Displaced commercial risk
Pressure on an Islamic bank to give up part of its own profit so investment account holders earn a competitive return.
Displaced commercial risk arises when an Islamic bank acting as mudarib gives up part of its own profit to smooth the returns paid to investment account holders, as the IADI-IFSB core principles describe it. Banks do so to keep returns in line with competitors and to avoid withdrawals, even though the contract does not require it. The practice shifts risk from account holders to shareholders, and IFSB-23 reflects it in capital requirements.
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.Profit equalisation reserveAn amount set aside from mudarabah income to maintain a level of return for investment account holders and the bank over time.Rate of return riskThe risk that changes in market rates affect an Islamic bank's net income; the analogue of interest rate risk in the banking book.Investment account holderA customer who places funds in an investment account and shares in its returns and risks, rather than holding a deposit claim.