Rate of return risk
The risk that changes in market rates affect an Islamic bank's net income; the analogue of interest rate risk in the banking book.
Rate of return risk is the possible impact on an Islamic bank's net income of changes in market benchmark rates, since many of its assets earn fixed returns while investment account holders expect returns in line with the market. IFSB-22 describes it as the analogue of interest rate risk in the banking book and calls for qualitative and quantitative disclosures on how it is defined and managed. It is closely linked to displaced commercial risk.
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
Displaced commercial riskPressure on an Islamic bank to give up part of its own profit so investment account holders earn a competitive return.Islamic profit rate swapAn alternative to an interest rate swap that exchanges fixed and floating profit flows through commodity murabaha trades.MurabahaA sale at cost plus an agreed, disclosed profit; the seller must own the asset first. Payment is often deferred in instalments.Investment account holderA customer who places funds in an investment account and shares in its returns and risks, rather than holding a deposit claim.