Essays on Risks of Islamic Financial Contracts Assignment

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The paper "Risks of Islamic Financial Contracts" is a great example of an assignment on finance and accounting. A contract is a mutual agreement between an employer and his or her employee. The employer can be an organization, a company, or a group of people. In Islamic countries such as Iran, Saudi Arabia, and Afghanistan among others, there are different types of financial contracts such as Murabahah, Mudharabah, Musharakah, Salam, Istisna’ a, and Ijarah. Several types of research show that the risks of Islamic financial contracts change at different stages of contracts. To begin with, in the Murabahah type of financial contract, the risks change depending on the stage of the contract.

In this type of contract, the first stage of the contract involves a supplier who sells his or her product at a markup. The risks found here are very different from the risks found in the other stages or forms of the contract. In the first stage where a supplier sells his or her product at a markup, the risks experienced are mark-up risks. Mark-up risks are often based on benchmarks from other suppliers but once they are determined, they cannot be changed.

Mark-up risks include changes in prices and other costs. The second stage in the Murabaha type of contract involves the bank buying a product from a supplier and selling the product to a customer at its cost plus a markup. The product that the bank buys and sells can be buildings, land, cars, and machinery among others. In this stage, the customer who buys the product from the bank normally pays by installments. The risks found in this stage of the Murabaha type of contract include credit risks, liquidity risks, and operational risks.

Credit risks are experienced when a customer does not keep his or her promise. This might happen when a customer has purchased an asset from the bank but wants the bank to finance the asset. Credit risks can also be experienced when the product to be sold gets damaged before the customer buys the product. Consequently, liquidity risks are experienced when a customer defaults his or her payment or cancels his or her promise.

This causes problems or challenges for the bank while selling the product. In addition, operational risks are experienced when the bank that is to sell the asset consumes the asset before selling it to a customer. The third stage in the Murabaha type of contract involves buying a commodity or a basket of commodities for example metals that are traded in London Metal Exchange which are held by another bank for a predetermined amount at a predetermined price. The risks in this stage are different from the risks found in the previous stages of the Murabaha type of contract.

The risks available at this stage are commodity risks which are experienced when banks may have to hold on to a product in case the customer who was to buy the product changes his or her mind. This may expose the bank to problems or challenges of disposing of the product.

References

IDB. IDB credit rating and capital adequacy. The Islamic development bank

group risk management department. 2009. Web.

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