Book Chapters

Basel Accords promote Value at Risk (VaR) – which is the most used method – as the preferred one to measure and report market risks of financial institutions. Using VaR usually requires having asset valuation models and identifying their risk factors as model input parameters, allowing thus to stress them and calculate valuations (mark–to–market or mark–to–model). The previous requirements will make VaR calculation – roughly adapted from conventional finance – complicated for Islamic finance as there are not well–known valuation models, and the risk factors may not be easily identified.

This paper examines the relationship between the volume of investment deposits (profit sharing investment accounts–PSIA) and capitalization of Islamic commercial banks in a context of asymmetric information. Unlike current accounts holders, investment accounts holders may support part or all of the losses on assets value, which could be a source of moral hazard among bank managers and shareholders. To test these assumptions, we use the system generalized method of moments (System GMM) on a dynamic panel of 59 Islamic banks observed during the period 2005–2009.

This study aims to determine the stability of Islamic banking as compared with conventional banking in Indonesia. In this case, the level of bank stability is measured individually using an accounting-based bank soundness measurement called the Z-score indicator. Using the parametric statistical t-test, the study shows that the level of stability in Islamic banks versus conventional banks is significantly different. This research uses the sample data of 12 Islamic banks and 71 conventional banks in Indonesia during the period of 2004–2009.

This paper examines the effects of currency and the banking crises on economic downturns in North Africa and GCC countries based on a Financial Stress Index (FSI). The paper identifies episodes of financial turmoil according to FSI values and proposes an analytical framework to assess the impact of financial stress – in particular the effect of Islamic banks distress and conventional banks distress – on the economic downturn.

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 tools for understanding the plausible impact of a “what-if scenario” in the banking industry. The global financial crisis has placed the spotlight squarely on stress tests. Though Islamic banks operate within the similar financial environment, their balance sheet composition calls for different treatment in stress testing.

This paper studies the international transmission of bank liquidity shocks from multinational Islamic bank-holding companies to their subsidiaries. Based on a total sample of 120 Islamic and conventional bank subsidiaries, we test whether foreign bank lending is determined by different factors for Islamic and conventional banks. We estimate a model that includes subsidiary and parent bank characteristics as well as host and home country variables. Our empirical findings show that conventional parent bank fragility negatively affects lending by their subsidiaries.

This paper provides a critical review of the Islamic Economics (IEs) and Finance (IF) literature that have examined the stability of the Islamic Financial System (IFS) and its institutions vis-à-vis the conventional interest-based system. The authors have been able to analyze thirty-four investigations over a thirty-year period, from 1983 to 2013. The research aims to provide an account of the main findings and conclusions of the literature, discuss the robustness and comprehensiveness of these findings, and highlight some venues for future explorations.

The FSAP, initiated by the IMF and the World Bank, has been implemented internationally including the IDB and IFSB member countries. The initiative is beneficial to further improve the quality of the financial industry as well as to contribute to global financial stability. The rapid growth of Islamic finance internationally poses new challenges to the supervisory authority particularly with the growing significance of the newly developed industry.