IBOR Transition Poses Extra Challenges for Shariah-Compliant Banks: Fitch Ratings

Fitch Ratings (Fitch) notes that Islamic banks and conventional banks are exposed to similar uncertainties from the impending transition away from legacy interbank offered rates (IBOR), with regards to increased exposure to profit-rate, operational and legal risks, as well as lack of clarity on derivatives hedging and accounting. However, Shariah-compliance implications pose additional complexities for Islamic banks.

According to Fitch, the changeover to IBOR’s based on overnight risk-free rates (RFR) could affect Islamic banks’ Viability Ratings, (resulting from weakening of profitability due to higher operational costs, compression in margins, or reputational risk) given the need for Islamic banks to com...