Risk Management in
Islamic Financial Instruments
104
Type of risk Definition Institution Depositors
Bank Shareholders
Demand Investment
Displaced
Commercial
risk is the risk
of divergence
between
assets’
performance
and
expectations
for returns on
liabilities
Displaced
commercial risk
may adversely
affect the value
of the bank’s
capital. Return
on equity goes
down
Shareholders
are exposed
to the risk of
not receiving
their share of
the bank’s
profit
Investment
depositors
may have to
forgo
receiving
their
mudarib
share
Withdrawal
risk where the
bank is
exposed to the
risk of
withdrawal of
deposits
Withdrawal risk
exposes the
bank to liquidity
problems and
erosion of its
franchise value
Insolvency
risk is the risk
of bank’s
failure to meet
its obligations
when they fall
due
Insolvency risk
may expose the
bank to loss of
its reputation
Insolvency risk exposes the different
stakeholders to counter – party risks
Treasury
Risks
Asset &
Liability
Management
(ALM) risk
Asset &
Liability
Management
(ALM) risk is
a balance sheet
mismatch risk
resulting from
the difference
in terms and
conditions of a
bank’s
portfolio on its
asset & liability
sides
This may
adversely affect
the bank’s
capital