Intellectual capital disclosure practices and governance mechanisms of Islamic banks: a comparative study between IFRS and AAOIFI financial reporting regimes
Abstract
The exchange rate, a pivotal determinant of macroeconomic stability, shapes domestic prices, consumption, production, and trade while amplifying exposure to external shocks through structural dollar dependency in trade invoicing, commodity pricing, debt, and reserves. EMDEs such as OIC countries face chronic vulnerabilities - including excessive foreign currency-denominated debt, persistent current account deficits, and exchange rate disconnects from macroeconomic fundamentals driven by risk-sharing shocks, deepening global value chains, and financial contagion. These vulnerabilities are further compounded by escalating geopolitical risks and the ongoing global power shift, underscoring structural implications for the dollar-centric international monetary system and the urgency of cooperative responses. This study proposes an innovative monetary framework for a select group of OIC countries, introducing the Islamic Regional Currency Unit (IRCU) - a weighted member currency basket. The IRCU aims to mitigate currency risk via reduced dollar reliance, enhance regional monetary cooperation, and stimulate intra-regional trade through exchange rate stabilisation. It also positions the OIC within multipolar monetary debates, highlighting both opportunities and feasibility constraints under global integration. Methodologically, exchange rate volatility (ERV) is quantified through moving standard deviations against USD and IRCU, with F-tests, coefficient of variation, and divergence indicators to compare regime-specific patterns. Export-import demand functions are estimated via Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) models addressing cross-sectional dependence and dynamic effects, centred on counterfactual USD versus IRCU trade-invoicing scenarios. Robustness is verified using Common Correlated Effects (CCEMG) and Augmented Mean Group (AMG) estimators; Panel Granger causality tests map ERV-trade linkages. Results confirm the IRCU's efficacy in mitigating ERV through regional currency anchoring, significantly outperforming dollar-pegged regimes. Intra-OIC exports show heightened sensitivity to regional GDP growth with neutralised ERV-trade disruptions; imports demonstrate income-driven growth and lower depreciation sensitivity. Operationally, exchange rate decoupling, volatility insulation, and trade rebalancing under the IRCU reduce dollar dependency through diversified exposure and systemic resilience. Granger tests confirm eliminated bidirectional ERV-trade linkages, stabilising trade flows; robustness checks via Common Correlated Effects (CCEMG) and Augmented Mean Group (AMG) estimators validate structural adaptability across economic heterogeneities. The proposed framework combines exchange rate bands, a Regional Monetary Council, and IRCU-linked commodity pricing to minimise currency risk and strengthen monetary stability in fragmented, dollar-dependent economies. Supported by liquidity safeguards, pooled reserves, and labour market reforms, it is designed to reduce dollar reliance, enhance shock resilience, and realign trade flows. By explicitly recognising feasibility challenges, potential spillover effects, and the need for credible institutions, the framework balances ambition with practical constraints. Institutionalised coordination across fiscal, monetary, and structural domains further underpins monetary cohesion and fosters long-term stability.
Keywords
Islamic Regional Currency Unit (IRCU) , Exchange rate , Exchange rate volatility , Currency basket , Regional currency , Dollar dependency
Citation
Alam, A. (2025). Alternative currency arrangement for select OIC countries to enhance monetary and trade cooperation: An exploration study (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.edu.my/handle/INCEIF/4333
Publisher
INCEIF
DOI
License
Available in downloadable format
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