Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.701413
Title: Corporate governance dilemma with unrestricted profit sharing investment accounts in Islamic banks
Author: Alhammadi, S.
ISNI:       0000 0004 5991 5299
Awarding Body: University of Reading
Current Institution: University of Reading
Date of Award: 2016
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Abstract:
The aim of this research is to focus on a key issue in Islamic finance, i.e. the corporate governance (CG) of Islamic banks, which arises because of the way they raise deposits using profit-sharing contracts. More specifically, the research addresses some key CG issues relating to unrestricted investment account holders (UIAHs) as major stakeholders, comparing their status, as a type of equity investor, to that of shareholders. In fact, UIAHs do not have any governance rights (other than the right to withdraw their funds) and there is a lack of transparency in banks’ dealings with them. The research reviews the relationship of UIAHs with the Islamic banks (IBs), since UIAHs as savers or depositors are likely to have different risk-return preferences compared to shareholders, and in particular to be more risk-averse. This research shows that this lack of governance rights and transparency leads not only to unfair treatment in a significant number of cases, but also to ambiguity regarding their status and rights. A comparative analysis of the rates of return received by shareholders and UIAHs was carried out using the coefficients of variation (CV) as a measure of risk-adjusted rates of return, to test whether current CG practice in IBs shows fairness of treatment to UIAHs in terms of risk-adjusted returns. Both UIAHs and shareholders face the same investment risk in the asset pool held by an Islamic bank in which their funds are invested, whereby banks utilise these funds to finance their operations. The results showed not only that there was a difference in rates of return, since on average shareholders received far higher rates of return than UIAHs with comparable levels of variation, but also that more than 32% of the UIAHs had a higher CV of rates of return than shareholders, which indicates that on a risk adjusted basis the UIAHs in these banks had lower rates of return for the same level of risk. An empirical study was conducted using a panel data model to test certain relevant and well-established CG variables that might have influenced the difference in rates of return. Again, the results showed a bleak picture for the UIAHs in many of the banks. The panel data analysis focused on the profit sharing and revealed that the main driver, which seems to have great explanatory power, is the size of the return on assets (ROA). It seems important to look at other aspects besides the sharing of the accounting profit, especially in the light of the interview with Kuwait Finance House (KFH-Kuwait) management, by further investigating the UIAHs’ issue of fair treatment. This was done in the first place through conducting a mixed methods approach that involves a two-phase project called explanatory sequential design. The focus was the behaviour of the stock market: the amount of value for shareholders that could be attached to retained earnings as suggested by the Gordon growth model. However, the value of retained earnings to shareholders depends on such earnings flowing through into share prices, but, given the lack of market efficiency in the Gulf Cooperation Council (GCC) stock markets, it is not possible to base a significant conclusion on the behaviour of share prices. In addition, because of the 2008 financial crisis and its effects in the following years, any share price benefit to shareholders from retained earnings was effectively wiped out. These results led to another look at the difference in rates of return between the shareholders and the UIAHs, emphasising the dividend yield against UIAHs’ yield, which are similar in that both are based on cash payments. For a sample of 20 IBs, the result was that the mean dividend yield was 83 basis points higher than the rate of return of payouts to UIAHs. It was also found that in one third of the cases the CV of the rates of returns paid out to UIAHs was higher than that of the dividend yields. The issue of whether such a difference of 83 basis points is justified (for example, as a return for the bank as asset manager) is not easy to resolve because of the lack of transparency which makes it virtually impossible for UIAHsto make that judgement for themselves; in addition, this was the mean for the entire sample, not the difference for any individual bank. By contrast, the fact that the CVs of the rates of return paid to UIAHs were higher than the CVs of the dividend yields for a significant proportion of IBs in the sample is clearly indicative of a lack of fairness and raises an important CG issue with respect to such banks.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.701413  DOI: Not available
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