Economic Capital and Risk Management in Islamic Finance (Islamic Business and Finance Series)

Cover
Half Title
Series
Title
Copyright
Dedication
Contents
Preface
About the Authors
List of Figures
List of Tables
List of Boxes
Part I Capital under Mudarabah and Musharakah Contracts
	1 Introduction
		1.1 Overview of Islamic Banking
		1.2 Basic Concept of Capital
		1.3 Capital for Islamic Banks
		1.4 Supervisory Capital Framework
		1.5 Rate of Profit
			1.5.1 Reasons for Profit
Part II Economic and Regulatory Capital
	2 Concept of Capital
		2.1 Accountant’s View on Capital
		2.2 Regulators’ View on Capital
		2.3 Economic Capital
		2.4 Regulatory and Economic Capital: What’s the Difference?
			2.4.1 Formula
			2.4.2 A Hypothetical Example
		2.5 Expected Loss and Unexpected Loss
		2.6 Economic Capital and Risk Measurement
			2.6.1 A Hypothetical Example
		2.7 Volatility and Capital
	3 The Significance of Economic Capital to Islamic Banks
		3.1 Role of Capital and Shareholder Wealth Creation
		3.2 Risk Management and Wealth Creation
		3.3 Capital Allocation and Cost of Capital
		3.4 Economic Profit
		3.5 Risks by Type of Contracts
			3.5.1 Credit Risks in Sales-Based Contracts
			3.5.2 Equity Risks in Profit-Sharing Contracts
			3.5.3 Specific Risk Features in Islamic Banks
		3.6 Economic Capital for Equity Financing and Sale Receivables
		3.7 Shari’ah-Compliant Instruments
			3.7.1 Asset-Based Instruments
			3.7.2 Profit-Sharing Instruments
Part III Capital under Mudarabah, Musharakah and Other Related Contracts
	4 Capital under Mudarabah Contract and Musharakah Contract
		4.1 Concept of Property Rights and Trust
		4.2 Elements of Mudarabah Contract
			4.2.1 Wordings (Sighah)
			4.2.2 Distribution of Profits and Capital
		4.3 Types of Mudarabah and Termination of Mudarabah
			4.3.1 Unilateral Termination
			4.3.2 Types of Termination
		4.4 The Concept of Musharakah
			4.4.1 Different Schools of Islamic Jurisprudences
Part IV Economic Capital and Risk Management
	5 Market Risk
		5.1 Definition of Market Risk
		5.2 Characteristics of Market Risk
			5.2.1 Salam Contract
			5.2.2 Istisna’ Contract
		5.3 Type of Market Risk
			5.3.1 Benchmark Rate Risk
			5.3.2 Foreign Exchange Risk
			5.3.3 Equity Market Risk
			5.3.4 Commodity Risk
		5.4 Policies and Procedures for Market Risk Management
		5.5 Significance of Market Risk Measurement
		5.6 Basel Accord and Market Risk
			5.6.1 Standardised Measurement
		5.7 Measuring Market Risk Exposure
			5.7.1 Variance-Covariance Approach (The Risk-Metric™ Model)
			5.7.2 Historical Simulation Approach
			5.7.3 Monte-Carlo Simulation Approach
		5.8 Volatility Forecasting
		5.9 Market Factors, Market Risk and Stress Testing
		5.10 Capital Requirement for Market Risk
			5.10.1 Implementing VaR into Capital Requirement for Market Risk
			5.10.2 Standardised Approach into Capital Requirement for Market Risk
			5.10.3 An Extension of Economic Capital for Market Risk
	6 Credit Risk
		6.1 Definition of Credit Risk
		6.2 Nature of Credit Risk
		6.3 Sources of Credit Risk
			6.3.1 External and Internal Risk Factors
		6.4 Credit Risk Assessment and Basel III
			6.4.1 Standardised Model
			6.4.2 Advanced Internal Rating-Based Model
		6.5 Credit Risk Management
			6.5.1 Role of the Board of Directors and Senior Management
			6.5.2 Risk Identification, Measurements and Monitoring
			6.5.3 Risk Controlling and Risk Mitigation
		6.6 Credit Risk: The Challenge for Financial Market
		6.7 Measurement of Loss Given Default
			6.7.1 Loss Given Default under Basel III and IFSB
			6.7.2 Calculation of Loss Given Default
			6.7.3 Loss Given Default under Asymptotic Single Factor Models
		6.8 Exposure at Default
			6.8.1 Exposure at Default under Basel III
			6.8.2 Principles of Estimation of Exposure at Default (EAD)
			6.8.3 Guidance on Calculation of Exposure at Default
			6.8.4 Estimation of Exposure at Default
		6.9 Capital Requirements for Credit Risk
			6.9.1 Risk Weights for Assets
			6.9.2 Capital Requirement for Credit Risk under Basel III
			6.9.3 Implementing VaR Approach
			6.9.4 Capital Requirement for Islamic Bank
	7 Operational Risk
		7.1 Definition and Sources of Operational Risks
		7.2 Categorisation of Operational Risks
		7.3 Operational Risk: Islamic Banks’ Perspective
			7.3.1 Sources of Shari’ah Non-compliance Risk
			7.3.2 Profile of Operational Risk
			7.3.3 Impact of Shari’ah Non-compliance Risk
		7.4 Operational Risk Management
			7.4.1 Elements in Risk Management
			7.4.2 Multi-Discipline and Process of Operational Risk Management
		7.5 Capital Requirements for Operational Risk
			7.5.1 New Standardised Measurement Approach
			7.5.2 Calculation of Business Indicator Component
			7.5.3 Calculation of Loss Component and Capital Requirement
			7.5.4 Data Requirements
Part V Strategic Planning and Economic Capital
	8 Displaced Commercial Risk and α-Factor
		8.1 Displaced Commercial Risks
		8.2 α-Factor and Risk
		8.3 Mitigation of Displaced Commercial Risk
			8.3.1 Profit-Equalisation Reserve
			8.3.2 Investment Risk Reserve
		8.4 Measuring α-Factor – An Example
	9 Stress Testing in the Presence of Shari’ah Non-compliance Risks
		9.1 Shari’ah Non-compliance Risks
		9.2 Material Risks: Operational and Shari’ah-Compliance
		9.3 Criteria of Good Key Risk Indicators
		9.4 Selecting the Key Risk Indicators for SNC Risks
		9.5 Stress Testing – An Example
Glossary of Arabic Terms
Index