Financial Risk Management for Islamic Banking

Nowadays in European, American and most westernized markets, financial institutions such as Credit Swiss, Deutsche Bank, HSBC, the Islamic Bank of Britain etc, are offering more products and services of Islamic finance. Moreover, a great number of financial institutions in GCC (Gulf Cooperation Council) countries and Asia are managing funds of over US$300 billion, and are encouraged from their markets to provide Islamic financial products. As a result of the growth market of Islamic finance, the demand for risk management for Islamic financial products and services is becoming a very hot issue for both westernized and Islamic financial markets. This book presents a common framework on how to efficiently manage the risks faced, by identifying where the Islamic financial products and services are risk exposed, to effectively minimise the overall degree of Islamic financial risks. Case studies and examples provide good understanding of the abovementioned issues, and many others, as well as on how to practically implement the steps of risk management framework for the Islamic financial institutes. Risk management for Islamic banking financial products and services is one of the greatest challenges that many westernized as well as Islamic Banks are phasing nowadays. Therefore, this book will be a valuable guide for those that are working on both non-Islamic and Islamic finance.

IOANNIS AKKIZIDIS is Risk Management Consultant & Analyst at IRIS integrated risk management ag, Zürich, Switzerland.

SUNIL KUMAR KHANDELWAL is Head of Risk Management - Middle East at IRIS integrated risk management ag, Dubai, United Arab Emirates.

List of Tables	p. x
List of Figures	p. xii
Foreword	p. xiv
Foreword	p. xvi
Preface	p. xviii
About the Authors	p. xxiv
Acknowledgements	p. xxvi
Abbreviations	p. xxviii
Principles of Islamic Finance	p. 1
Introduction	p. 1
Risk Management Issues in Islamic Financial Contracts	p. 28
Introduction	p. 28
An overview of financial risks	p. 30
Identifying risks in Islamic finance	p. 36
Risk of non-compliance with Shariah rules	p. 41
Main elements used in financial risk analysis	p. 41
Musharakah contracts of partnership and financial risks	p. 42
Mudarabah contracts of partnership	p. 49
Murabaha contract agreements and financial risk	p. 54
Salam contract agreements and financial risk	p. 58
Istisna contracts and financial risks	p. 63
Ijarah contract agreement and financial risk	p. 68
Basel II and IFSB for Islamic Financial Risk	p. 80
Introduction	p. 80
The Basel accord	p. 82
Risk management according to Basel II and the Islamic financial industry	p. 83
The three pillars of Basel II	p. 84
Pillar 2: Supervisory review	p. 96
Pillar 3: Market discipline	p. 98
IFSB principles of risk management	p. 99
Credit Risks in Islamic Finance	p. 109
Introduction	p. 109
Credit risk exposure identification	p. 110
Credit risk assessment models	p. 113
Credit risk valuation	p. 118
Credit risk mitigation	p. 133
Credit rating systems	p. 134
Validating the credit rating systems	p. 139
Market Risks in Islamic Finance	p. 148
Introduction	p. 148
Identification of market risk factors	p. 149
Rate of return risk	p. 149
Commodity risk in Islamic finance	p. 154
FX rate risks	p. 159
Equity price risks	p. 160
Valuation issues on equity prices and FX rates	p. 160
Quantification of foreign exchange risk, equity risk, and commodity risk	p. 161
Data referring to market risk factors	p. 161
Sensitivity in market risk	p. 163
Market risk valuation models	p. 164
VaR models for Islamic financial contracts	p. 164
Position and market data	p. 166
Position risk and exposure risk	p. 168
Evaluation methods of market risk	p. 168
Variance-co-variance method	p. 169
Monte Carlo simulation method	p. 173
Historical simulation	p. 174
Back-testing and stress-testing for market risk exposures	p. 176
Operational Risk in Islamic Finance	p. 182
Introduction	p. 182
Main elements in operational risk analysis	p. 183
Identification of operational risk	p. 185
Measuring operational risks	p. 197
Loss events	p. 199
Evaluating operational risk based on VaR analysis	p. 203
Elements in the framework of the operational risk management	p. 206
Concluding Remarks	p. 211
Index	p. 217
Table of Contents provided by Ingram. All Rights Reserved.

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Financial Risk Management for Islamic Banking and Finance

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