We use a classic Merton credit risk framework to argue that Islamic Banking Institutions (IBIs) face less incentive to … take on risks than Conventional Banking Institutions (CBI). IBIs have less incentive for risk shifting both in and outside … analysis suggests that the loss absorption capacity of Islamic banks leads to less risk taking and a more stable banking system. …

-and-loss sharing (PLS) is more efficient and equitable in distribution of wealth and income. Allocation of funds under risk sharing … creditworthiness of competing entrepreneurs. Furthermore, risk sharing offers both entrepreneurs and investors incentives to be truly … transformed into business entities, and financers will be obliged to assess the risk involved more cautiously, and effectively …

system's ability to evaluate and manage risk has therefore been identified as a precondition for more ambitious … liberalization efforts in the future (Dobson and Jacquet, 1998). Encouragingly, in some countries banks have begun to implement Value-at-Risk … role in determining the extent of market risk on the macroeconomic level, with potentially important implications regarding …

) risk estimates with portfolio risk. We use loan performance as a direct measure of portfolio risk as well as less direct … market-based measures. Our results document that loan performance is highly correlated with AIRB risk weights and that, in … contrast, Basel I risk weights are not reflective of loan performance. We find that capital requirements under the AIRB …