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Measurement of the displaced commercial risk in Islamic Banks

Author

Listed:
  • Kaouther Toumi

    () (LGCO - Laboratoire Gouvernance et Contrôle Organisationnel - UT3 - Université Toulouse III - Paul Sabatier - Université Fédérale Toulouse Midi-Pyrénées)

  • Jean-Laurent Viviani

    () (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Zeinab Chayeh

    () (U. Paris 6 - Université Pierre & Marie Curie - Paris 6)

Abstract

Highlights We identify the displaced commercial risk DCR exposure of Islamic banks. We identify the scenarios of displaced commercial risk exposure to compute the DCR Profits and Losses to Islamic banks shareholders. Scenarios of risk depend on the actual rate of return on investment accounts, the benchmark rate of return and level of existing reserves to mitigate the DCR. We assess the capital charge needed to cover the displaced commercial risk using the Value-at-risk measure of risk, DCR-VaR. We assess the coefficient alpha α CAR-VaR for the capital adequacy ratio for Islamic banks. We consider three methods, the Historical non-parametric VaR, the parametric-VaR and the Extreme Value Theory-VaR. Abstract The objective of the research is to quantify the displaced commercial risk (DCR) based on quantitative finance techniques. We develop an internal model based on the Value-at-risk (VaR) measure of risk to assess the DCR-VaR and the alpha coefficient in the capital adequacy ratio of Islamic banks. We identify first the scenarios of exposure of Islamic banks to DCR that depend on the actual return on unrestricted profit sharing investment accounts (PSIA U), the benchmark return as well as the level of the existing profit equalization reserve (PER) and investment risk reserve (IRR). Second, we quantify the DCR-VaR and the alpha coefficient for a given holding period and for given confidence level. We illustrate the DCR-VaR model on selected Islamic banks from Bahrain. Our model helps to better assess the needed equity to cover the DCR and an accurate capital adequacy ratio for Islamic banks. The model has also policy implications for regulators and the IFSB to develop better guidance on good practices in managing this risk.

Suggested Citation

  • Kaouther Toumi & Jean-Laurent Viviani & Zeinab Chayeh, 2019. "Measurement of the displaced commercial risk in Islamic Banks," Post-Print halshs-01806496, HAL.
  • Handle: RePEc:hal:journl:halshs-01806496
    DOI: 10.1016/j.qref.2018.03.001
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01806496
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    References listed on IDEAS

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    Cited by:

    1. Baldwin, Kenneth & Alhalboni, Maryam, 2020. "The impact of profit-sharing investment accounts on shareholders’ wealth," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).

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    Keywords

    Investment risk reserve; Profit equalization reserve; Extreme value theory; Value-at-risk; Capital adequacy ratio; Displaced commercial risk;
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