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Andreas Jobst and Mr. Juan Sole

and provide a total view of capital adequacy—on an aggregated or individual basis—of legal entities and/or across groups. Compared to conventional banks, Islamic banks require a more nuanced treatment of risk factors given the specificities of risk exposures, the influence of shari’ah compliance on the transmission of shocks, and the impact of potential risk mitigation. Thus, this section identifies the characteristics of these risk factors and illustrates how properties of Islamic banking shape the way in which shocks can be integrated into a standard

Andreas Jobst and Mr. Juan Sole
This paper provides a conceptual overview of key aspects of the design and implementation of solvency stress testing of Islamic banks. Based on existing regulatory standards and prudential practice, the paper explains how Islamic finance principles and their impact on various risk drivers affect the capital assessment of asset-oriented financial intermediation under stress. The formal specification of these risk factors helps operationalize and integrate the stress testing of Islamic banks within established frameworks for financial stability analysis.
Ms. Inutu Lukonga

(Bahrain, Djibouti, Iraq, Morocco, Sudan, United Arab Emirates, West Bank and Gaza). 11 Five countries (Algeria, Iraq, Mauritania, Morocco, Saudi Arabia) do not require Islamic banks to establish a Sharī’ah board at the bank level. The Sharī’ah boards differ in their mandate, scope, governance, and accountability, making harmonization of rulings a challenge. In particular, of the seven countries that require centralized or NSBs, in Bahrain and Djibouti the Sharī’ah boards only have advisory powers. The NSB in Iraq has powers to evaluate Sharī’ah compliance in

Mr. Juan Sole and Andreas Jobst
Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari'ah-compliant structures. Islamic finance is governed by the shari'ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari'ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.
Mr. Juan Sole and Andreas Jobst

definite performance is essential to establishing possible shari’ah compliance of derivatives, conventional remedies to these contractual uncertainties (using futures or options) seem to controvert Islamic principles. For instance, the assurance of both payment and delivery through state-contingent (periodic) cash settlement (in the case of futures) and provisions for unilateral deferment (in the case of options) imply a zero-sum proposition ex ante and intertemporal debt creation without underlying asset transfer ( Jobst, 2008a ). In addition, some controversial

Elsie Addo Awadzi

other supervisory agency or as a stand-alone institution. Sharī’ah supervisory boards and the Sharī’ah compliance role they play for Islamic banks may have implications for the design of institutional arrangements for Islamic bank resolution and AML/ CFT internal controls. Balance sheets: The balance sheets of Islamic banks tend to be different from those of their conventional peers and are underpinned by transactions structured to comply with Sharī’ah prohibitions against interest and excessive risk-taking. Islamic banking transactions range from interest

Mr. Amadou N Sy, Mr. Peter J Kunzel, Mr. Paul S. Mills, and Andreas Jobst
Recent years have witnessed a surge in the issuance of Islamic capital market securities (sukuk) by corporates and public sector entities amid growing demand for alternative investments. As the sukuk market continues to develop, new challenges and opportunities for sovereign debt managers and capital market development arise. This paper reviews the key developments in the sukuk market and informs the debate about challenges and opportunities going forward.
Mr. Amadou N Sy, Mr. Peter J Kunzel, Mr. Paul S. Mills, and Andreas Jobst

shari’ah compliance. This paper reviews the current state of the sukuk market, examines pertinent legal and economic implications of shari’ah compliance on the configuration of sukuk issuance, and informs the debate about the prospects of sukuk issuance by sovereign issuers in both Muslim and non-Muslim countries going forward. A. Definition of Islamic Finance Islamic finance is driven by the general precept of extending the tenets of the religious beliefs in the shari’ah to financial agreements and transactions . Shari’ah law bans the sale and purchase

International Monetary Fund
This paper discusses the need for ensuring financial stability in countries with Islamic Banking (IB). IB continues to grow rapidly, in size and complexity, posing a challenge to supervisory authorities and central banks. The legal environment within which IBs operate can be complex and challenging and may have implications for financial stability. IBs operate in diverse legal environments, some of which are more evolved than others in providing strong legal underpinnings for IB. International governance standards apply to IB but need to be customized to consider IBs’ distinct governance features. Significant progress has been achieved in developing prudential standards for IB, although broader implementation and more consistent application are needed. Progress has been slow in developing IB’s liquidity management and money markets. In recent years, hybrid financial products in IB have emerged that replicate aspects of conventional finance in an IB context, raising financial stability concerns. The IMF has played an important role in promoting financial stability in IB jurisdictions, working closely with IB standard setters, and international organization to shape IB standards and promote best practices.