Assessing the Stability and Resilience of Islamic Banks Through Stress Testing Under Standardized Approach of the IFSB Capital Adequacy Framework

Stress testing is an essential risk management tool that helps financial institutions to identify, assess and mitigate risks in their businesses. Stress tests have been and are an excellent tool for understanding the plausible impact of a what-if scenario in banking industry. The global financial crisis has placed the spotlight squarely on stress tests. Though, Islamic banks operate within the similar financial environment, and their balance sheet composition, however, calls for different treatment in stress testing. Stress testing work has been extensively discussed by the international framework such as of Basel Committee on Banking Supervision and Committee of European Banking Supervisors, and is reflected in the IMF work as well. However, the existing literature on stress testing is either mostly from conventional banks perspective or is dominated by the qualitative nature from academic perspective.