Asset Liability Management for Islamic Banks:
A Model to Quantify the Capital Required to Absorb Refinancing Risk

KENNETH BALDWIN
 
Wednesday 16 April, 2014 (16-06-1435) 

Abstract

Asset Liability Management (ALM) for Islamic banks is complicated by several factors. Access to only short-dated funding instruments leads to unavoidable maturity mismatches between assets and liabilities. This gives rise to net income uncertainty due to the refinancing of liabilities. Hedging this uncertainty may be challenging for some Islamic banks given differing opinions as to Shariah permissibility of available hedging instruments, insufficient appetite for counterparty credit risk exposure, and human resource constraints. As a practical alternative to risk transference through hedging, this paper develops a framework to enable Islamic banks to quantify the reserve needed to instead absorb refinancing risk, which can be priced into, and built from, corresponding asset returns.