Understanding Mental Model of Displaced Commercial Risk Using System Dynamics
Keywords:
Displaced Commercial Risk, Islamic Banking, System Dynamics, Risk Management, Financial Intermediation.Abstract
Islamic banking as an intermediary institution faces unique challenges in the form of Displaced Commercial Risk (DCR)—the risk of customer funds moving to conventional banks due to the inability to compete in providing returns. This study aims to develop a dynamic model of DCR management using the System Dynamics approach to understand the complex interactions between variables such as conventional interest rates, Islamic profit sharing, branch growth, and customer satisfaction. Data were collected through interviews with Islamic bank management, customers, regulators, and financial statement analysis. The results of the Causal Loop Diagram (CLD) modelling identified four feedback mechanisms: (1) Loop R1 (The negative impact of return differentials on client retention in Islamic banking), (2) Loop B1 (the effect of branch expansion on market share), (3) Loop B2 (dynamics of operational costs vs. profitability), and (4) Loop B3 (the role of service quality in mitigating DCR). Simulations show that fluctuations in conventional interest rates and operational efficiency are critical factors in the stability of Islamic bank funding. This study recommends integrating competitive profit-sharing policies, branch network optimization, and technology adoption to reduce DCR. This model provides theoretical contributions to Sharia risk management based on system dynamics and practical guidance for regulators and industry players.
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