10.4. Liquidity risk tolerance

(1) Liquidity risk tolerance refers to both the absolute risk that an Islamic Bank is open to take and the actual limits that an Islamic Bank pursues. An Islamic Bank’s liquidity risk tolerance must be appropriate for its business and its role in the financial system, and must be expressed in a way that clearly states that it is a trade-off between risks and profits.

(2) In approving an Islamic Bank’s liquidity risk tolerance, the governing body must ensure that the limit is commensurate with an Islamic Bank’s ability to have sufficient recourse to Shari’ah-compliant funds to mitigate liquidity risk.

Guidance

The terms ‘risk tolerance’ and ‘risk appetite’ are used interchangeably to describe both the absolute risks that a firm is open to take (which some may call risk appetite) and the actual limits within its risk appetite that a firm pursues (which some call risk tolerance). For example, an Islamic Bank may have set, as the absolute liquidity risk it is willing to take, a limit of 20% (risk tolerance) but at the same time prefer to keep to an actual level of 10% (risk appetite).