Displaced Commercial Risk (DCR) Mitigation Analysis in Temporary Syirkah Fund Management in Islamic Banks

Abstract

This study presents an in-depth conceptual analysis of Displaced Commercial Risk (DCR) mitigation strategies, one of the most fundamental and unique risks faced by Islamic banks in a dual banking system. DCR, as the risk that Islamic banks are forced to pay returns to investment depositors that do not reflect the performance of the underlying assets in order to maintain competitiveness, inherently threatens the essential principle of profit-loss sharing (PLS). Using a critical analysis approach and literature synthesis, this study deconstructs the limitations of the conventional mitigation paradigm that relies too heavily on reactive instruments such as the Profit Equalization Reserve (PER). This study argues that this approach is merely a symptomatic treatment that fails to address the root cause and potentially creates moral hazard. As a novel finding, this study formulates a Dynamic Capability Framework for DCR Mitigation. Rather than viewing DCR mitigation as a technical function, this framework conceptualizes it as a core organizational capability that must be built. This framework consists of three capability pillars: (1) Sensing Capacity to identify market volatility and asset risks, (2) Seizing Capacity to respond through proactive asset-liability management and adaptive reserve management, and (3) Transforming Capacity to build long-term resilience through product innovation and stakeholder expectation management. These findings imply a strategic paradigm shift for practitioners and regulators, from static risk management to building dynamic organizational capabilities to maintain the sustainability and sharia integrity of Islamic banking.