Capital adequacy (Islamic banks)
Holding enough capital against risks; for Islamic banks, the IFSB adapts the Basel rules to each Shariah contract.
Capital adequacy is the requirement that a bank hold capital resources sufficient for the risks it takes. For institutions offering Islamic financial services, IFSB-23 adapts the Basel framework by setting the capital treatment contract by contract, since murabaha, ijarah, salam, istisna, musharakah and mudarabah each carry different combinations of credit, market and equity risk. It also addresses risks specific to Islamic banks, such as those arising from investment accounts.
Sources
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.
Related terms
Alpha factorIn IFSB capital rules, the share of risk on investment-account-funded assets that is treated as falling on shareholders.Displaced commercial riskPressure on an Islamic bank to give up part of its own profit so investment account holders earn a competitive return.Profit-sharing investment account (PSIA)An account whose funds the bank invests, usually as mudarib, with returns based on actual results rather than a promised rate.Operational riskThe risk of loss from failed processes, systems, people or external events; for Islamic institutions it includes Shariah non-compliance risk.