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Index

Page reference followed by f indicate an illustrated figure; and page reference followed by t indicate a table

AAOIFI see Accounting and Auditing Agricultural Bank of Iran 177, 348 Organisation for Islamic Financial Ahmad Hamad Algosaibi & Brothers Institutions (AAOIFI) 103, 106, 342 Abu Dhabi Investment Authority 171 AIG 159 Abu Dhabi Islamic Bank 81 Al Baraka Banking Group 60, 81, 98, accountability for risk 364 103 Accounting and Auditing Organisation Al Gosaibi Group 327 for Islamic Financial Institutions Al Mahmood, Dr Abdul Latif 174 Al Rajhi Bank 64, 68, 77, 171 k (AAOIFI) 25, 34–6, 35t, 57, 152, k 179, 313, 386 Al Sanea, Maan 103, 104 standards 36, 99–100, 103, 141, 143, Algosaibi Groups 104 ALM see Asset Liability Management 180, 217, 229, 271, 289, 360, 363, (ALM) 376 AMA see Advanced Measurement on sukuk 176–7 Approach (AMA) accounting standards 217f, 362 Amlak 168, 338 AAOIFI 36, 99–100, 103, 141, 143, analysis of variance (ANOVA) 209 180, 217, 229, 271, 289, 360, 363, anti-money laundering (AML) systems 376 98 IAS 360 Arab Bank 104 IFSB 37, 38t, 99–100, 124, 128, Arbitrage Pricing Theory (Ross) 46 151, 152, 180, 229, 271, 360 Arbitration and Reconciliation Centre IFRS 104, 360COPYRIGHTEDfor IslamicMATERIAL Financial Institutions IIFM 124 (ARCIFI) 35t IILM 124 arbun 65, 113, 115–16, 369 LMC 124 Arcapita Bank 66, 168, 329, 375 Advanced Measurement Approach ARCIFI see Arbitration and (AMA) 135, 140 Reconciliation Centre for Islamic aggregate index 45 Financial Institutions

415

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416 INDEX

Asian Development Bank 36 Basel Accord Asian financial crisis (1997–1998) 329 classification of capital in 130t asset composition of Islamic banks steps in 130–43 175, 175t see also Basel I Accord; Basel II asset-backing obligation 20 Accord; Basel III Accord asset–liability management (ALM) 53, Basel I Accord (1988) 128, 130–1, 325 60, 80–92 issues with 131 displaced commercial risk 86–9 Basel II Accord 6, 7, 92, 128, 132, funding sources for IFIs 80–3, 82t 354–5, 384, 387 in Islamic banking 84–6 vs 1988 Basel Capital Accord 132 operational risk 89–92 adherence to 229 asset–liability management risk 6, credit risk capital charge 134–5 313, 338, 344 criticism of, and amendments to risk perception 136–8 by interview 312, 312t, 313, 313t determination of risk weights 140 by questionnaire 218, 218t, 219 Islamic banks and 138–42 Awal Bank 103–4 market risk capital charge 135 Awan, Dr Mohammed Mahmoud 371 operational risk capital charge 135 opinions on back-testing 61 by interview 319, 320t, 325 k Badawi, Prime Minister Abdullah 173, by questionnaire 231, 232 k 361 structure 133f Central Bank 147 Three Pillars of 132–6, 152 Bahrain Islamic Bank 37 Pillar 1 134, 135, 138–40, 355 bai’ salam 24, 114–15, 116 Pillar 2 134, 137, 141, 355, 359 bai’al-arbun 113 supervisory review 135–6 balance sheet netting 110 Pillar 3 135, 136, 137, 141–2 Bank for International Settlements market discipline 136 (BIS) 36, 130 Basel III Accord 6, 142–3, 143f, guidelines 128 354–5, 387 Bank Islam 150, 329 opinions on Bank Islam Malaysia Berhad 150 by interview 319, 320t, 322–5, Bank Muamalat Malaysia Berhad 322t, 323t, 324t 150 by questionnaire 231 Bank Negara Malaysia 77 Basel Committee on Banking regulation 82 Supervision (BCBS) 70, 89, 128, Bank of Credit and Commerce 129, 130, 152 International (BCCI) 98 on capital charges 135 Barclays 171 ‘International Framework for Bartlett’s test of Sphericity 209, Liquidity Risk Measurement, 271–2, 272t, 289–90, 290t Standards and Monitoring’ 137

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Index 417

on liquidity 141 nature of activities 283, 284t, 356, standards 43, 152, 387 362 ‘Strengthening the Resilience of the position of respondent 283, 285t, Banking Sector’ 137 356 see also Basel Accord opinions on Basic Indicator Approach 135, 139, by interview 319–25 145 by questionnaire 233t, 234f bay’ al-dayn (sale of debt) 77 risk perception 229–34, 230t, 233t, bay’ al-salam contracts 58, 68 234f BCBS see Basel Committee on as tool for risk mitigation 150–1 Banking Supervision (BCBS) see also Basel Accord benchmark risk 63, 66–7, 219 Capital Adequacy Ratio (CAR) betaofanasset45 BIS see Bank for International of Basel II Accord 134 Settlements (BIS) Capital Asset Pricing Model (CAPM) Black’s zero-beta model 124 124 Black-Scholes-Merton option pricing Capital Requirement Report 296t 46 capital-to-liabilities ratio 129 Blom Development Bank of car finance 15 k 94 CAR see Capital Adequacy Ratio k BNP-Paribas 15, 103 (CAR) Bonferroni adjustment 278 cash management 53 Box’s Test of Equality of Covariance CDOs see Collateralised Debt Matrices 274, 276, 277t, 279, 279t, Obligations (CDOs) 293t CDS see Credit Default Swaps (CDS) Buffett, Warren 96, 159 Central Bank of Bahrain (CBB) 72, 77 business risk 51, 52, 53 Central Bank of Kuwait 147 Central Bank of 77 capital Chi-Square test 208, 218, 224, 225, classification of 129–30, t130 253, 346 significance in banking 128–9 CIBAFI see (General) Council for capital adequacy for Islamic banks 127–51, 281–3, 353–6 Islamic Banks and Financial adherence to 229, 230t Institutions (CIBAFI) Basel II versus IFSB 148t Citibank 15, 171 calculation 84, 88, 100 Classified Accounts Reportt 296 , 300t IFSB principles on 143–50 closed questions 196–7 K-W test results Cohen’s 279, 280, 293 capital adequacy 282, 282t Collateralised Debt Obligations nature of FI 282, 283t (CDOs) 164

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418 INDEX

Committee of European Banking results by respondent’s position Supervisors 70 288t commodity risk 52, 68, 219 MANOVA test 292–5, 293t Commodity Risk Report 295, 296t risk perception 234–9, 235f, concentration risk 6, 52, 59–60, 338, 236t–8t 339, 341, 344 total variance 290t risk perception perceptions of, by questionnaire by interview 312, 312t, 314t 234–9, 235f, 236t–8t K-W results 258, 259t credit crunch see credit crisis by questionnaire 218, 218t, 219 credit default swaps (CDS) 113 conglomeration of risks 107 credit derivatives 112 corporate governance frameworks Credit Exposure Report 295, 296t 341–2, 343 credit ratings 110 corporate governance risk 46, 102–4, credit risk (default risk) 46, 52, 54, 341, 343 339, 341 K-W test results 254, 259t in Islamic banks 55–9 Council for Islamic Banks and management 339 Financial Institutions (CIBAFI) 34, risk perception 35t,37 by questionnaire 218, 218t Country Report 296t, 299t credit VaR 59 k k country risk 52, 222 CreditEdge 59 credit cards 15 Cronbach’s alpha test 206–7 credit crisis 51, 156–62, 356–63 cross-currency rate swaps 369 (2008/09) 94 currency forwards 369 causes of 160–2 currency risk 52, 67–8, 219 crisis, need for alternative system 163 debt bubble 156–9 data analysis 207–10 derivatives and 159–60 data collection 195–207 Islamic finance and banking and see also interviews; questionnaires 163–73, 165t, 283–95 Dawnay Day, Richmond, Aston factor analysis for 289–92 commodities 68 failures in Islamic finance 169–70 DB see Deutsche Bank (DB) impact on Islamic banking 165–8 DCR see Displaced Commercial Risk Islamic banking strength after (DCR) crisis 170–3 deductive theory 193–4 K-W test depth interviews 202 accounting standards 287t descriptive analysis method 207–8 nature of activities 287t descriptive research 192 nature of FI 286, 286t Deutsche Bank AG (DB) 64 results by region 283–6, 286t DIB see Dubai Islamic Bank (DIB)

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Index 419

Direct Oblimin 273 exposure at default (EAD) 59, 140 discretionary portfolios 15 external fraud 89 displaced commercial risk (DCR) 86–7, 93, 123, 344 factor analysis 209, 253, 271–81, 351, management of 87–9, 87f 357 risk perception factor rotation 273 by questionnaire 218t, 220 factor sensitivities 61 documentation risk 92 family ownership/majority ownership Doha Bank 99 342–3 dual murabahah 64, 65, 116–17, 118f fiduciary risk 100–2 Dubai Islamic Bank (DIB) 37, 64, 88, financial crisis see credit crisis 91 financial risk 51, 52, 53 Dubai World 169 Financial Services Authority (FSA) 105 EAD see Exposure at Default (EAD) fiqh 57, 93, 112, 113, 115, 116, 368, East Cameron Gas Company 385 169, 327 fiqh al-muaamalat 93 East Cameron Partners (ECP) 29 First Energy Bank 374 sukuk 109t Fisher, Irving 45 efficient market hypothesis 46 foreign exchange rates (FX risk) 61 k Eglinton, Ken 361 k Foreign Exchange (FX) Risk Report Equamax 273 295, 296t, 298t equity and commodity prices (price forward rate swaps 369 risk) 61 free-style interviews 202 equity investment risk 65–6 risk perception frequency distribution 207–8, 220, by questionnaire 218t, 219 250, 340 equity management 53 of capital adequacy standards Equity Mark-To-Market Report 296t, 230f 300t of current practices in Islamic Estimates of Worst Case 365 banking 248f European Islamic Investment Bank Plc of risk perceptions 222, 223t (EIIB) 73, 201 Friedman test 209, 253, 264, 265 European Union FSA see Financial Services Authority Capital Adequacy Directive 132 (FSA) expected losses (EL) 59 future of Islamic banking 372–8 expected shortfall 62 views on explanatory research 193 by interview 333–5 explorative approach 194 by questionnaire 246, 247t, 248, exploratory interviews 202 248f, 249, 250t, 306–7, 307t exploratory research 192 future research 390–1

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420 INDEX

gap analysis 61, 110, 365 ICD see Islamic Corporation for the GCC see Gulf Co-operation Council Development of the Private Sector (GCC) 35t, 36–7 (General) Council for Islamic Banks ICIEC see Islamic Corporation for the and Financial Institutions (CIBAFI) Insurance of Investment and Export 34, 35t,37 Credit 35t German State of Saxony Anhalt sukuk ICMA see International Capital Market Association (ICMA) 28 IDB see Islamic Development Bank gharar 20, 62, 112, 114, 115 (IDB) global credit crisis 325–30 idiosyncratic risk 45 Global Investment House 167, 168, IFI balance sheet 81t 327 IFRS see International Financial governance risks 53 Reporting Standards (IFRS) Gulf Co-operation Council (GCC) 18 IFSB see Islamic Financial Services Board Directors Institute 343 Board (IFSB) Gulf Finance House in Bahrain 66 Ihlas Finans of 74, 99 Gulf International Bank 104 IIFM see International Islamic Financial Markets (IIFM) Hadith 178 IILM see International Islamic k Hanafi school of thought 93–4, 115, Liquidity Management Corporation k 116 (IILM) Hanbali school of thought 93–4, 115, IIMM see Islamic Interbank Money 116 Market (IIMM) haram 20, 114, 115, 168 IINCEIF see International Centre for hedge funds 15, 171 Education in Islamic Finance hedging 110 (IINCEIF) IIRA see Islamic International Rating hibah 24, 25 Agency (IIRA) Historical approach 61 ijara (ijarah) 22–3, 30, 56, 60, 68, 81, Hotelling’s Trace 276 91, 107, 121, 140, 145, 170, 174, HSBC 15 250, 264, 345, 346, 348 Hypovereinsbank 104 intensity of use of 224t portfolio 64 IAH see Investment Account Holder risk perception 225, 225t, 266t (IAH) ijarah sukuk 25–6, 78 IAS accounting standards 360 ijarah wa-Iqtinah 22–3 IBB see Islamic Bank of Britain Plc IMA see Internal Model Approach (IBB) (IMA) IBF see Islamic Banking and Finance IMF see International Monetary Fund (IBF) (IMF)

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Index 421

inductive reasoning 193, 194 ‘tahawwut’ (Hedging) Master Industry Concentration Risk Report Agreement 111 295, 296t International Islamic Liquidity infrastructure and information systems Management Corporation (IILM) 51 39, 79 initial public offerings 15 accounting standards 124 interest rate risk 63, 135 International Islamic Trade Finance interest-rate cycle 63 Corporation (ITFC) 35t Internal-Based Rating System 365 International Monetary Fund (IMF) internal fraud 89 34, 36 internal model approach (IMA) 135, International Swaps and Derivatives 140 Association (ISDA) 39 internal rate of return (IRR) 178 interpretative analysis 210 internal rating based approach (IRB) interview data analysis 309–36 134, 140 interview questions 310–11 International Capital Market interview themes 310 Association (ICMA) 77 results and data analysis 311–35 International Centre for Education in capital adequacy for Islamic banks Islamic Finance (IINCEIF) 311, 319–25 k International Financial Reporting future of Islamic banking 311, k Standards (IFRS) 100, 103, 104 333–5 accounting standards 37, 38t, global credit crisis 311, 325–30 99–100, 104, 124, 128, 151, 152, risk mitigation 311, 330–2 180, 229, 271, 360 risk perception in Islamic banking International Islamic Bank for 310–11, 311–19 Investment and Development in theory vs practice in Islamic , 89 banking 311, 332–3 International Islamic Centre for interviews 202–5, 205t Reconciliation and Commercial administration of interview and Arbitration (IICRA) 34 sampling 204–5 International Islamic Financial advantages of 203 Markets (IIFM) 34, 35t, 37–9, 77 depth 202 accounting standards 124 disadvantages 203 Memorandum of Understanding exploratory 202 with the International Capital free-style 202 Market Association (ICMA) 37–8 interview structure 204 Memorandum of Understanding operationalising 203–5 with the International Swaps and sample size 205 Derivatives Association (ISDA), standardised 202 111 inventory management 107

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422 INDEX

Investment Account Holder (IAH) Islamic Corporation for the Insurance 138, 139 of Investment and Export Credit Investment Dar Company (‘TID’) v. (ICIEC) 35t Blom Development Bank 94 Islamic Development Bank (IDB) 34, Investment Dar, The see The 35t, 36, 37, 78 Investment Dar (TID) Islamic finance contracts investment risk reserves (IRRs) 86, 87, correlation between conventional 200 and Islamic banks and risk IRB see Internal Rating Based perception 225, 226t Approach (IRB) intensity of use of 222–4, 224t, 226f IRR see Internal Rate of Return (IRR) perceived risk levels of 222–6 IRTI see Islamic Research and risk perception in Islamic finance Training Institute (IRTI) contracts 225, 225t ISDA see International Swaps and see also individual instruments Derivatives Association (ISDA) Islamic financial contracts 20–4,f 21 , Ishaq, Sheikh Esam M. 171 345–50 Islamic Bank of Britain Plc (IBB) 98 intensity of use of 222–4, 224t, 226f, Islamic Bank of 99 345–7 Islamic banking risk levels of 222–9, 223t k future of 372–8 risk perception in 347–50 k views on risks attached to 225, 226, 225t, 226t by interview 333–5 Islamic Financial Services Board by questionnaire 246, 247t, 248, (IFSB) 34, 35t, 36–7, 79, 128, 152, 248f, 249t, 250t, 306–7, 307t 354 practical issues 304–6, 370–2 Exposure Draft on Risk theory vs practice in 332–3 Management 101–2 Islamic Banking Act (1983) 150 GN-1: Guidance Note in Connection Islamic Banking and Finance (IBF) with the Capital Adequacy development stages 33f Standard: Recognition of Ratings global assets 18, 19f by ECAIs on Shari’ah-Compliant historical background of 14–17, 16t Financial Institutions 144 institutional developments 33–9, 35t, principles of credit risk management 36f 55t–6t principles of 20 principles of market risk size of industry 17–19, 19t management 62t vs conventional banking 31–3, 31f, principles of rate of equity 32t investment risk management 65t Islamic Corporation for the principles on capital adequacy 7, Development of the Private Sector 143–50 (ICD) 35t, 36–7 standards 5–6, 38t–9t, 99–100

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Index 423

IFSB-1: Guiding Principles of supervisory discretion formula for Risk Management for calculating CAR 146, 146f, 147f Institutions 38t, 42–3, 143 Islamic hedging tools 114–17 IFSB-2: Capital Adequacy Islamic insurance see Takaful Standards for Institutions 38t, Islamic Interbank Money Market 143–4, 150 (IIMM) 77 IFSB-3: Guiding Principles on Islamic International Rating Agency Corporate Governance for (IIRA) 34, 35t,39 Institutions Offering Only Islamic mortgages 15, 60, 77, 98, 168 Islamic Financial Services 38t Islamic products distribution 174f IFSB-4: Disclosures to Promote Islamic Profit Rate Swap (IPRS) 69 Transparency and Market Islamic Research and Training Discipline for Institutions Institute (IRTI) 34–5 offering Islamic Financial istisna’a contracts 23, 58, 68, 91, 93, Services 38t 107, 121, 139, 140, 145, 186, 245, IFSB-5: Guidance on Key 345, 348 Elements in the Supervisory intensity of use of 224t Review Process of Institutions risk perception 225t, 267t offering Islamic Financial istithmar 30 Services 38t ITFC see International Islamic Trade k IFSB-6: Guiding Principles on Finance Corporation (ITFC) k Governance for Islamic Collective Investment Schemes JP Morgan 46 38t IFSB-7: Capital Adequacy Kaiser-Meyer-Olkin (KMO) test 209, Requirements for Sukuk 271–2, 272t, 289–90, 290t Securitisations and Real Estate Kaiser’s criterion 273 Investment 38t, 144 Keynes, John Maynard 45, 163 IFSB-8: Guiding Principles on KFH 171 Governance for Takaful (Islamic Khaleeji Commercial Bank 374 Insurance) Undertakings 38t khiar 369 IFSB-9: Guiding Principles on khiyar al-shart option 116 Conduct of Business 38t know-your-customers (KYC) system IFSB-10: Guiding Principles on 98 Shari’ah Governance Systems Kondratief cycles’ 156 for Institutions Offering Islamic Kruskal-Wallis (K-W) test 208, 222, Financial Services 38t 253, 340 IFSB-11: Standard on Solvency on capital adequacy 282, 282t Requirements for Takaful nature of FI 282, 283t (Islamic Insurance) nature of activities 283, 284t, 356, Undertakings 38t 362

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424 INDEX

Kruskal-Wallis (K-W) test lack of standardisation risk 93–4 (Continued) Large Exposure Report 295, 296t position of respondent 283, 285t, lease finance 15 356 leasing and real estate projects 15 credit crisis and Islamic banking legal risk 52, 53, 105–7, 312–13 accounting standards 287t Lehman Brothers 5, 159 nature of activities 287t Levene’s Test of Equality of Error nature of FI 286, 286t Variances 276, 277t, 279, 280t, 293, results by region 283–6, 286t 293t results by respondent’s position LGD see Loss Given Default (LGD) 288t LIBOR, national variant of 66 on risk measurement 301t Likert scale 207, 218 by nature of FI 302t limitations of study 389–90 by region 302t, 341, 343–4, 377 liquidity management 53 on risk mitigation 303–4, 303t, Liquidity Management Centre (LMC) 367–70 34, 35t, 37, 77, 79 by nature of FI 304t accounting standards 124 on risk perception Liquidity Management House (LMH) concentration risk 258, 259t 329 corporate governance risk 254, liquidity risk 6, 46, 52, 69–80, 123, k 259t 313, 338, 340, 341, 344 k credit risk 260, 260t in Islamic banks 70–4, 71t,72f, 74 entire research sample 254, reduction in Islamic banks 74–80 254t–6t risk perception liquidity risk 260–1, 261t by interview 312, 312t, 313, 313t nature of FI 269–71, 270t, 272t by questionnaire 218, 218t, 219 perceived risk seriousness 269, Liquidity Risk Report 296t, 299t 270t literature review 9, 43, 124, 182, 195, respondent’s position and 199, 210, 220, 226, 337, 338, 353, accounting standards 261, 262t 354, 378, 389 results by nature of FI 261, 262t LMC see Liquidity Management risk categories in relation to nature Centre (LMC) of FI 261–3, 263t LME see London Metal Exchange selected sample data 254, 258t (LME) on risk reporting 295, 296t London Metal Exchange (LME) (Over Kuala Lumpur Interbank Offered Rate The Counter (OTC) Contracts) 21 (KLibor) 66 loss given default (LGD) 59, 140 Kuwait Finance House 37, 68, 85, 88, 329 Malayan Banking Berhad 82 Kuwait Souq al-Manakh crisis (1982) Malaysia 329 Banking Act 1983 150

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Index 425

during 1997 currency crisis 154 intensity of use of 222, 224t, 264, IFSB Act 2002 37 265t market share 18 risk perception 225, 225t, 266t Malaysian Financial Market mudarib 57–8, 65–6 Association 369 ‘mudarib fee’ 22 Malaysian ringgit (MYR) 29 active management of 220 Maliki school 93–4, 15 multiple factor model 46 Mann-Whitney U test 208 multivariate analysis of variance MANOVA test 253, 274, 279, 281, (MANOVA) 209, 253, 274, 279, 352, 362 281, 292, 295, 352, 361, 362, 382 mark-up based contracts 347–9 multivariate tests 276–8, 277t, 280t, see also ijarah; istisna’a; 284t murabahah; salam; wakalah murabahah (‘cost-plus financing’ or mark-up risk 66, 219 ‘mark-up’) 21–2, 23, 57–8, 68, marked-to-market trading 61–2 72–3, 121, 219, 345 market risk 46, 52, 54, 61–9 dual 64, 65, 116–17, 118 charges 140 fixed income 175 in Islamic banks 62–3, 62t intensity of use of 222, 224t management 61 reverse 319 managing for IFIs 68–9 risk perception 225, 225t, 266–9, k risk perception k 266t, 267t, 268t, 269t by questionnaire 218t, 219 Market Risk Amendment (1996) 144 ‘murabahah syndrome’ 174, 222, 346 maslahah 113 musawama 24 Master Agreement for Treasury musharakah (equity participation) 22, Placement (MATP) 39 30, 65–6, 121, 219, 222, 345, 346, maturity matching analysis 365 349 maysir 112, 115 diminishing 56, 57, 64, 121 Merrill Lynch 46 intensity of use of 222, 224t Mit Ghamr bank, Egypt 14 risk perception 225, 225t, 266t–7t mixed method-based research 195 mutajara 77 Modigliani and Miller Theorem 46 money laundering 46 Nakheel PJSC 29, 169–70 Monte Carlo approach 61 name lending 342 Moody’s 59 National Bank of Abu Dhabi 29 mortgages 64 non-parametric data analysis 253 Islamic 15, 17, 60, 77, 98, 168 non-parametric tests 208 residential 70, 131 Non-Performing Loan (NPL) 165 subprime 154, 156–7, 359 Northern Rock 70, 179 mudarabah (profit-sharing agreement) NPL see Non-Performing Loan (NPL) 22, 30, 65, 345 n-vivo 210

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426 INDEX

Obama, Barack 153 Prince Waleed’s Kingdom Holdings OIC see Organisation of Islamic 171 Cooperation (OIC) principal component analysis (PCA) oil prices (1973) 14 273, 290 open-ended questions 196–7, Rotated Component Matrix 291, 199–200, 210 292t operational risk 52, 54, 89–90 total variance 290t IFSB principles of 90t Varimax rotation 290 in Islamic banks 90–2 Principal Protected Funds (PPFs) 116 risk perception principal-agent problem 57–8 by questionnaire 218t, 219 private equity 15 Operational Risk Report 296t, 297t probability of default (PD) 59, 140 Organisation of Islamic Cooperation profit-and-loss sharing (PLS) 20, 33, (OIC) 117–18, 219 Fiqh Academy Resolution 57 contracts 141 originate-and-distribute business modes 54 approach 29 principle 40 originate-and-hold business model 29 profit equalisation reserve (PER) 86, originate-to-distribute model 157 87, 88, 139, 144, 178, 220 profit-rate cycle 63 k parallel bay’ al-salam contract 68 Profit Rate Risk Reportt 296 , 298t k parallel salam 24 profit rate swaps 64, 69, 111, 368, 369 parametric tests 61, 208 profit-sharing contracts 7, 347–9 Partial Eta Squared 279, 280 see also mudarabah; musharakah for ‘resilience of IFIs’ 293 profit-sharing investment accounts PCA see principal component analysis (PSIAs) 63–4, 80–1, 128, 178–9, (PCA) 180 PD see Probability of Default (PD) restricted 80 Pecking Order Theory 46 unrestricted 80 people risk 91–2, 219 prohibition of interest see riba PER see Profit Equalisation Reserve prohibition of uncertainty see gharar (PER) prohibition of unlawful assets see personal loans 15 haram petrodollars 14 Promax 273 Pillai’s Trace 276 PSIA see profit-sharing investment PLS see Profit and Loss Sharing (PLS) accounts (PSIA) political risk 52, 222, 339–40, 384 portfolio theory 45 qard al-hasan 65 PPFs see Principal Protected Funds qard hassan 24–5, 359 (PPFs) Qatar Investment Authority 171 price risks 68 Qatar Islamic Bank 68

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Index 427

qualitative data analysis 210 risk levels of Islamic finance qualitative method 191, 194, 195 contracts 222–9, 223t quantitative data analysis 207–10 risk management and mitigation quantitative research method 191, 194, 239–46 195 risk management and reporting Quartimax 273 239–42, 240t, 241t Quartimin 273 risk measurement 242, 243 questionnaire, descriptive: data risk mitigation 244–6, 244f, 245, analysis and results 213–51 246 characteristics of respondents risks attached to Islamic finance 213–17 contracts 225, 226 accounting standards used by questionnaire, study 393–400 financial institution 217, 217f questionnaires, survey 195–202 activities of financial institution advantages of 196 215–17, 216t disadvantages of 196 geographic distribution of study level and characteristics of sample 214, 214t measurements 197–8 nature of financial institution 215, interval/ratio scale 197 216t nominal scale 197 positions of participants 214–15, ordinal scale 197 k 215t open-ended v closed questions k evaluating the practice of Islamic 196–7 banking 246, 247t, 248 response rate 201t future of Islamic banking 248–50 sampling 198–202 growth strategies for IFIs 248, 249t, administration and 201–2 250t design and structure 199–200 risk perception 217–50 additional risk issues facing IFIs rab al-mal (principal) 57, 65 226–9, 227f, 228 RAROC see Risk-adjusted Return on among different groups 220, 221t Capital (RAROC) capital adequacy for Islamic banks rate-of-return risk (profit rate risk) 61, 229–34 62–5, 63t, 123, 219 credit crisis and Islamic banks real estate sector 15, 18, 56, 59–60, 73, 234–9 83, 98, 164, 165, 167, 168, 181, 225, Intensity of use of different 312, 339 Islamic financial contracts regulatory and tax issues 104–5 222–4, 224t, 226 regulatory risk 52, 140, 222 overall risks faced by Islamic reliability of data 205–7 banks 217–22, 218t re-pricing risk 52 risk issues in Islamic banks reputational risk 6, 52, 96–9, 312, 315, 217–39 338, 339, 344

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428 INDEX

reputational risk (Continued) risk culture and governance 48–9 risk perception risk diversification 110 by interview 312, 312t, 315 risk exposures 53t by questionnaire 218, 218t, 219 risk management research, future 390–1 conducting 49–50, 50f research design 191–3 definition 44–5 research difficulties and limitations framework 48–51, 49f 210–11 history of 45–6 research hypotheses 185–91 systemic importance of 47–8 research implications and vs risk measurement 48 recommendations 386–9 risk management and reporting consolidation 387 239–42, 240t, 241t–2t, 295–300, diversification 387–8 363–5 innovation 388 frequency of producing capital liquidity enhancement 388 requirement report 297t risk management infrastructure, frequency of producing classified investment in 388 accounts report 300t Shari’ah-based approach versus frequency of producing country Shari’ah compliance 388–9 report 299t research methodology 191 frequency of producing equity k research on risk management in mark-to-market report 300t k Islamic banks 120–3 frequency of producing FX risk research questions and objectives report 298t 183–5 frequency of producing liquidity risk research strategy 193–4 report 299t deductive theory 193–4 frequency of producing operational explorative approach 194 risk report 297t inductive approach 194 frequency of producing profit rate responsibility for risk 364 risk report 298t return on equity (ROE) 122–3 risk measurement 242, 243t, 50, riba 20, 59 301–2, 365–7 risk K-W test results 295, 296t classification of 51–4 K-W test results for 301t common to both Islamic and by nature of FI 302t conventional banks 54–9 by region 302t, 341, 343–4, 377 definition 44 risk mitigation 244–6, 244f, 245t, interaction and mutation of 54 246t, 303–4, 367–70 risk-adjusted return on capital by interview 330–2 (RAROC) 117 in Islamic banking 110–12 risk avoidance techniques 52 K-W test results for 303t RiskCalc 59 by nature of FI 304t

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Index 429

risk obligation 20 Roy’s Largest Root 276 risk perception 217–50, 254–81 RWAs see risk weighted assets in Islamic banking 311–19 (RWAs) overall risks 254–63 Islamic finance contracts 264–9 Saad Group 2, 29, 103, 104, 106, 169, intensity of use 264, 264t 327, 342 Mudarabah 264, 265t Golden Belt sukuk 169 risk perception for 265–9, salam (salaam) (forward sale) 24, 30, 266t–7t 58, 121, 345 Wakala and Salaam 265, 265t contracts 68 K-W test results intensity of use of 224, 224t, 264, concentration risk 258, 259t 265, 265t corporate governance risk 254, parallel 24 259t risk perception 225, 225t, 267t credit risk 260, 260t Saudi Arabian Monetary Agency entire research sample 254, (SAMA) 77 254t–6t securitisation 369 liquidity risk 260–1, 261t securitised debt-based assets 164 nature of FI 269–71, 270t, 272t self-administered questionnaire 195 perceived risk seriousness 269, semi-structured interviews 195 k 270t Shafii school 93–4, 115 k respondent’s position and Shamil Bank of Bahrain 85 accounting standards Shamil Bank of Bahrain v. Beximco 261, 262t Pharmaceuticals Ltd in 2004 106 results by nature of FI 261, 262t Shari’ah and Islamic derivatives risk categories in relation to 112–14 nature of FI 261–3, 263t Shari’ah arbitrage risk 95 selected sample data 254, 258t Shari’ah-compliant engineering 317, risk management and reporting 369 295–300, 363–5 Shari’ah-non-compliance risk 6, 93–6, risk-return trade-off 45, 47 218, 219, 229, 312, 338, 340, 344 risk-sharing assets 175–6 risk perception Risk Tracker 59 by interview 312–13, 312t risk-transferring techniques 52 by questionnaire 218t, 219 risk weighted assets (RWAs) Shari’ah scholars, shortfall of 95–6, 145, 146 97f risk-weighted capital ratio 150 Sharjah Islamic Bank 81 risk weightings 117 Sharpe’s Capital Asset Pricing Model ROE see return on equity (ROE) (CAPM) 45–6 Rotated Component Matrix 273, 275 significance testing 208 Royal Bank of Scotland 157 single-factor models of risk 45

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430 INDEX

SIVs see Special Investment Vehicles takaful 15, 17, 98, 391 (SIVs) Tamweel 108, 168, 338 snowball sampling method 198–9, 204 tangibles 21, 56, 140, 144, 177, 314, Solidarity Fund 35t 319, 339 Sorouh PJSC 108 tawarruq 21, 22, 68, 173–5 Spearman’s Rank Correlation technology risk 92 Coefficient 208, 224, 225 teleconference interviews 204 special investment vehicles (SIVs) 164 Tests of Between-Subjects Effects stamp duty 105 278–9, 278t, 280, 281t, 293, 294t Standard & Poor’s 59 The International Banking Corporation Standard Chartered Bank 15 (TIBC) 103 standardised approach (SA) 135, 139 The Investment Dar (TID) 2, 29, 167, standardised interviews 202 169, 313, 327, 375 Stiglitz, Joseph 159 tolerance level 61 stop-loss provisions 61 total return swaps 369 stress-testing analysis 50, 61, 110 treasury risk 53 structured products, mutual funds, 15 triangulation method 195 subprime assets 164 subprime mortgage 154, 156–7, 359 UBS 46 sukuk (sak) 25–30, 176–7, 369, 383 UK sovereign sukuk 28 k asset-backed 81 uncontrollable risk 52 k defaults 169–70 Unicorn Investment Bank 374, 375 definition 25 univariate analysis of variance East Cameron asset-backed 108, (ANOVA) 209 109t unsystematic risk 52 Golden Belt 106 US Financial Crimes Enforcement ijara sukuk 25–6 Network 99 issuance 2008–2009 164 US GAAP standards 100 issuance by country 29, 30f US Office of the Comptroller of the lack of liquidity 78–9 Currency 99 market developments 26–30, 27f Usmani, Sheikh Muhammad Taqi 170, risk management issues in 107–9 174, 175, 176 transparency 109 types of 25–6 validity of data 205–7 systematic risk 52, 157, 170, 179, 180, Value at Risk (VaR) 50, 69 322, 355 marked-to-market trading 61–2 models 46 Tabung Haji in Malaysia 14 VaR see Value at Risk (VaR) Tadawul (Saudi stock exchange) 78–9 Varimax 273 Tahawwut (Hedging) Master venture capital 15 Agreement 39 video conference interviews 204

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Index 431

wa’ad contract 65, 114, 116, Wilks’ Lambda 276, 280, 293 117, 369 World Bank 36 wadiah 25 World Islamic Economic Forum wakala 23–4, 30, 168, 265, 319 (WIFE), fifth (2009) 172, 361 intensity of use of 224t, 264, World recession 2009 155f, 158f 265t risk perception 225, 225t, 266t Yudhoyono, President Susilo Wall Street model 5, 125, 153, 181, Bambang 172–3, 361 332, 335, 360, 371 Weighted Average Cost of Capital Zawya 340, 342 (WACC) 46 zero-beta model (Black) 124 WestLB, 103 z-scores 122

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