Development of a Climate Risk Mathematical Model as a Basis for Public Policy Transformation in Sharia Financial Institutions
Keywords:
climate risk index, Islamic financial institutions, mathematical climate risk model, public policy transformation, SARIMA and decision support systemAbstract
Climate-related hazards are increasingly recognized as a source of systemic financial vulnerability, yet public-policy instruments for climate-responsive Islamic finance remain largely qualitative and reactive. This study develops an original Mathematical Climate Risk Model (MCRM) that integrates seasonal rainfall forecasting, climate variability, extreme-event frequency, financial exposure, and institutional sensitivity into a single Climate Risk Index (CRI), together with mathematically derived multi-level risk classification and decision rules. Using a SARIMA(1,1,1)(1,1,1)12 rainfall-forecasting sub-model and an illustrative panel of ten Islamic financial institutions (Islamic commercial banks, Islamic rural banks/BPRS, and Islamic microfinance cooperatives/BMT), the model is shown to correctly flag compounding, multi-component climate risk and to remain robust at the extremes of the risk distribution under sensitivity analysis of its weighting and thresholding choices. The CRI is embedded in an eight-stage Public Policy Transformation Framework that links climate observation to mathematical modelling, risk classification, financing adjustment, regulatory intervention, and monitoring/evaluation. The article positions mathematical modelling as the principal scientific contribution and public-policy transformation in Islamic finance as its applied context, and derives concrete policy recommendations for OJK, Bank Indonesia, the Ministry of Finance, and Islamic financial institutions, including risk-tiered financing ceilings and climate-adjusted profit-sharing buffers.
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