Financial Risk Management for Islamic Banking and Finance Book

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