Islamic banking contracts and risk profile of Islamic banks

This chapter aims to analyse the risk profile of Islamic banks through the identification and classification of the typical risks associated with the main Islamic banking contracts and through the overall effect that these risks have on the risk profile of Islamic financial institutions (IFIs) and their available capital. At this aim, it first explains the system of risks underlying each Islamic contract, considering the position of the bank and its customers in the transactions (both on the asset side and the liability side). Second, it analyses the overall risk profile of Islamic banks taking into account the supervisory point of view. Finally, it discusses to what extent the peculiarities of IFIs can be properly integrated within the current financial regulation of European countries, with special reference to Italy as a country geographically very close to the Middle East and North Africa (MENA) region, that is the region in which Islamic banking industry will record high growth rates in the coming years.