Stage-I Shariah compliant Macaulay’s duration model testing

Abstract

Purpose The purpose of this study is to develop, test and examine econometric methodology for Sharīʿah-compliant duration models of Islamic banks. Design/methodology/approach The research evaluates all existing duration models from Sharīʿah’s perspective and develops a four-stage framework for testing Sharīʿah-compliant duration models. The econometric methodology consists of multiple regression, Johansen co-integration, error correction model, vector error correction model (VECM) and threshold vector error models (TVECM). Findings Regressions analysis suggests that returns on earning assets and interbank offered rates are significant factors for calculating the duration of earning assets, whereas returns paid on return bearing liabilities and average interbank rates of deposits are significant factors for duration of return bearing liabilities. VECM suggests that short run duration converges into long run duration and TVECM suggests that management of assets and liabilities also plays a significant role that can bring about a change of about 15% in respective durations. Practical implications Sharīʿah-compliant duration models will improve risk and Sharīʿah efficiency, which will ultimately improve market capitalization and returns stability of Islamic banks in the long run. Originality/value Sharīʿah-compliant duration models testing provides insight into how various factors, namely, rates of return, benchmark rates and managerial skills of Islamic bank risk managers impact durations of assets and liabilities. It also explains the future course of action for Sharīʿah-compliant duration model testing.

Shariah Compliant Macaulay’s Duration Model Testing: Evidence from Islamic banks in Indonesia

“…This research uses the methodology of Shah et al (2021b) for testing Shariah compliant duration models. Following Shah et al (2021b) this research uses data relating to financial assets and liabilities of various maturity ladders as reported in various financial statements of Islamic banks in Indonesia Pakistan for the period 2009 to 2019. Maturities are calculated in terms of Stohs and Mauer (1996).…”

“…Procedure for testing a financial model has also been explained by Shah et al (2021b). Their framework for testing the duration model has been given hereunder:…”

“…This model has been proposed by Xu and Ma (2018) et al (2020a) propose Shariah compliant models of duration for earning assets and return bearing liabilities of Islamic banks. These models have been tested by Shah et al (2021b).…”

“…Having reviewed the literature on Islamic banks and various duration models developed and tested so far, the objective in this research is to further test the Shariah compliant duration model of Shah et al (2020)a and tested by Shah et al (2021b).…”

“…Guletkin & Rogalski (1984) provide three hypotheses to be tested on duration models using multiple regression analysis that have been amended for use in Shariah context by Shah et al (2021b) as under:…”