GRA · Banking Nexus
Spatial financeWhere capital meets hazard, exposure and transition
Islamic banking
Islamic banks operate under contracts and governance structures designed to comply with Islamic commercial law, using sale, lease and partnership-based instruments in place of interest-bearing loans. This page describes the structure of Islamic banking and its distinctive prudential risks, including rate-of-return risk, displaced commercial risk and liquidity management constraints, as studied by supervisors and standard setters. It is professional risk research only: it gives no religious rulings and takes no position on the permissibility of any product.
Islamic banking on the record.
Islamic banking: how the risk develops.
Islamic banking structure and professional risk research without religious rulings. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Contract structure shapes risk
Murabaha sale, ijarah lease, musharakah and mudarabah partnerships and sukuk carry different mixes of credit, market, equity and operational risk. The risk profile depends on the contract's actual terms, not on its label.
Investment accounts share returns
Profit-sharing investment account holders bear losses in principle. Competitive pressure can lead banks to smooth returns and absorb losses themselves, a transfer known as displaced commercial risk.
Liquidity tools are narrower
A limited stock of eligible high-quality liquid assets and fewer compatible interbank and central bank facilities can make liquidity management harder in stress, particularly in shallow sukuk markets.
Governance adds a layer
Shariah governance boards and compliance review sit alongside the usual board and control functions. Failure to comply with adopted standards can lead to forgone income and legal and reputational risk, treated as operational risk.
Activity and exposure in Western Europe.
Night lights, population density and flood water over Western Europe, from NASA GIBS. Each layer carries its own date.
The interactive map needs JavaScript; the layer list and sources are below.
Layers 3
Activity and exposure, for this page
Keyboard, with the map focused
Hold Ctrl or ⌘ and scroll to zoom
Latest available
NASA GIBS / EOSDIS · ASTER GDEM (METI, NASA) · Blue Marble (NASA) · © OpenStreetMap contributors (ODbL) · Natural Earth
Loading the latest NASA imagery.
Drag to move. Ctrl or ⌘ and scroll, pinch or the buttons to zoom; hover for the values under the pointer; reset returns to the region.
Activity and exposure, framed on Western Europe.Satellite and model products as NASA publishes them, each with its own date. They are indicators, not assessments of any place.
Data: NASA GIBS · ASTER GDEM · Blue Marble · © OpenStreetMap contributors · Natural Earth · NASA EONET · U.S. Geological Survey · CIESIN/Columbia, NASA SEDAC HBASESources and licences
- We acknowledge the use of imagery provided by services from NASA's Global Imagery Browse Services (GIBS), part of NASA's Earth Science Data and Information System (ESDIS). Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). NASA open data
- We acknowledge the use of imagery provided by services from NASA's Global Imagery Browse Services (GIBS), part of NASA's Earth Science Data and Information System (ESDIS). Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). NASA open data
- VIIRS Black Marble night-time lights, NASA Goddard Space Flight Center; distributed by the NASA Level-1 and Atmosphere Archive and Distribution System (LAADS DAAC); imagery via NASA GIBS. Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). NASA open data
- Center for International Earth Science Information Network (CIESIN), Columbia University. 2018. Gridded Population of the World, Version 4 (GPWv4): Population Density, Revision 11. NASA Socioeconomic Data and Applications Center (SEDAC). Licensed under CC BY 4.0. Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). doi:10.7927/H49C6VHW. CC BY 4.0
- VIIRS near-real-time products (flood, land surface temperature, snow cover, corrected reflectance), NASA LANCE; imagery via NASA GIBS. Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). NASA open data
- MODIS land products (vegetation indices, gross primary production, land cover), NASA LP DAAC and LANCE; imagery via NASA GIBS. Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). NASA open data
- ASTER GDEM is a product of METI and NASA (ASTER Global Digital Elevation Model V003, NASA LP DAAC); imagery via NASA GIBS. Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). Cite as: NASA/METI/AIST/Japan Spacesystems and U.S./Japan ASTER Science Team (2019). ASTER Global Digital Elevation Model V003. doi:10.5067/ASTER/ASTGTM.003. NASA open data
- Made with Natural Earth. Free vector and raster map data @ naturalearthdata.com. Public domain
- © OpenStreetMap contributors (ODbL), via NASA GIBS (coastlines, boundaries, roads and place names). Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). ODbL
- Blue Marble, NASA Earth Observatory; imagery via NASA GIBS. Colours redrawn from the published colour map; values averaged into hexagonal cells where shown (modified). NASA open data
- Context on the globe and flat map: coastlines, boundaries, roads and place names from NASA GIBS reference layers (OpenStreetMap data, ODbL, © OpenStreetMap contributors); Blue Marble imagery as an optional base; 3D terrain and the elevation read-out from the ASTER GDEM elevation colour index (5 m to 200 m classes, exaggerated for legibility). Boundaries are drawn as published and imply no position on any territory.
- Live events: NASA Earth Observatory Natural Event Tracker (EONET); events are indicative and keep their original source links.
- Live: NASA EONET Events are indicative, not authority warnings.
- Live: U.S. Geological Survey Events are indicative, not authority warnings.
- Context: CIESIN/Columbia, NASA SEDAC HBASE. Center for International Earth Science Information Network (CIESIN), Columbia University, and NASA Socioeconomic Data and Applications Center (SEDAC): Global Human Built-up And Settlement Extent (HBASE) 2010; Seto, Guneralp and Hutyra 2012, Global Grid of Probabilities of Urban Expansion to 2030; Global Urban Heat Island (UHI) Data Set, 2013.
- NASA GIBS: We acknowledge the use of imagery provided by services from NASA's Global Imagery Browse Services (GIBS), part of NASA's Earth Science Data and Information System (ESDIS).
- Optional layers (5 sources in the layer list: live, forecast, observed and context) print their provider credit on the map and here when switched on; forecasts are model output and derived indices are estimates.
Layers and dates
- Night-time lights, daily: VIIRS Black Marble (VNP46A2), NASA LAADS DAAC · 12 Oct 2026
- Population density, 2020: Population: CIESIN, Columbia University, Gridded Population of the World v4.11 (2018), NASA SEDAC, CC BY 4.0 · static
- Flood water, 3-day composite: VIIRS Global Flood Product, NASA LANCE · 14 Oct 2026
- Land surface temperature, day, 8-day composite: VIIRS NOAA-20 Level 3, 8-day, NASA LANCE · 14 Sep 2026
- True colour: VIIRS NOAA-20 corrected reflectance, NASA LANCE · 13 Oct 2026
- Land cover type (IGBP), yearly: MODIS Terra and Aqua land cover (MCD12Q1), NASA LP DAAC · 2024
What is measured, and how well.
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Capital adequacy ratio of Islamic banks | percent of risk-weighted assets | quarterly | IFSB prudential indicators | Published statistics |
| Non-performing financing ratio | percent of gross financing | quarterly | IFSB prudential indicators | Published statistics |
| Liquid assets ratio | percent of total assets | quarterly | IFSB prudential indicators | Published statistics |
| Profit-sharing investment accounts in funding | percent of total funding | quarterly | Supervisory returns | Published statistics |
| Financing by contract type | percent of total financing | quarterly | IFSB structural indicators | Published statistics |
| Sukuk holdings eligible as high-quality liquid assets | percent of liquid assets | quarterly | Supervisory returns | REPORTED |
| Real estate concentration of financing | percent of total financing | quarterly | IFSB prudential indicators | Published statistics |
How a shock to assets becomes a system loss.
The equity the system loses after interbank contagion, against the initial hit, as leverage, interconnection and recovery rates change, the core of a macroprudential stress test. Teaching model with stated illustrative values, not a prediction. The map on this page shows Western Europe; the model itself is not tied to a place.
Controls
- Fall in external assets
- 2.0%
- Leverage (assets over equity)
- 10 times
- Interbank share of assets
- 10%
- Recovery on interbank claims
- 40%
- Banks in the system
- 20
- Core banks
- 20% of banks
Readouts
- Equity lost to the initial shock
- 18.0%
- Equity lost after contagion
- 45.0%
- Added by contagion (DebtRank)
- 27.0 points
- Banks in default
- 0
Numbers, methods and sources
| Round | System equity lost (%) | Banks in default |
|---|---|---|
| 0 | 18.00 | 0 |
| 1 | 28.80 | 0 |
| 2 | 35.28 | 0 |
| 3 | 39.17 | 0 |
| 4 | 41.50 | 0 |
| 5 | 42.90 | 0 |
| 6 | 43.74 | 0 |
| 7 | 44.24 | 0 |
| 8 | 44.55 | 0 |
| 9 | 44.73 | 0 |
| 10 | 44.84 | 0 |
| 11 | 44.90 | 0 |
| 12 | 44.94 | 0 |
| 13 | 44.96 | 0 |
| 14 | 44.98 | 0 |
| 15 | 44.99 | 0 |
| 16 | 44.99 | 0 |
| 17 | 45.00 | 0 |
| 18 | 45.00 | 0 |
| 19 | 45.00 | 0 |
| 20 | 45.00 | 0 |
| 21 | 45.00 | 0 |
| 22 | 45.00 | 0 |
| 23 | 45.00 | 0 |
| 24 | 45.00 | 0 |
| 25 | 45.00 | 0 |
| 26 | 45.00 | 0 |
| 27 | 45.00 | 0 |
| 28 | 45.00 | 0 |
| 29 | 45.00 | 0 |
| 30 | 45.00 | 0 |
Methods
- DebtRank Battiston and others (2012), Scientific Reports 2:541
- Differential DebtRank Bardoscia and others (2015), PLOS ONE 10
- Contagion in financial networks Gai and Kapadia (2010), Proc. R. Soc. A 466
- Clearing in financial networks Eisenberg and Noe (2001), Management Science 47
- Uncertainty fan (parameter Monte Carlo) Spiegelhalter, Pearson and Short (2011), Visualising uncertainty about the future, Science 333
- One-at-a-time sensitivity (tornado) Saltelli and others (2008), Global Sensitivity Analysis: The Primer, Wiley
Data
No observed data enters this model: it runs on the teaching values set by the controls, to be replaced with a programme's own evidence.
Across the six pillars, led by Nexus Consortium
- Experiments Labs
- Built in Banking Nexus in Foundry
- Tested at Banking Nexus in Universe
- Codified in Finance, Insurance and the Economy in Standards
- Published in Banking Nexus in Reports
- Taught in Faculty of Finance and Economics in Academy
Where the evidence comes from.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| IFSB Prudential and Structural Islamic Financial Indicators database | Country-level capital, asset quality, liquidity and structure of Islamic banking | Free, IFSB terms of use |
| IFSB Islamic Financial Services Industry Stability Report | Periodic assessment of the sector's growth, resilience and risks | Free, IFSB terms of use |
| IMF Financial Soundness Indicators, Article IV and FSAP reports | Country assessments that cover Islamic banks where they are significant | Free, IMF terms of use |
| World Bank Global Financial Development Database | Financial system context for jurisdictions with Islamic banking | Free, CC BY 4.0 |
| National central bank Islamic banking statistics | Balance sheet and prudential data published by supervisors such as Bank Negara Malaysia | Free, central bank terms |
| AAOIFI accounting, auditing and governance standards | Standards adopted by Islamic financial institutions in several jurisdictions | Licensed, AAOIFI copyright |
Trace a shock in Islamic banking to the balance sheet.
Assembled from the Nexus Standards area profile Banking: the shocks it names, the systems and sectors that carry the loss, the controls that dampen it and the data that observe it. Pick an initiating shock and step through the cascade to see which exposures it reaches and where losses could concentrate. The Map view places the run on an example geography with open data. Every weight is a stated assumption. An exercise, not a forecast, a valuation, a rating or investment advice. To model a place of your own choosing, open the full System Builder.
Hazards
- Tropical cyclone
- Earthquake
- Ice-jam flood
- Wildfire
- Dam failure
- Sea-ice loss
- Storm surge (set off downstream)
- Intense rainfall (set off downstream)
- River flood (set off downstream)
- Flash flood (set off downstream)
- Dangerous surf (set off downstream)
- Widespread power outage (set off downstream)
- Mass displacement (set off downstream)
- Coastal flood (set off downstream)
- Coastal erosion (set off downstream)
- Aftershock sequence (set off downstream)
- Fault surface rupture (set off downstream)
- Soil liquefaction (set off downstream)
Systems and couplings
- Banking
- Central banks and financial supervisors Coupling
- Insurance and reinsurance Coupling
- Cities and the built environment Coupling
- Digital, telecom and platforms Coupling
Controls
NS-0Constitution and principlesNS-3Risk record UNIs (grammar, legacy crosswalk, allocation authority)NS-9Contextual UNIs (deployments, instances, programme instances)NS-10Policies and clauses (machine-readable obligations: definition, binding, evaluation and enforcement)NS-11Verification and monitoring (evidence, attestations, zero-trust conformance observation)NS-14Conformance and crosswalk to external standardsNRS-U2Universe platform profile: Banking NexusNRS-F2Banking climate, nature and transition riskNRS-H113Hazard family: Financial-system fragility (NHS-1 soc.financial-system)NRS-K20Domain pack profile: Climate adaptation (DOMAIN-020)NRS-U8Universe platform profile: Energy NexusNRS-D1Risk-informed development and project screening
Observation
- BIS statistics (banking, credit, debt securities, property prices) (listed for reference)
- IMF data services (IFS, FSI, WEO, GFS) (listed for reference)
- World Development Indicators (listed for reference)
- GLEIF Golden Copy (LEI Level 1 and Level 2 data) (listed for reference)
- Bank capital to assets ratio (%)
- Bank nonperforming loans to total gross loans (%)
- Domestic credit to private sector (% of GDP)
- (a) Number of commercial bank branches per 100,000 adults and (b) number of automated teller machines (ATMs) per 100,000 adults
Example geography
- Western Europe: 152 hexagonal cells
- Rain rate, last half hour (IMERG), NASA GIBS
- Night lights tonight, outages (VIIRS Day/Night Band), NASA GIBS
- Surface water through cloud, 30 m (OPERA DSWx-S1 radar), NASA GIBS
- Carbon monoxide, smoke transport (AIRS), NASA GIBS
Who decides, and what the evidence serves.
Banking Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Bank board | What risk appetite, return smoothing policy and reserve practice to adopt for investment accounts | Displaced commercial risk analysis, return history and capital impact |
| Prudential supervisor | How to apply capital, liquidity and governance standards to Islamic banks consistently with conventional peers | IFSB standards, prudential indicators and supervisory review |
| Central bank | Which liquidity facilities and eligible collateral are available to Islamic banks in stress | Liquid asset holdings, sukuk market depth and facility design |
| Shariah governance board, within its own mandate | Whether products conform to the standards the bank has adopted; rulings rest with qualified scholars, not Banking Nexus | Product documentation and compliance review findings |
Outputs this topic produces
- Explainers on the prudential risks of Islamic banking contracts
- Comparisons of IFSB and Basel standards and how jurisdictions apply them
- Research on liquidity management tools and on sukuk as liquid assets
- Briefings on Islamic banking structure across jurisdictions
What Islamic banking means for exposure, loss and capital.
The exposure, loss, scenario and capital views a risk officer, supervisor or ministry of finance would ask for, with the frameworks they report against. Structures follow supervisory and actuarial practice. Values are illustrative: never prices, ratings or advice.
Scenario pathways
How Islamic banking could be stressed under the scenario families central banks and supervisors use.
| Scenario family | Transition risk | Physical risk | What a stress test asks |
|---|---|---|---|
| Orderly | Early, gradual policy | Lower | Can the book absorb a steady repricing? |
| Disorderly | Late, abrupt policy | Lower to medium | What breaks under a sudden repricing and credit migration? |
| Hot house world | Limited policy | High and rising | Where do physical losses concentrate in collateral and insurance? |
Shared questions the industry asks.
- 01
How do contract structures change risk?
How sale-based, lease-based and partnership contracts distribute credit, market and operational risk.
- 02
How is liquidity managed?
How banks manage liquidity with limited compliant instruments and markets.
- 03
What is displaced commercial risk?
How banks manage pressure to pay competitive returns to investment account holders.
- 04
How do shocks reach Islamic banks?
How real-economy and hazard exposures pass through asset-backed financing.
How the risk arises and transmits.
Islamic banks finance through contracts such as cost-plus sale, leasing and partnership. Because financing is tied to real assets, banks may bear asset and market risks that conventional lenders do not, such as ownership risk in leasing.
Liquidity management can be harder. Compliant short-term instruments and interbank markets are less developed in some jurisdictions, which can lead banks to hold more cash or face constraints in stress.
Profit-sharing investment accounts introduce displaced commercial risk: banks may forgo income to pay returns comparable to competitors, so depositors' expected risk-sharing may in practice fall on shareholders.
Governance includes Shariah supervisory boards that rule on compliance. These rulings are matters for each institution's own scholars; the Global Risks Alliance (GRA) research takes no position on them.
Prudential standards for Islamic banks have been developed by specialised standard-setting bodies alongside general banking frameworks, and their application varies by jurisdiction.
How evidence is gathered, and where it stops.
| Method or data | What it shows | Its limit |
|---|---|---|
| Contract-level analysis | Risk allocation by structure | Practice varies across institutions |
| Liquidity studies | Instruments and buffers | Market data can be limited |
| Comparative prudential review | Application of standards | Jurisdictional differences |
| Stress scenarios | Exposure to sector and asset shocks | Assumption-dependent |
How it is studied, and what the methods cannot say.
- 01Financial economics and macro-financeMacro-financial stress scenarios · Credit cycle and buffer calibrationApplied here
- 02Financial and risk engineeringExpected credit loss modelling · Counterparty exposure and valuation adjustmentsApplied here
- 03Probability and statisticsEstimating default and loss parameters · Operational loss modellingApplied here
- 04Network science and contagionInterbank and counterparty contagion · Overlapping portfolios and fire salesApplied here
Questions and answers.
Does Banking Nexus give Shariah rulings?
What is displaced commercial risk?
Which standards apply to Islamic banks?
Why can liquidity management be harder?
Does GRA say whether a product is Shariah-compliant?
Is Islamic banking riskier than conventional banking?
Who takes part in this research?
Contribute evidence from this page.
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