Islamic finance in Europe (115)

Continuation

Market risk

Market risk for an IIFS (Institutions Offering Islamic Financial Services) arises in the form of unfavourable price movements.

These are:

-      equity and commodity prices (price risk)

-      benchmark rates (interest rate risk)

-      foreign exchange rates (FX risk)

-      yields (rate of return risk)

-      and volatility in the value of tradable or leasable assets.

For example, under an ijarah operating lease contract, an IIFS might be exposed to market risk:

-      due to a reduction in the residual value of the leased asset at the expiry of the lease term

-      or, in the case of early termination, due to default.

From the research paper of European Central Bank

(Authors: F.Mauro, P.Caristi, S.Couderc, A.D.Maria, L.Ho, B.K.Grewal, S.Masciantonio, S. Ongena and S.Zaher)