Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors

Post-global financial crisis scenario has presented extraordinary challenges to the global economy, in general, and the banking industry, in particular. This has brought the financial industry to a set of new challenges including risk management in changing benchmark rates risk for Islamic banks. Th...

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Main Authors:	Chattha, Jamshaid Anwar, Syed Jaafar Alhabshi, Syed Musa
Format:	Article
Language:	English
Published:	IIUM Press 2017
Subjects:	HG3368 Islamic Banking and Finance
Online Access:	http://irep.iium.edu.my/61303/ http://irep.iium.edu.my/61303/ http://irep.iium.edu.my/61303/1/61303_Risk%20management%20in%20changing%20benchmark%20rates%20regime.pdf

id	iium-61303
recordtype	eprints
spelling	iium-613032018-01-12T07:02:14Z http://irep.iium.edu.my/61303/ Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors Chattha, Jamshaid Anwar Syed Jaafar Alhabshi, Syed Musa HG3368 Islamic Banking and Finance Post-global financial crisis scenario has presented extraordinary challenges to the global economy, in general, and the banking industry, in particular. This has brought the financial industry to a set of new challenges including risk management in changing benchmark rates risk for Islamic banks. Thus, in recent years, the management of benchmark rates (or interest rates) received considerable prominence in the banking sector due to a number of reasons including supervision of banks’ benchmark rates under Basel II Pillar II. Taking into account the specific features of Islamic banks, the purpose of the paper is to theoretically and empirically review the possible prudential implications of lowly and increasing benchmark rates risk, and provide a sturdy risk management and regulatory perspective for Islamic banks and supervisors. For low rates perspective, policy rates of 12 central banks were collected and analyzed. However, for increasing rates scenario, we used duration gap and stress testing approaches, with a sample of 50 Islamic banks from 13 countries, for the period 2009-2015. Our empirical results indicate that persistently low benchmark rate regime carries strategic implications for Islamic banks including pressure on profitability, excessive risk taking and distortion in credit allocations. On the other hand, an increasing benchmark rate regime indicates the significant loss of the capital base, emergence of displaced commercial risk causing early withdrawals by the customers due to higher expectations in dual banking systems. This study concludes that implications under both scenarios call for a better risk management with appropriate tools and effective supervisory oversight for Islamic banks. IIUM Press 2017-12-31 Article PeerReviewed application/pdf en http://irep.iium.edu.my/61303/1/61303_Risk%20management%20in%20changing%20benchmark%20rates%20regime.pdf Chattha, Jamshaid Anwar and Syed Jaafar Alhabshi, Syed Musa (2017) Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors. Journal of Islamic Finance, 6 (Special Issue). pp. 205-230. ISSN 2289-2109 E-ISSN 2289-2117 http://journals.iium.edu.my/iiibf-journal/index.php/jif/article/view/267
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HG3368 Islamic Banking and Finance
spellingShingle	HG3368 Islamic Banking and Finance Chattha, Jamshaid Anwar Syed Jaafar Alhabshi, Syed Musa Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors
description	Post-global financial crisis scenario has presented extraordinary challenges to the global economy, in general, and the banking industry, in particular. This has brought the financial industry to a set of new challenges including risk management in changing benchmark rates risk for Islamic banks. Thus, in recent years, the management of benchmark rates (or interest rates) received considerable prominence in the banking sector due to a number of reasons including supervision of banks’ benchmark rates under Basel II Pillar II. Taking into account the specific features of Islamic banks, the purpose of the paper is to theoretically and empirically review the possible prudential implications of lowly and increasing benchmark rates risk, and provide a sturdy risk management and regulatory perspective for Islamic banks and supervisors. For low rates perspective, policy rates of 12 central banks were collected and analyzed. However, for increasing rates scenario, we used duration gap and stress testing approaches, with a sample of 50 Islamic banks from 13 countries, for the period 2009-2015. Our empirical results indicate that persistently low benchmark rate regime carries strategic implications for Islamic banks including pressure on profitability, excessive risk taking and distortion in credit allocations. On the other hand, an increasing benchmark rate regime indicates the significant loss of the capital base, emergence of displaced commercial risk causing early withdrawals by the customers due to higher expectations in dual banking systems. This study concludes that implications under both scenarios call for a better risk management with appropriate tools and effective supervisory oversight for Islamic banks.
format	Article
author	Chattha, Jamshaid Anwar Syed Jaafar Alhabshi, Syed Musa
author_facet	Chattha, Jamshaid Anwar Syed Jaafar Alhabshi, Syed Musa
author_sort	Chattha, Jamshaid Anwar
title	Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors
title_short	Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors
title_full	Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors
title_fullStr	Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors
title_full_unstemmed	Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors
title_sort	risk management in changing benchmark rates regime: prudential implications for islamic banks and supervisors
publisher	IIUM Press
publishDate	2017
url	http://irep.iium.edu.my/61303/ http://irep.iium.edu.my/61303/ http://irep.iium.edu.my/61303/1/61303_Risk%20management%20in%20changing%20benchmark%20rates%20regime.pdf
first_indexed	2023-09-18T21:26:56Z
last_indexed	2023-09-18T21:26:56Z
_version_	1777412254170349568

Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors

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