Modelling shariah risk in islamic finance

A probability approach

Research output: Contribution to journalArticle

Abstract

The validity of a contract determines the Shariah compliance status of an Islamic financial institution’s products and services. The contract is deemed valid and effective provided that all the essential elements and the necessary conditions of the contract are fully satisfied. The purpose of this study is to examine the modelling of Shariah risk in a basis of contract’s validity. In particular, this study attempts to measure Shariah risk with respect to the likelihood of the contract will not comply with the Shariah requirements of a valid contract, i.e. Shariah defaults. The present study is conducted using qualitative content analysis method through literature surveys. At the first part, the study reviews binomial model considering the basic assumptions for independent defaults to measure Shariah defaults. By expanding the underlying assumptions, in the second part, the study develops a model of Shariah risk, taking into account the probability of default of one and/or more essential elements of a valid contract. The application shows that Shariah risk can be modelled using the binomial estimation for predicting probability of default of each element considering that the element is independent default. This study pretends to be a guide to the literature, providing a comprehensive list of references and suggesting different possible extensions for its future development particularly in application of Shariah risk model.

Original languageEnglish
Pages (from-to)870-885
Number of pages16
JournalInternational Journal of Business and Society
Volume19
Issue number3
Publication statusPublished - 1 Jan 2018

Fingerprint

Modeling
Islamic finance
Probability of default
Content analysis
Islamic financial institutions
Binomial model
Risk measures
Literature survey
Risk taking
Risk model

Keywords

  • Contracts
  • Islamic finance
  • Modelling
  • Probability approach
  • Shariah risk

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Modelling shariah risk in islamic finance : A probability approach. / Noor, Nurul Syazwani Mohd; Mohd. Shafiai, Muhammad Hakimi; Ismail, Abd. Ghafar.

In: International Journal of Business and Society, Vol. 19, No. 3, 01.01.2018, p. 870-885.

Research output: Contribution to journalArticle

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