Religiosity, Neglected Risk and Asset Returns: Theory and Evidence from Islamic Finance Industry

45 Pages Posted: 24 Jul 2019

See all articles by Saad Azmat

Saad Azmat

Monash University - Department of Accounting and Finance

Haiqa Ali

Lahore University of Management Sciences (LUMS)

A. S. M. Sohel Azad

Deakin University

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: April 22, 2019

Abstract

This paper studies the sociological influence of religion on the risk and return in the financial markets with particular context of Islamic finance. The paper builds a theoretical model to show how intermediaries serve their customers’ religious needs by creating innovative Islamic financial instruments. The customer’s emphasis on religiosity exposes the industry to a theological risk, which can increase the financial fragility of the system. In our model, the theological risk emerges as a neglected component, which can be realized in the event of a bad news challenging the religious legitimacy of (Islamic) finance structures. Using stock prices data for 104 Islamic bond (Sukuk) issuers, our analysis shows that Islamic bond issuers experienced a significant decline in their stock prices, following multiple formal and informal announcements in 2008, which challenged the religious legitimacy of Islamic bond structures. We complement our analysis using 1361 new Sukuk issues in Malaysia from 2005 to 2016 to investigate the impact of a regulatory change (introduced by Bank Negara in 2015) that limited the supply of sovereign Sukuk to serve only the Islamic banking industry.nter Abstract Body]

Keywords: Financial innovation; Coarse thinking; Financial crisis; Islamic finance

JEL Classification: D03; E44; G01; G14; G21; G32

Suggested Citation

Azmat, Saad and Ali, Haiqa and Azad, A. S. M. Sohel and Hassan, M. Kabir, Religiosity, Neglected Risk and Asset Returns: Theory and Evidence from Islamic Finance Industry (April 22, 2019). 3rd Chapman Conference on Money and Finance - Financial Market Development in Emerging Asia: Impact on Corporate Performance, Capital Flows and Politics | May 4, 2018, Available at SSRN: https://ssrn.com/abstract=3424422 or http://dx.doi.org/10.2139/ssrn.3424422

Saad Azmat

Monash University - Department of Accounting and Finance ( email )

Building 11E
Clayton, Victoria 3800
Australia

Haiqa Ali

Lahore University of Management Sciences (LUMS) ( email )

D.H.A, Lahore Cantt
Lahore, Punjab 54792
Pakistan

A. S. M. Sohel Azad (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood
Melbourne, Victoria 3125
Australia

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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