Online from: 2010
Subject Area: Accounting and Finance
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Article citation: , (2012) "2011 Awards for Excellence", Journal of Islamic Accounting and Business Research, Vol. 3 Iss: 1, pp. -
The following article was selected for this year’s Outstanding Paper Award for Journal of Islamic Accounting and Business Research
Islamic Financial Services Board, Kuala Lumpur, Malaysia and Henley Business School, ICMA Centre, University of Reading, Reading, UK
Rifaat Ahmed Abdel Karim
Islamic Financial Services Board, Kuala Lumpur, Malaysia
Centennial Group, Washington, DC, USA
Purpose -- The aims of this paper are: first, to draw attention to the issues of displaced commercial risk (DCR) which arise as a result of the risk characteristics of profit-sharing investment accounts (PSIA), the main source of funding of Islamic banks in most jurisdictions; and, second, to present a value-at-risk approach to the estimation of DCR and the associated adjustments in capital requirements.
Design/methodology/approach -- The paper is based on empirical research into the characteristics of PSIA in practice, which vary to a greater or lesser extent from what one would expect them to be in principle, on an analysis of the capital adequacy and risk management implications that flow from this, and on an econometric formulation whereby the extent of DCR in Islamic banks may be estimated.
Findings -- The findings are, first, that the characteristics of PSIA can vary from being a deposit like product (fixed return, capital certain, all risks borne by shareholders) to an investment product (variable return, bearing the risk of losses in underlying investments), depending upon the extent to which the balance sheet risks get shifted (“displaced”) from investment account holders to shareholders through various techniques available to Islamic banks’ management. Second, the paper finds that this DCR has a major impact on Islamic bank’s economic and regulatory capital requirements, asset-liability management, and product pricing. Finally, it proposes an econometric approach to estimating DCR but report that individual Islamic banks generally lack the data needed to apply this approach, in the absence of which panel data for a population of Islamic banks may be used to estimate DCR for that population.
Research limitations/implications -- Empirically, the paper is thus limited by the lack of data just mentioned. Furthermore, the application of the proposed panel data approach has been left for future research.
Originality/value -- The analysis of the issues and the development of the econometric model represent in themselves an original research contribution of some significance.
Keywords: Banks, Finance, Financial risk, Investments, Islam, Profit
This article originally appeared in Volume 1 Number 1, 2010, pp. 10-31, Journal of Islamic Accounting and Business Research
The following article was selected for this year’s Highly Commended Award
Bassam Maali and Christopher Napier
This article originally appeared in Volume 1 Numbers 2, 2010, Journal of Islamic Accounting and Business Research
Professor Mervyn Lewis
University of South Australia, Australia