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Article citation: M. Kabir Hassan, (2011) "Editors notes", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 4 Iss: 2, pp. -
I have assumed the Editorship of the International Journal of Islamic and Middle Eastern Finance and Management as of January 1, 2011. I want to thank the outgoing Editor Dr Kadom Shubber and the Editorial Team and Editorial Advisory Board for their outstanding work, which has put the journal on a solid beginning. I will be responsible for all submissions to this journal beginning of January 2011, and the articles that were under the review process but not completed during the past editorial tenure. Our ex-Editor, Dr Kadom Shubber, has reviewed and processed five articles for the current volume.
The majority of Islamic countries – including Arab countries – are poor and economically underdeveloped. Islamic countries are characterised as developing, less developed or underdeveloped by United Nations’ criteria or other international and generally accepted development indicators. Conventional economic parameters based on gross domestic product (GDP) and gross national income per capita growth rates for Arab countries are neither reassuring nor promising either. Using GDP figures alone can be misleading when analyzing the nuances of economic output or the well-being of nations using broad concerns. Supplementing basic GDP figures with the 22 social, economic and environmental components of the newly introduced genuine progress index shows the same sad conclusion, however. The developmental path of the majority of Arab/Islamic countries – including the rich resource countries – lacks investment in people, shows steady decline in productivity, provides a shortage of employment opportunities, is marked by low levels of quality education, and employs depletion of non-renewable natural resources. This is a harmful as well as unsustainable path.
The economies of most Arab countries are stagnant with low levels of international trade and little capital inflow. Prolonged economic stagnation over the past 30 years – coupled with high rates of population growth – has led declining living standards across the majority of Arab countries. This accounts for much of the recent unrest in the region. However, difficulties facing the majority of Arab Muslim countries are not limited to the economic sphere. Problems also extend to social, political, and institutional environments. Reform has been slow, selective, and usually designed to undermine effectiveness while justifying agendas of the elite. Such backwardness can be blamed solely on Arab Governments that draw on regulations, protectionism, state-dominated economies, corruption, poor delivery, oversized public sectors, and outdated educational methods. Political unrest during the past half-century has left its mark on every Arab country. This is evidenced by regional wars, border disputes, and internal conflicts. The Human Development Report from 2002 highlighted the adverse impact of political instability hindering development efforts and contributing to the economic disarray of Middle-Eastern Islamic/Arab countries.
Accumulated deposits in the Islamic banks in the Gulf States have exceeded US$1 trillion in 2010. Interestingly, most of this wealth is re-invested in overseas financial institutions since local banks have neither the facilities nor the capabilities to invest such wealth in the region. The irony is that financing new business initiatives remains a genuine problem facing the majority of potential local entrepreneurs while national wealth is invested passively in foreign economies. Investment of even a small portion of this wealth at home would make a huge impact on the indigenous economic development.
There is a consensus among all nations – regardless of the status of their “well-being” – that entrepreneurship has a vital role to play economic development. Consequently, development questions should be given a wide context. The importance of entrepreneurship to the economic well-being of the Arab/Islamic countries is not in question. However, the suitability of the prevailing Western entrepreneurship model to the political, cultural, and economic environment of these countries is highly controversial. The revolutionary Schumpeterian model of entrepreneurship – with its emphasis on innovation and creativity – is best suited to the liberal industrialised countries of Western Europe and North America. Likewise, the evolutionary Kirznerian version of entrepreneurship – with its focus on creative imitation and adaptiveness – has played a key role in the development of newly industrialised East Asian economies. Most development theories are largely based on mainstream economies with Western origins. These theories view entrepreneurship purely as an economic activity and presume that the prime motive of the entrepreneur is to maximise personal returns. The Islamic paradigm embraces something beyond this presumption.
Islam has no ill feelings towards the Western perception of entrepreneurship as an “economic activity”. It strongly argues that economic activity – like all other activities – must be based on ethical and moral foundations to be socially acceptable and beneficial. Islam considers the profit motive to be legitimate and moral as long as it is kept free of interest (riba), greed, speculation and exploitation. Maximizing returns is not considered the ultimate goal of the Islamic entrepreneur. Materialistic gain is intended to please The Almighty Allah through its lawful and righteous use. Thus, entrepreneurship in Islam has a moral dimension alongside its economic dimension. Muslim entrepreneurs meet their economic needs, serve their communities, and fulfil religious duties so they then attain falah in this worldly life and will be rewarded generously in the hereafter.
The first article by Imran Tahir and Mark Brimble elucidates the strong growth in Islamic finance and banking across the globe. This growth has coupled with a movement towards implementation of Islamic law amongst adherents. The article’s authors use experimental design to investigate the investment behaviours of Muslims. They argue that investment in shares is permissible under Islam law pursuant to five conditions and find that Islamic beliefs influence investment behaviour. The degree of influence is pursuant to the religiosity of the individual. In addition, they find evidence of “Western style” wealth maximisation in Muslim investors as well as a desire to consider sustainable investment principles in asset allocations.
These findings have implications for investors, financial advisors, and policy makers. Muslim investors will be able to diversify their portfolios to include shares instead of being restricted to Islamic institutions if share investment as permissible under Islamic law. This suggests an opportunity for financial institutions to further develop suitable products and services. Institutions must be aware that Islamic investors do not have a homogenous set of investment characteristics. This research suggests a market for sustainable financial services and products in the Islamic community may prove useful and should be explored.
The second article by Lee and Ullah examines factors that motivate customers selecting Islamic banks in Pakistan. Estimating the degree of importance of Shari’a compliance for Islamic banks’ customers helps assess the potential risk of deposit withdrawal upon violation of Shari’a principles. They present descriptive statistics and cross-tabulation analysis based on data collected from 357 customers. Their findings reveal that Islamic banks’ customers highly value Shari’a compliance in their banks and that non-compliance with Shari’a principles leads to disgruntled customers. One interesting finding is that customers will switch banks upon repeated violations of Shari’a. Still, the findings reveal that Shari’a compliance is not the only satisfaction yardstick for Islamic banks’ customers. Customers also expect their banks to be convenient and technologically advanced as well as safe and secure. The paper has profound implications for IFIs operating in Pakistan. These institutions must be mindful of compliance as well as other factors to remain competitive with conventional banks.
The third article by Alanazi, Liu and Forster examines financial performance of 16 Saudi IPO firms going public between 2003 and 2009. Firm performance is measured by ROA and ROS. Both show significant deterioration after the IPO. Findings show performance decline for all 16 Saudi firms starting the year of the IPO. The losses intensify in subsequent years. Regression analysis indicates that performance decline among the Saudi IPOs was associated with IPO occurrence. Performance deterioration was not due to conflict between original owners and the new shareholders. Issuing a minority of shares to the market and retaining the majority of the shares was found to be positively linked to the change in the ROA. Saudi owners achieved two objectives through IPO. First, the original owners kept controlling power even after the issue. Second, they rode a surge in the Saudi capital market that was likely to give their shares higher prices than underlying real value. Finally, the age of the firm in Saudi Arabia had a significant positive impact on the performance. The size of the firm did not. This implies that well-established Saudi firms achieved higher performance levels than newer counterparts.
The next article by Al Zaabi uses an emerging market (EM) Z-score model to predict bankruptcy and measure the financial performance of major Islamic banks in the UAE. The measures could be used as warning alarms for any future financial distress facing Islamic banks in the UAE. In addition, this study introduces the Z-score model as a beneficial diagnostic tool for identifying possible causes behind deterioration of financial performance. Thorough understanding of the relationship between the denominator and the numerator of all ratios in the Z-score model provides insight for Islamic banks. It is a helpful indicator to manage industry position that facilitates drafting of SWOT analysis and budgets. This study’s importance stems from its attempt to measure the distance to default by using a weighted average Z-score for Islamic banks in the UAE. The study’s results show that Islamic banks in the UAE are healthy and financially sound since their emerging market Z-score falls in the healthy area of the scale. The banks scores significantly exceeded the cut-off value of 2.60 on the EM Z-score.
The fifth article by Erdem and Erdem seeks to determine the context of short, medium, and long time functional strategies of small and middle size family businesses in different sectors. Another goal is to discuss findings in terms of strategic orientations required by global competition. Explorative characteristic were gathered from the 36 owners-managers (111 people) who were leaders in forming strategies for their businesses. The survey’s study consists of 32 items concerning management/human resource management, marketing, production, and finance functions. The data were evaluated using descriptive and variance analyses. The study provides some interesting insight but does have its limitations. One of the main limitations is that owner/manager perceptions were the only source of data. The lack of a measure of the efficiency level of functional strategies and practices or performance of enterprises is an additional limitation. Small sample size does not allow generalizations to be made.
I hope the reader will enjoy the current issue of the journal.
M. Kabir Hassan
Kayed, R.N. and Hassan, M.K. (2010), Islamic Entrepreneurship, Routledge, London, p. 376 (hardback)