mid - sized banks. the main problem, however, is that it would usually result in much higher capital requirements as compared to irb. there is much less fine tuning of the risk weights, and banks have to rely on external rating agencies. the banks adopting this approach would thus be at a disadvantage against their competitors. jurisdictions that will stick to the sa for too long may find that their domestic banks are losing ground to the foreign banks operating globally who are more likely to adopt irb. fifth, the irb approach is being preferred by large global banks, which already competitively price credit risk. the key parameters under irb approach are pd ( probability of default ), lgd ( loss given default ), m ( maturity ) and ead ( exposure at default ). under the firb, the banks calculate pd of their portfolio, while the other parameters i. e. lgd and ead are prescribed by the regulator. minimum pd is 0. 03 % for banks and corporates ; no floor has been prescribed for sovereigns. the lgd for senior exposure is 45 % and the subordinated exposure attracts a lower recovery of 75 %. these rates should be re - examined by the regulators taking into account the ground realities of their respective jurisdictions. 1 the advanced irb provides discretion to banks, and as such there is an incentive to move too quickly to airb without adequate preparation. the balancing act has to be performed by the regulator, on one hand it has to promote the efficiency of banking capital and pursue more fine tuned risk assessment, and on the other it has to ensure that banks have sufficient resources and expertise to undertake this complex task. the airb approach has very high sensitivity to the changes in lgd and m given the differences in pds. in a paper by ing bank 2, it is shown that at higher lgd levels e. g. 75 % there is a particularly strong impact on the risk weights of bonds of lower rated issuers. on a similar note the variations in maturity m, have greater impact on low rated borrowers as compared to high rated borrowers. it implies that in case of a bbb - rated borrower, the risk weights will be highest for subordinated loans ( lgd 75 % ) having long maturity ( e. g. 5 years ). at the same time for short term secured loans ( i. e. with low lgd ) the difference in risk weights will not vary a

funds. in parallel to these developments, if has progressed on capital market development. few significant development on this front are : ( i ) islamic benchmark has evolved to provide an alternate to libor by introducing islamic sovereign paper. some initiatives include ( a ) sudan government investment certificates based on pool of ijara, salam, and murabahah instruments to raise long term financing, one year maturity government musharakah certificates based on equity partnerships ; ( b ) bay al - dayn ( debt trading ) government investment issues ( gii ) by malaysia ; and ( c ) baharian al - salam sukuks whereby government agrees to sell forward to islamic banks a commodity ( typically aluminium ) against spot payment. islamic banks in turn designate the government their agent to sell the ijara sukuk are financial obligations, issued by lessor, and backed primarily by cash flows from lease receivables from a credit lessee. arsalan tariq : “ managing financial risks of sukuk structures. ” commodity to a third party on delivery and the price of sale determines the price of the sukuk. ( ii ) islamic investment indices. equity benchmark indices are designed to track the performance of leading publicly trading companies who are involved in activities consistent with islamic shariah law. examples of this are dow jones and ftse islamic indices which focus on limited range of companies excluding companies which are involved in products / businesses not permissible under islam. ( iii ) islamic equity funds include shariah - compliant equity and hedge funds, commodity, leasing and trade related funds. barring equity funds, other funds are low risk. in the case of leasing, the fund is a securitized pool of lease contracts dealing with collateralized assets generating a steady stream of cash flow. similarly, commodity funds have a short - term exposure in markets that are efficient and have developed forward markets, thus reducing the level of risk. in contrast, equity funds are similar to conventional mutual funds and are exposed to a higher degree of risks. such funds are designed to ensure that equity stocks included in the fund are not only well diversified but also fully compliant with the shariah ’ s guidelines. ( iv ) development of derivatives and its equivalents. there is a debate on whether if allows setting price at a future date with some scholars arguing it is not permissible and others with flexible interpretation that forward trades are permissible in islam, if structured to provide specific quantity, time,