Differences in the risk management practices of Islamic versus conventional financial institutions in Pakistan

Abstract

PurposeThe purpose of this paper is to provide an insight into the differences in the risk management practices of Islamic financial institutions (IFI) and conventional financial institutions (CFI) in Pakistan.Design/methodology/approachThe study makes use of primary data collection method using a questionnaire survey.FindingsLiterature review discovered that the types of risks faced by both types of financial institutions can be classified under six categories. The research concludes that credit risk, equity investment risk, market risk, liquidity risk, rate of return risk and operational risk management practices in IFI are not different from the practices in CFI. Whereas the overall risk management practices of IFI and CFI are alike in Pakistan.Research limitations/implicationsFurther research with a larger sample size is recommended.Practical implicationsThe paper opens our eyes to the fact that much is unknown about the risk management practices in Pakistani financial system, creating a need for empirical studies for further discoveries to formulate better frameworks and to prevent an impending financial crisis that might be unravelling at the time this paper is being read.Originality/valueThis is the first empirical study of its kind that addresses the unmarked topic of RMP in IFI and CFI in Pakistan. The research was conducted because few studies have been executed to understand differences in the risk management practices in Pakistan, exclusively among Islamic financial institutions. This study is expected to expand the existing literature by providing novel empirical evidence.