Journal of Islamic Banking and Finance

Quantification of Fiduciary Risks: Islamic Sources of Funds, Neo- Institutionalism and SARWAR Bank
Shahid Anjum

Abstract
Islamic banks, besides conventional banking risks like credit, market, liquidity and operational etc., are also faced with unique risks like displaced commercial risk or fiduciary risk. These two types of risks can even trigger a deposit withdrawal risk or a quasi bank run. Fiduciary risk means breaching of investment contract or mismanagement of funds by the bank. From depositors’ point of view this definition conveys two points. First one is that banks can default on the investment contract with depositors because in Islamic banks depositors hold the investment contracts with bank and this originates liabilities side risk of Islamic banks’ balance sheets. Second point is that because of lack of due diligence on part of the Islamic banks’ management or information asymmetries leading to moral hazard or adverse selection, either mismanagement of funds by the bank can occur or user of funds can breach the investment contract. This fact points to the asset side risks of banks’ balance sheets. Neo-Institutionalism describes the links between institutional factors, economic decision making and stakeholders. This study has tried to quantify the fiduciary risks in banks by measuring the risks inherent in Shariah financial products on both sides of the balance sheet. A multi-criteria decision making method know as Analytical Hierarchy Process as weighting technique and minmax as scoring method have been used to rank various balance sheets based on market orientation of banks. Six theoretical banks types with different balance sheet structures has been ranked in a search for an Islamic bank with least fiduciary risks which can rightly be called as Socially Adopted, Risk Weighted and Analytically Rated (SARWAR) Bank.

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