Risk Management and Accounting
What the exam tests
This domain tests risk identification, measurement, mitigation, and accounting treatment for Islamic contracts and takaful. Expect credit, market, liquidity, operational, rate-of-return, displaced commercial, and Shariah non-compliance risk.
Core rules
- Credit risk arises in murabahah, ijarah, salam, istisna, and profit-sharing exposures.
- Rate-of-return risk arises when returns on assets and investment accounts diverge.
- Displaced commercial risk arises when a bank forgoes profit to pay depositors competitive returns.
- Shariah non-compliance risk can cause income purification or loss.
- AAOIFI accounting standards govern murabahah, ijarah, mudarabah, and takaful reporting.
- Murabahah profit is deferred and recognized over the financing term, not fully upfront.
Worked example
A murabahah asset costs 100,000 and is sold for 110,000 payable over 12 months. The receivable is recorded at 110,000. The 10,000 profit is deferred and recognized over the term, about 833.33 per month. If the client defaults, the bank assesses credit loss and makes an impairment provision; it does not simply keep recognizing profit.
Traps
Do not recognize the full murabahah profit at inception. Do not ignore rate-of-return or displaced commercial risk. Do not mix takaful fund accounting with operator accounting. Do not treat Shariah non-compliance as only a reputational issue.