Debt selling and their impact on the Islamic bank value

Abstract

Theoretically, this paper shows that one of the risk management mechanisms through selling of debt can affect the value of the Islamic banks. Islamic banks are able to maximize its value from the sale of murabahah housing debt activity in order to manage their risk due to ~ uncertainty fluctuation in interest rates. Thus, the model is developed in tractable way to maximize the Islamic banks' values from the sale of housing debt financing in order to hedge against risk due to the fluctuation in interest rates. The findings show that Islamic banks could improve their earnings and improve the problem in aligning their assets and liabilities through the benefits of debt selling. A rise in market interest rate leads to an increase of the base financing rate and mark-up rate in Islamic bank, since market interest rates serve as a benchmark in determining their profit or mark-up. If Islamic banks engage in debt selling to decrease their risk exposure, their earnings or value may be amplified since they have the opportunity to adopt other positive NPV projects from the payoff on the murabahah debt selling.