Assignment Task: In the early years of Islamic banking, most if not all financing was on fixed rate basis. A significant achievement was made in 2003 in the area of risk management when the first variable rate financing/ floating rate financing product was developed for the Islamic banking industry under the concept of bai' bithaman ajil (deferred payment sale), or in short, BBA. This Shariah-compliant product was structured by a working group comprising representatives from Bank Negara Malaysia and the industry to enable the Islamic financial institutions which operate in a dual banking environment to constantly match the current market financing rate in order to give matching returns to their depositors, thereby alleviating any mismatch risk. By doing this, the Islamic financial institutions are able to receive a varying income streams from their financing activities which will be distributed to the depositors at a more competitive rate. The new instrument is an alternative to the existing mode of financing portfolio which is predominantly fixed-rate in nature. Currently, this new mode of financing is applicable to house, property and term financing only and would be extended to other types of financing in due course. Undoubtedly, this new product is expected to grow significantly as it is a natural hedging product in particular in view of the risk exposure issues prevalent in Islamic banking today.
1) Based on case study given, Explain your understanding the challenging of fixed rate financing on the bank's book results in an Asset-Liability Mismatch.