CONTENTS -- Foreword-Kenneth G. Lay -- Foreword-Dr. Shamshad Akhtar -- Acknowledgments -- About the Authors -- Acronyms and Abbreviations -- Part One: Principles and Key Stakeholders -- 1 Principles and Development of Islamic Finance -- Principles of Islamic Financial Systems -- Development and Growth of Islamic Finance -- 2 Theory and Practice of Islamic Financial Intermediation -- Structure of Financial Statements -- Basic Contracts and Instruments -- Islamic Financial Institutions in Practice -- 3 Corporate Governance: A Partnership -- Supervisory Authorities:Monitoring Risk Management -- The Shareholders: Appointing Risk Policy Makers -- The Board of Directors: Ultimate Responsibility for a Bank's Affairs -- Management: Responsibility for Bank Operations and the Implementation of Risk Management Policies -- The Audit Committee and Internal Auditors: An Assessment of the Board's Risk Management Implementation -- External Auditors: A Reassessment of the Traditional Approach of Auditing Banks -- The Role of the General Public -- 4 Key Stakeholders -- Internal Stakeholders -- Multilateral Institutions -- Regulatory Bodies -- Part Two: Risk Management -- 5 Framework for Risk Analysis -- Risk Exposure and Management -- Understanding the Risk Environment -- Risk-Based Analysis of Banks -- Analysis versus Computation -- Analytical Tools -- Analytical Techniques -- 6 Balance-Sheet Structure -- Composition of Assets -- Composition of Liabilities -- Equity -- Balance-Sheet Growth and Structural Change -- 7 Income Statement Structure -- Composition of the Income Statement -- Income Structure and Earnings Quality -- Profitability Indicators and Ratio Analysis -- 8 Credit Risk Management -- Formal Policies for Managing Credit Risk -- Policies to Reduce Credit Risk -- Credit Risk Specific to Islamic Banks -- Analyzing Credit Risk in the Asset Portfolio.

Asset Classification and Loss Provisioning Policies -- Review of Risk Management Capacity -- 9 ALM, Liquidity, and Market Risks -- Asset-Liability Management (ALM) -- Liquidity Risk -- Market Risk -- Market Risk Measurement -- Market Risk Management -- Notes -- 10 Operational and Islamic Banking Risks -- Operational Risk -- Risks Specific to Islamic Banking -- Reputational Risk -- Part Three: Governance and Regulation -- 11 Governance Issues in Islamic Banks -- Stakeholder-Based Governance Model -- Role and Responsibilities of Shariah Boards -- Issues in Shariah Governance -- Shariah Review Units and Other Structures -- Improvement in Shariah Governance -- Investment Account Holders as Stakeholders -- Financial Institutions as Stakeholders -- 12 Transparency and Data Quality -- Transparency and Accountability -- Limitations of Transparency -- Transparency in Financial Statements -- Disclosure and Data Quality -- Deficiencies in Accounting Practices -- Applicability of IFRS to Islamic Banks -- Transparency and Islamic Financial Institutions -- 13 Capital Adequacy and Basel II -- Significance of Capital in Banking -- Basel I and Basel II -- Pillar 1: Capital Adequacy Requirement -- Capital Adequacy Methodology for Islamic Banks -- Pillar 2: Supervisory Review -- Pillar 3:Market Discipline -- Managing Capital Adequacy -- 14 The Relationship between Risk Analysis and Bank Supervision -- The Risk Analysis Process -- The Supervisory Process -- Consolidated Supervision -- Supervisory Cooperation with Internal and External Auditors -- Part Four: Future Challenges -- 15 Future Challenges -- Areas for Improvement -- Steps Forward: Some Recommendations -- Regulation, Governance, and Transparency -- References -- Appendix: A Glossary of Islamic Terms -- Appendix: B IFSB Standard on Risk Management -- Appendix: C Proposed Outline for Bank Analytical Reports.

Index -- Box 1.1 Principles of an Islamic Financial System -- Box 3.1 Accountability of Bank Management -- Box 3.2 Fit and Proper Standards for Bank Management -- Box 3.3 The Responsibilities of Management -- Box 3.4 The Responsibilities of Audit Committees and Internal Auditors -- Box 3.5 The Responsibilities of External Auditors -- Box 8.1 IFSB Principles of Credit Risk -- Box 8.2 Content of an Investment and Financing Asset Review File -- Box 8.3 Signs of a Distorted Credit Culture -- Box 8.4 Asset Classification Rules -- Box 9.1 IFSB Principles of Liquidity Risk -- Box 9.2 IFSB Principle of Market Risk -- Box 9.3 IFSB Principles of Rate-of-Return Risk -- Box 9.4 IFSB Principles of Equity Investment Risk -- Box 11.1 IFSB Principles of Corporate Governance for Islamic Banks -- Box 12.1 Criteria for Evaluating Accounting Standards -- Box 12.2 Survey on Public Disclosure of Banks -- Box 12.3 AAOIFI Standards -- Box 13.1 IFSB Principles for Minimum Capital Adequacy Requirements (CAR) -- Box 13.2 IFSB Standard Formula for CAR -- Box 13.3 IFSB Supervisory Discretion Formula for CAR -- Box 13.4 Computation of CAR for an Islamic Bank -- Figure 2.1 Contracts and Instruments -- Figure 3.1 Partnership in Corporate Governance of Banks -- Figure 5.1 Composition of an Islamic Bank's Assets, by Periods -- Figure 5.2 Trends in Asset Growth, by Period -- Figure 6.1 Composition of an Islamic Bank's Balance Sheet -- Figure 6.2 Structure of an Islamic Bank's Assets -- Figure 6.3 Structural Change and Asset Growth, 2001-06 -- Figure 6.4 Growth of Assets, Year on Year -- Figure 6.5 Hypothetical Growth of Assets -- Figure 7.1 Asset Structure versus Income Structure -- Figure 7.2 Relationship of Income to Expenses, 2001-06 -- Figure 7.3 Select Profitability Ratios 2001-06 -- Figure 7.4 Additional Profitability Ratios, 2001-06.

Figure 7.5 Example: Return on Assets (ROA) and on Equity (ROE), Adjusted for the Cost of Capital -- Figure 8.1 Exposure to 20 Largest Exposures (Hypothetical Example) -- Figure 8.2 Customer Profile:Who Are We Investing In? -- Figure 8.3 Composition of Islamic Products:What Are We Investing In? (2006 Compared to 2001) -- Figure 8.4 Year-on-Year Fluctuations in Growth of Portfolio Components -- Figure 9.1 Liquidity Mismatches (Derived from Maturity Profile of Assets and Liabilities) -- Figure 9.2 Cash Flows (Derived from Cash Flow Statements) -- Figure 9.3 Exposure to Marketable Securities, 2001-06 -- Figure 9.4 Simplistic Impact on Equity of Marking to Market -- Figure 11.1 Corporate Governance Structures in Institutions Offering Islamic and Conventional Financial Services -- Figure 12.1 Transparency in Financial Statements Achieved through Compliance with the IFRS Framework -- Figure 13.1 Framework for Measuring Credit Risk Weights -- Figure 13.2 Framework for Measuring Market Risk Weights -- Figure 13.3 Components of Bank Capital -- Figure 13.4 Risk Profile of Assets -- Figure 13.5 Capital Tiers and Compliance -- Figure 13.6 Potential Capital Shortfall Assuming Continued Average Growth in Assets and Capital -- Figure 14.1 The Context of Bank Supervision -- Table 1.1 Development of Islamic Economics and Finance in Modern History -- Table 2.1 Theoretical Balance Sheet of an Islamic Bank Based on Maturity Profile and Functionality -- Table 2.2 Sources and Application of Funds -- Table 2.3 Size of Islamic Financial Institutions in 1999 -- Table 4.1 Importance of Key Stakeholders in the Islamic Finance Industry -- Table 5.1 Banking Risk Exposures -- Table 5.2 Contractual Role and Risk in Islamic Banking -- Table 5.3 Stages of the Analytical Review Process -- Table 5.4 Balance-Sheet Composition of Assets -- Table 5.5 Balance-Sheet Growth, Year on Year.

Table 6.1 Composition of an Islamic Bank's Balance Sheet -- Table 6.2 Islamic Financing and Investing Assets Grass -- Table 6.3 Percentage Composition of the Balance Sheet, 2001-06 -- Table 7.1 Composition of the Income Statement, 2005-06 -- Table 7.2 Percentage Composition of Islamic Products' Revenues over Time -- Table 7.3 Profitability Ratios, 2001-06 -- Table 8.1 Related-Party Lending -- Table 8.2 Customer Profile:Who Are We Investing In? -- Table 8.3 Composition of Products:What Are We Investing In? -- Table 8.4 Maturity Profile of Total Assets: For How Long Are We Investing? -- Table 8.5 Recommended Provisions -- Table 8.6 Year-on-Year Fluctuations in Growth of Portfolio Components -- Table 9.1 Theoretical Balance Sheet of an Islamic Bank Based on Functionality -- Table 9.2 Maturity Profile of Assets and Liabilities -- Table 9.3 Sample Approach to Market Risk Disclosure: Value-at-Risk by Category and for Entire Institution -- Table 9.4 Simplistic Calculation of Net Effective Open Positions (Assuming Uniform Instruments in Every Market) -- Table 11.1 Presence of a Centralized Shariah Supervisory Board or Islamic Rating Agency in Select Countries -- Table 11.2 Regulations Governing Shariah Supervisory Boards in Select Countries -- Table 11.3 External Shariah Boards in Select Countries -- Table 12.1 Disclosure Practices of Islamic Banks -- Table 13.1 Classification of Capital in the Basel Accords -- Table 13.2 Capital Adequacy Standards for Credit Risk: Basel II versus IFSB -- Table 13.3 Capital Adequacy Standards for Market Risk: Basel II versus IFSB -- Table 13.4 Capital Adequacy Standard for Operational Risk: Basel II versus IFSB -- Table 13.5 Trend Analysis of Capital Adequacy Ratios -- Table 14.1 Stages of the Analytical Review Process -- Table 14.2 Adapting the External Audit to Specific Circumstances and Needs.