Solvency stress testing of Islamic commercial banks

Chattha, Jamshaid Anwar; Archer, Simon N.

doi:10.1108/jiabr-09-2014-0031

Cited by 11 publications

(16 citation statements)

References 13 publications

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“…[ 21 ] examined a solvency stress test based on the standardized approach as per IFSB-15. 5 Furthermore, the authors included macro-financial relationships with different assumptions and stress scenario parameters to determine whether Islamic commercial banks can remain in compliance with all capital requirements in distress conditions.…”

Section: Literature Reviewmentioning

confidence: 99%

Regulatory policies in the global Islamic banking sector in the outbreak of COVID-19 pandemic

2021

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This paper forecasts the response of Islamic banks’ dynamics (size, profitability, nonperforming financing, and stability) to the COVID-19 pandemic over the period ranging from 2019Q4 to 2021Q4. Nine jurisdictions are considered based on their Islamic banks’ systemic importance, namely Bahrain, Brunei, Indonesia, Kuwait, Malaysia, Pakistan, Saudi Arabia, Turkey, and UAE. Using the bivariate VARX model, our forecasting exercise shows that the Islamic banks’ response to the COVID-19 pandemic is not uniform across jurisdictions. While the Islamic banks’ dynamics in Saudi Arabia, UAE, and Kuwait are less likely to be impaired, Bahrain, Brunei, Malaysia, Pakistan, and Turkey are expected to be relatively more affected especially in terms of their size growth. Saudi Arabia will continue leading the growth momentum of the global Islamic banking sector, and its Islamic banks’ assets are expected to reach at least $185.4 billion by the end of the fourth quarter of 2021. This paper recommends a prioritization approach for the implementation of the policy measures by the jurisdictions based on their banks-specific responses to the COVID-19 pandemic.

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Section: Literature Reviewmentioning

confidence: 99%

Regulatory policies in the global Islamic banking sector in the outbreak of COVID-19 pandemic

2021

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“…This indicates that the shock can be +/-, and that it is for each factor individually. Chattha and Archer (2016) and Chattha (2016) provide a comprehensive guide to conducting the sensitivity stress testing for ICBs, including a stress testing matrix and a three stage methodology that can be considered by ICBs.…”

Section: Stage 2: Determination Of Impact Of Rate Changes For Icbs -Smentioning

confidence: 99%

“…In a low-rate regime, we also argued that though, lower rates can have a positive effect on the economy, thus helping to lower bank-funding costs and boost asset prices; yet, concerns about their negative effect on ICBs' profitability, financial stability, and sustainability equally resonate to be comprehended. 30 Drawing on these 29 Guiding Principles, Chattha and Archer (2016) provide technical guidance (including a stress testing matrix) on how to carry out stress testing in accordance with these principles. 31 On-site work is used as a tool to provide independent verification that adequate policies, procedures and controls exist at IIFS, determine that information reported by IIFS is reliable, obtain additional information on the IIFS and its related companies needed for the assessment of the condition of the IIFS, monitor the IIFS's follow-up on supervisory concerns, etc.…”

Section: Conclusion and Moving Forwardmentioning

confidence: 99%

Risk Management in Changing Benchmark Rates Regime : Prudential Implications for Islamic Banks and Supervisors

Chattha

Alhabshi

2017

JIF

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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.

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“…Hence, despite common names (such as credit, liquidity, and operational risk), the nature of the risks and the means of dealing with them are different due to the distinctive intrinsic features of Islamic finance. Consequently, risk assessment systems should anticipate and measure these risks (Chattha and Archer, 2016;Khan and Ahmed, 2001). Not many studies offer helpful insight into these developments, particularly with reference to ICBs' stability, duration gap, and the internal capital adequacy assessment process (ICAAP).…”

Section: Risks In Islamic Banking Industry -Key Gapsmentioning

confidence: 99%

Estimation of Duration Gap and its Determinants for Islamic Banks: Empirical Evidence using Two-Step Robust GMM

Chattha

Alhabshi

2021

Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah

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The banking industry is in the business of risk management, which is of significant consideration to banks and their regulators. Islamic commercial banks (ICBs) are no exception as they too deal with a variety of peculiar risks. One specific risk is the rate of return risk (ROR) in the banking book, which is dealt with under Pillar 2 of the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) standards. The IFSB, similar to the BCBS, provides a detailed framework on the management of ROR risk for the ICBs, including modalities of maturity gap and calculation of precise duration of assets and liabilities. However, existing studies on risk management practices show significant gaps; there are no studies which specifically highlight the assessment of ROR risk with duration gap for ICBs. Therefore, we estimate the duration gap of ICBs and determine the factors influencing the duration gaps in the context of ROR risk. Using Duration Gap Model and Two-Step Robust Generalized Method of Moments (GMM), with a sample of 50 ICBs from 13 countries, for the period 2007-2015, our empirical findings are three-fold: (a) time series and cross-sectional duration gap of ICBs reflecting significant variations across the banks and countries; (b) ICBs have a general tendency of maintaining a higher (more) duration gap compared to their conventional counterparts, and are exposed to increasing ROR risk due to their larger duration gaps and severe liquidity mismatches; and (c) there is significant difference in the estimated coefficients of idiosyncratic factors influencing the duration gaps of ICBs. This study makes profound contributions to the existing corpus of literature and provides direction to the ICBs to reflect upon the significance of liquidity mismatch risk, ROR risk management with the duration gap, factors influencing the duration gaps, and management of the ROR risk under Pillar 2 of the BCBS and the IFSB standards.

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Solvency stress testing of Islamic commercial banks

Cited by 11 publications

References 13 publications

Regulatory policies in the global Islamic banking sector in the outbreak of COVID-19 pandemic

Regulatory policies in the global Islamic banking sector in the outbreak of COVID-19 pandemic

Risk Management in Changing Benchmark Rates Regime : Prudential Implications for Islamic Banks and Supervisors

Estimation of Duration Gap and its Determinants for Islamic Banks: Empirical Evidence using Two-Step Robust GMM

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