Management and monitoring of the displaced commercial risk: a prescriptive approach

Abstract

Purpose The displaced commercial risk is one of the specific risks in the Islamic finance that creates a serious debate among practitioners and researchers about its management. The purpose of this paper is to assess a new approach to manage this risk using machine learning algorithms. Design/methodology/approach To attempt this purpose, the authors use several machine learning algorithms applied to a set of financial data related to banks from different regions and consider the deposit variation intensity as an indicator. Findings Results show acceptable prediction accuracy. The model could be used to optimize the prudential reserves for banks and the incomes distributed to depositors. Research limitations/implications However, the model uses several variables as proxies since data are not available for some specific indicators, such as the profit equalization reserves and the investment risk reserves. Originality/value Previous studies have analyzed the origin and impact of DCR. To the best of authors’ knowledge, none of them has provided an ex ante management tool for this risk. Furthermore, the authors suggest the use of a new approach based on machine learning algorithms.