The displaced commercial risk and Islamic banks

Abstract

This Islamic Finance has attracted an ever-increasing interest over the last forty years and has undergone a remarkable expansion in asset value. Nevertheless, the peculiarity of Islamic financing modes proposed by these institutions may present certain limits in their execution which exposes these banks to risks that emanate from the characteristics of their particular modes of operation. The aim of our article is to analyze the main risk specifically to Islamic financial institutions namely the displaced commercial risk. This risk arises from participatory investment accounts. In other words, this situation occurs when the banks, under pressure from the environment, are forced to give up part of their profits to pay the depositors, in order to prevent massive withdrawals that can be translated into a liquidity crisis later. In order to avoid such a situation, Islamic banks highlight income smoothing mechanisms on participatory investment accounts.