Managing Risk through Shari’a                                                   Liquidity Risk
           Compliant Soluti...
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Risk Management in Islamic Finance 2


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Risk Management in Islamic Finance 2

  1. 1. Managing Risk through Shari’a Liquidity Risk Compliant Solutions: Part 2 • Shari’a compliant treasury management • Murabaha inter-bank deposits • How liquid are sukuk? Activity in secondary market • Reducing asset and liability mismatch • Promotion of mudaraba notice deposits to reduce on on- Rodney Wilson demand liability Professor • Limiting liabilities by moving specified investment Durham University accounts off-balance sheet • Assurance for demand depositors 24 July 2009 • Investment mudaraba deposits lower in pecking order Presented by CFA Institute and not guaranteed 2 Controlling Operational Risk Foreign Exchange Risks • Adequacy of reporting systems • Permissible hedging instruments • Concept of amanah or trust extends to disclosure to • Salam, a purchase contract with the price, time of stakeholders purchase and quantity involved specified • Concept of justice - adalah • Bai al-Salam is an immediate payment for future delivery • Responsibility through trusteeship - khilafah • Parallel with forward transaction, as aim is to execute transaction • Employee loyalty and motivation • S Swaps also possible, b t not of lik f lik – gold f gold, l ibl but t f like for like ld for ld • Religious factor in employment choice silver for silver • Common cultural ethos by workforce • Problematic hedging instruments • Principle of unity - tawhid • Options and futures where aim is speculation, not to carry out transaction • Emphasis in Islam on formal contracts • Debate over whether arbun (arboun) can be used, a down • “Believers, when you contract a debt for a fixed period, put payment to secure a call option, with the buyer loosing it in writing” Sura 2:282 their deposit if the contract not carried out. Can it be applied to put options- the right to sell? 3 4 Rate of Return Risk • Implications of prohibition of riba • Islamic banks potentially price makers, not price takers • Returns on mudaraba investment accounts may not vary with market interest • Murabaha mark-up and ijara rental costs not necessarily related to interest changes • Indirect interest rate effects • Asset liability management (ALM) still required as interest rate developments can effect spreads • GAP analysis may continue to be needed, the assessment of the difference between interest sensitive liabilities and assets for a given time period • Fixed variable return swaps involving murabaha/ijara possible rather than interest rate swaps 5 Hosted by CFA Institute