Risk Management in Islamic Finance

Risk Management in Islamic Finance

by MOHAMMAD NAUSHAD KHAN Available at: http://www.radianceweekly.com/353/10423/obama039s-peace-antics-in-israel-four-more-years-of-this/2013-04-07/report/story-detail/risk-management-in-islamic-finance.html

A case study of Bahrain was presented in order to focus on issues and challenges of risk management in Islamic financial industry by Kashif Hasan Khan at a programme organised by Forum for Discussion on Economic Issues, a joint forum of Sahulat and Radiance Viewsweekly in the Capital on 24 March.

The crux of his case study is to decode and simplify the problems of survival of Islamic finance industry which is expanding on each passing day despite confronting risk of varied nature. The other key aspect of his study is also aimed to find out and understand how the concerned scholars of this field have dealt with this emerging trend in the recent years and also to understand the nature of theoretical and practical development in the area of Islamic finance. As of now, the Islamic Banking and Finance is considered to be an alternative to the conventional banking and finance system.

The history of Islamic finance is roughly forty years old and surely has got ample space to grow in the present system despite many hurdles and resistance at various levels. Islamic banking and finance is in practice for a long time but it has gained popularity in the last decade. These banks operating on Islamic principles have managed to attract business not only from Islamic countries but also from some non-Islamic countries. Even after noticeable advancement and achievement it has faced controversies based on concept and practices.

On general note, the risk faced by conventional bank and Islamic Financial Institution are more or less the same but the magnitude of these risks are different for Islamic banks because of their compliance with Shari’ah. Apart from risk faced by traditional institutions, the Islamic institution faces some other forms of risk such as Shari’ah risk, unique risk, credit risk and operational risk. Also profit sharing feature of Islamic banking induces some additional risks.

The other important aspect is to be noted as per his study is that Islamic banks still lack the robust and effective risk management practices. In order to come out from such type of risk some banks in the Gulf region like ABC Islamic Bank in Bahrain has decided to make operational risk transparent throughout its enterprise to which end process is being developed to provide for regular reporting of relevant operational risk management information to business management, senior management, as well as to the Operational Risk Committee of ABC and the Board of Directors.

As per the findings of his study, he has concluded that risk management should be tackled in view of the cost implication because by not managing the cost the risk at times be larger than managing it. For Islamic banks effective regulation authorities must have sound knowledge and experience in dealing with risk management issues. The finding also shows that a majority of Islamic banks in Bahrain are using RAROC, GAP Analysis and value at risk for risk measurement. And for risk mitigation banks are normally dependent on derivatives followed by securitization, Guarantees, loan loss reserves, etc. The study also reflects that many banks in Bahrain have made substantial progress and progress in their development and implementation of risk measures.

Zulkifli Hasan
With MH Faruqi, Chief Editor and Founder of Impact International in London.

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