Front Matter Page

Monetary and Capital Markets Department


  • I. Preface

  • II. Introduction

  • III. Fundamentals of Islamic Finance

  • IV. Islamic Banks’ Balance Sheets and Implications for Stress Testing

  • V. Risks and Their Capital Impact within Islamic Banking

    • A. Displaced Commercial Risk

    • B. Credit Risk

    • C. Market Risk

    • D. Operational Risk

  • VI. Capital Requirement for Islamic Banks

  • VII. Stress Testing Islamic Banks

    • A. Scope of Risk Factors

    • B. Displaced Commercial Risk

    • C. Indirect Interest Rate Risk

    • D. Credit Risk

    • E. Market Risk

    • F. Operational Risk

    • G. Combination of Risk Factors and Organization of Risk Drivers

  • VIII. Conclusion

  • References

  • Appendices

  • I. Additional Tables

  • II. Modeling Unexpected Losses Using the Extreme Value Theory

  • III. Modeling Displaced Commercial Risk via Contingent Claims Analysis

  • IV. The Process-Driven Perspective of Profits in Islamic Finance

  • V. Comprehensive Representation of Credit and Market Risks in Stress Testing

  • VI. The Evolving Nature of Stress Testing

  • Box

  • 1. The Quantification of Displaced Commercial Risk

  • Tables

  • 1. Stylized Balance Sheet of an Islamic Bank

  • 2. Displaced Commercial Risk (DCR)―Current Regulatory Implementation

  • Figures

  • 1. Credit and Market Risks in Murabahah (Cost-Plus Sale) Contracts

  • 2. Credit and Market Risks in Ijara (Leasing) Contracts

  • 3. Credit and Market Risks in Salam (Forward) Contracts

  • 4. Generic and Unique Risks in Islamic Banking

  • 5. Profit Equalization Reserve (PER) and Investment Risk Reserve (IRR)

  • 6. Loss Absorption of Unexpected Losses by Unrestricted Investment Accounts

  • 7. Comparison of Conventional and Islamic Banking Capital Adequacy Formulae with Same Input Parameters

  • 8. Comparison of Conventional CAR and CARSDF

The Nature of Islamic Banking and Solvency Stress Testing - Conceptual Considerations
Author: Mr. Andreas A. Jobst and Mr. Juan Sole