Front Matter Page
Monetary and Capital Markets Department
Contents
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