Jurisprudential Analysis of Applying Credit Default Swap and Credit-Linked Note in Credit Risk Management of Banks

Abstract

Given the importance of credit risk in the banking system, banks have always paid special attention to credit risk management and have used different tools to manage it. Using credit derivatives, especially "credit default swap" and "credit-linked note", is one of the most common tools for this purpose. This paper investigates the possibility of applying these tools in the banking system of the Islamic Republic of Iran, and evaluates credit derivatives based on general conditions of contracts from the viewpoint of the jurisprudence of Shi'a. As a result, we can say that CDS is compliant with shariah, but CLN is not due to its having some usury problem.

Keywords

• credit risk
• credit default swap
• credit- linked note
• general conditions of contracts