An Introduction to Islamic Finance: Theory and Practice

278 AN INTRODUCTION TO ISLAMIC FINANCE

An IFI is also subject to all of these risks to varying degrees. Its opera-
tional, business, and event risks will be similar to those of its conventional
counterparts and, therefore, do not require any special treatment and dis-
cussion here. However, the nature of its fi nancial risk would be different
and it is, therefore, important to understand the key differences in the risk
profi les of intermediaries in the respective systems.
Table 13.2 presents a stylized balance sheet of an Islamic bank, display-
ing different activities and fi nancial instruments. It serves as a good starting
point for understanding the dynamics of the risks inherent in Islamic banks.
Panel A classifi es assets and liabilities based on the maturity profi le of differ-
ent instruments. Panel B provides an alternative view based on the function-
ality and purpose of different instruments. Some instruments, such as ijarah
and istisna’, can be used across different maturity groups. Although several
Islamic banks organize their fi nancial statements on the basis of functional-
ity, a maturity - based view of the balance sheet is important as it helps to
understand exposure at the institutional level.
Realizing the signifi cance of risk management, in December 2005 the
Islamic Financial Services Board (IFSB) issued a comprehensive standards

TABLE 13.2 Theoretical balance sheet of an Islamic bank based on maturity profi le
and functionality

Panel A. Based on maturity profi le

Assets Liabilities

Short - term trade fi nance (cash, murabahah,
salam)
Medium - term investments (ijarah, istisna’)
Long - term partnerships (musharakah)
Fee - based services (jo’alah, kifala, and so
forth)
Non - banking assets (property)

Demand deposits (amanah)

Investment accounts (mudarabah)

Special investment accounts

(mudarabah, musharakah)

Reserves

Equity capital

Panel B. Based on functionality

Assets Liabilities

Cash balances
Financing assets (murabahah, salam, ijarah,
istisna’)
Investment assets (mudarabah, musharakah)
Fee - based services (jo’alah, kifala, and
so forth)
Non - banking assets (property)

Demand deposits (amanah)

Investment accounts (mudarabah)

Special investment accounts

(mudarabah, musharakah)

Reserves

Equity capital

Source: van Greuning and Iqbal (2008)