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Volume :26 Issue : 99 2000      Add To Cart                                                                    Download

DIFFUSION OF ISLAMIC FINANCIAL INNOVATION: THE CASE OF ISLAMIC INVESTMENT FUNDS

Auther : Dr. Khalid A. Sahlawi, and Dr. Faud A. Al-Mubarak

 
A large part of the financial industry in Saudi Arabia has been transformed over the last ten to fifteen years by the spread of Islamic financial innovations.  The creation and diffusion of Islamic financial innovations has converted baking from an industry that almost exclusively performed on-balance-sheet interdiction into one in which Islamic contracts and other off-balance-sheet activities are important components of the package of services provided by banks and particularly large banks.

 To understand this great change in the banking industry, it is necessary to examine how these Islamic financial innovations arise and how they spread throughout the industry.  There is a considerable empirical literature examining the condition under which banks adopt various off-balance-sheet activities, particularly loan sales, standby letter of credit and loan commitments.  These studies test a number of different theories about the effects of regulatory factors and market influences on off-balance-sheet activities.  What are less well understood are the diffusion processes that determine the rates at which Islamic financial innovations spread across financial institutions.

This study caries out an empirical investigation, using Mansfield’s estimated model to examine the diffusion of one of the most important off-balance-sheet Islamic financial innovations (Islamic Investment Fund), and to determine the key factors that affect a bank’s decision to engage in such innovation.  The study will be the first of its kind (to the researchers’ knowledge), which investigates the adoption of Islamic financial innovations by banks.  It will contribute to the body of literature on Islamic and financial economics and will hopefully have a significant impact on future research in this area.

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May 18, 2017

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