ABSTRACT
This chapter defines and discusses displaced commercial risk, as well as the sources of displaced commercial risk. Customers’ flexibility to switch between banking systems (conventional and Islamic) necessitates that deposit or financing rates be comparable in order to avoid arbitrage flows. If benchmark rates rise, profit and loss sharing deposit holders may expect a higher rate of return. As a result, when the return on assets is underperforming in comparison to rivals’ rates, Islamic banks may face market pressure to pay a return that surpasses the rate produced on assets funded by profit and loss sharing investors.
