Impact of Financial Risk Management Practices on Islamic Banks Performance in Pakistan

Muhammad Ashraf ,Ahmad Shukri Yazid ,Norizan Remli

doi:10.7176/rjfa/12-14-02

Abstract

In current era, an effective risk management process is the basic requirement to perform better financial performances. Once the risk has been recognized, then organizing the risk is one of the main objectives to be done. The relationship between risk and return is associated with each other. In Islamic finance, reward cannot be obtained without risks i.e., more risks more rewards and vice versa. The key objective of the current study is to investigate the impact of the financial risk management practices (RMPs) on the Islamic banks (IBs) financial performance in Pakistan. To achieve the main objectives, this research measures the existing RMPs of the IBs and associate these RMPs with the IBs financial performance. This is a dynamic study that has researched both primary and secondary data. To proxy the IBs financial performance, return on assets (ROA) stood average for six years (2014-2019). An adapted questionnaire is distributing among the IBs risk managers for measuring the financial risk management practices of IBs. The methodology of this study comprises on the analysis of data using the analysis of multiple regression and correlation analysis. The results are display in tabulated form and mathematical regression equations. The current study identifies that practices of IBs in Pakistan indicates better financial risk management, resultantly these RMPs discloses the optimistic relationship with IBs financial performance. The study on financial performance recommends that IBs should plan and attempt the advanced techniques and process of risk measurement in IBs. To mitigate the financial risk, the current study proposes to trained the IBs managers with modern techniques which will be very useful and valuable for the IBs financial performance. Keywords: Risk Management, Islamic Banks, Financial Risk, Financial Performance DOI: 10.7176/RJFA/12-14-02 Publication date: July 31 st 2021

Highlights

The section regarding board of directors (BoD) polices and Shariah governance structure indicates that general polices has been approved by BoD and it shows that the administration takes obligatory action to organize and control the risk
This study intentions to deliver the connection and association between financial risk management practices and its impact on Islamic banks (IBs) performance by using the correlation analysis the data analysis showed that financial RM has great effect on financial performance and resultantly the practice of mitigation of risk followed it
When the investment started in Islamic banks with RM practices and risk mitigation tools and techniques, the revenue and income generation increases and IBs going towards better performance and strengthen the relationship

Summary

Introduction

Financial performance and capital structure of the institutions are influenced with high extent by unusual volatility in global financial markets producing the expansion of financial management, which emphasizes on the key variables expressing the cause of risk, foreign exchange, commodity and equity Brezeanu et al (2011). S. (2011), express that in the financial transactions, as a result of financial variables activities the financial risks (FR) occur from potential losses. These losses related with risks due to the liabilities which are not in match with assets. In the present study the researcher emphasis the financial term i.e. financial risks which enclosed the other type of risks such as market risk, credit risk, liquidity risks, foreign exchange risk etc. In Pakistan, IBs faces highest categories of financial risks, for instance liquidity risk, credit risk, market risk, operational risk and foreign exchange risk

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Conclusion