benefits of portfolio diversification in particular and keeping contagion risk at bay.

Automatically, risk shifting is absent in an ideal Islamic financial system (The Kuala Lumpur Declaration, 2012). Creating an opportunity for shared prosperity is a litmus test of the authenticity of Islamic banking. The present formation of Islamic finance has grown out of conventional finance and it uses its instruments.