Academic journal article Journal of Finance, Accounting and Management

Risk Sharing Equity-Based Islamic Finance, Macroeconomic Resilience and Significance to Oman as a New Entrant

Academic journal article Journal of Finance, Accounting and Management

Risk Sharing Equity-Based Islamic Finance, Macroeconomic Resilience and Significance to Oman as a New Entrant

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

In the age of dwindling oil resources and price dips, there is a consensus among experts and the international organizations, such as the International Monetary Fund (IMF, 2015) and the World Bank (WB, 2015) that diversifying sources of income and reducing reliance on oil revenues is the strategic solution that would help the GCC countries to overcome fluctuation of financial resources. Given its application to Oman, the sultanate is preemptive in realizing the importance of expanding sources of income. As a result, Oman continues to exert serious efforts in diversifying its economy. To this end, various priority themes including the development of the manufacturing sector, fisheries, tourism, infrastructure, the services and SMEs sector as well as human resource development have been resorted to. Moreover, given that the vision 2020 anticipates significant structural changes in the economy, forecast of a net increase in non-oil GDP to increase to 81% in 2020 is envisaged (Mansour, 2014). However, the pursuit of above objectives can pose its fair share of challenges while threatening to impact economic growth. Government budgets alone cannot be relied upon as the source of financing massive development bills. To this need, a suitable and sustainable financial architecture ranks second to none. Resorting to a diverse and resilient financial setup will hold the key in providing the necessary means to meet the required ends.

Islamic finance is ascending to greater prominence in the global financial system and has fast extended beyond the predominantly Muslim economies to major industrial ones. Given the growth trends, the industry is set to surpass the $2 trillion mark in global assets by 2018. This growing significance is not only a manifestation of the viability of Islamic finance but also a testimony of its potential to offer resilient economic growth. The financial soundness and stability mechanism are an in-built dimension of an Islamic financial system as it resides within a financial trajectory underpinned by the principles of Islamic Shariah. Compliance to these principles contributes towards insulating the Islamic financial system from the potential risks of financial stress triggered by excessive leverage and speculative financial activities. However, in view of the progress, the question of long-term sustainability becomes crucial. For long, observers have suggested that IFI's growth has been due to petrodollar resources. Given the recent significant reduction in oil prices, this hypothesis is being put to test. If, as is expected by some analysts, the oil price decline has a permanent component then it becomes even more important that IFI finds ways and means of long-term sustainability.

The present study will attempting to tackle the question of long-term sustainability of Islamic Finance, focuses on its 'value preposition' and will discuss the significance of the same for a new entrant like Oman. The discussion becomes more relevant as the country formally shifts focus from oil driven revenues to economic diversification. After putting forwarding the introduction in above section I, the following section II briefs on Oman's adoption and current progress in Islamic Finance. The same is followed suit by section III which establishes 'risk sharing' based financing as the essence and 'value preposition' of Islamic Finance. Section IV then uses the highly advanced wavelet approach to empirically demonstrate the better growth claims of risk sharing based financing in comparison to debt finance. Section V puts forward some macro-economic implications and the economic significance of Islamic Finance to Oman. Section VI concludes the study.

II. Oman's Adoption and Current Progress in Islamic Finance.

The Royal decree number 69/2012 paved the way for dual banking system in Oman by amending the Banking Law No. 114/2000. This allowed for both conventional and Shariah compliant products. …

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