A NOTE: DEBT SELLING AND THEIR IMPACT ON ISLAMIC BANK VALUE

This paper shows how a risk management mechanism through selling debt can affect the value of Islamic banks. Islamic banks are able to maximize their value from the sale of murabahah on housing debt in order to manage their risk arising fromuctuations in interest rates. A tractable theoretical model is developed to maximize the Islamic banks' values from the sale of housing debt � nancing in order to hedge againstuctuations in interest rates. Ourndings showed that Islamic banks could improve their earnings and rectify the problem in aligning their assets and liabilities through the benets of debt selling. A rise in the market interest rates leads to an increase in the basenancing rate and the mark-up rate in Islamic banks, since market interest rates serve as benchmarks in determining prots or mark-ups. If the Islamic banks engage in debt selling to decrease their risk exposure, their earnings or value may be amplied since they have the opportunity to undertake other positive NPV projects from the payoffs on the murabahah debt selling.