Towards a Plural Financial System
Edited by Valentino Cattelan
Chapter 6: Islamic banking contracts and the risk profile of Islamic banks
This chapter aims to analyse the risk profile of Islamic banks through the identification and classification of the typical risks associated with the main Islamic banking contracts. The financial literature (Zubair and Mirakor, 1987; Moshin and Mirakhor, 1991; Archer et al., 1998; Solè, 2007) has mainly focused on the comparison between Islamic banks and traditional (better, conventional) banks, on the grounds of the recent emergence of the Islamic financial industry in Western countries. Regrettably, less attention has been given to the typical risks associated with each contract and the interactions among these risks within Islamic financial institutions (IFIs) (but see recently on the topic Archer et al., 2010). Making up for this limitation, we argue that a better understanding of the Islamic banking industry requires the consideration of the risk profile of each contract and the overall effect that these risks have on the risk profile of Islamic institutions and their available capital.
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