Shariah review of duration models: issues and future research directions

Abstract

This research performs Shariah review of Macaulay's duration and all subsequently developed related models. It finds that there are twenty one models of duration that have been introduced so far but none of them is fully Shariah compliant for use in Islamic banks. The research identifies a variety of future research directions that include development of separate yield curves for assets and liabilities of Islamic banks; how book value based models are more compliant with Shariah; and need for incorporation of specific factors in an Islamic financial model to make them more Shariah effective in Islamic bank risk management.