What is it about?
We have shown first time an application of stress testing for Islamic banks through illustration and examples. We provide a methodology for designing and conducting solvency stress tests, under the standardised approach as per IFSB-15 for Islamic banks.
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Why is it important?
We focus on the gap with respect to the stress testing of capital adequacy. Our main contribution is twofold. The first is the development of an STeM – a step-by-step approach, which provides a method for simulating solvency (i.e. capital adequacy) stress tests for ICBs; the second is the demonstration of the potentially crucial impact of profit-sharing investment accounts and the way they are managed by ICBs (notably the smoothing of profit payouts) in assessing the capital adequacy of the ICBs.
Perspectives
This is an underdeveloped area for Islamic banks. There is a lot work required to make contribution in this area. More in-depth work is being undertaken to demonstrate the application of stress testing tool for Islamic banks.
Dr. Jamshaid Anwar Chattha
Central Bank of Kuwait
Read the Original
This page is a summary of: Solvency stress testing of Islamic commercial banks, Journal of Islamic Accounting and Business Research, April 2016, Emerald,
DOI: 10.1108/jiabr-09-2014-0031.
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