Abstract
This research paper aims to explore the operational risk management structure of Pakistani Islamic banking system by developing a system dynamic model through a novel methodology called system thinking approach. This model has facilitated to understand the interrelationships between various characters of operational risk and its management. In order to develop the system dynamic model, this study has been divided into three stages. In the first stage, the researchers have developed an initial casual loop diagram on the basis of preliminary knowledge and understanding achieved through literature review on causal interconnections between various variables of operational risk management system. In the second stage, semi-structured face to face interviews have been conducted from risk managers to improve, confirm and add risk factors in the preliminary model. In the last stage, a refined system dynamic model has been developed based on interview data analysis. The model indicates that an escalation in the operational risk induces the Islamic banking institutions to proactively develop a framework to manage the operational risk as per the prudential regulations of the central bank. Therefore, the Islamic banking institutions take steps to manage the operational risk by giving training to their staff, making contingency plans, adopting advanced technology for Islamic banking, improving internal control system, confirming disciplined workplace environment and ensuring compliance with Sharīʿah and fiduciary responsibilities.
Highlights
An effective and balanced economic system without any financial crisis is the biggest challenge in front of today’s world
As this paper aims to explore the operational risk management structure of Islamic Banking Institutions (IBIs) in Pakistan; it is important to decide, what is the best way to achieve this objective? One way of describing the working of a system is to study the system through literature, confirm and modify it by integrating practical and theoretical approaches, incorporate changes and present this exploration in the shape of a traditional study
As aim of this study is to examine the operational risk management structure of the Pakistani Islamic banking sector, the risk managers are the most relevant individuals for this study
Summary
An effective and balanced economic system without any financial crisis is the biggest challenge in front of today’s world. An effort is in progress by the Muslims of twenty-first century to establish an economic system and financial institutions on the basis of Islamic. Content from this work is copyrighted by Journal of Islamic Business and Management, which permits restricted commercial use, distribution and reproduction in any medium under a written permission. Journal of Islamic Business and Management Vol 8 Issue 2 laws, principles and regulations. Risk sharing which is the base of Islamic financial system has appeared as a substitute to conventional financial system of risk transfer in the era of black swans, difficulties and complications, for a multipolar world (El Tiby, 2011; Mirakhor & Smolo, 2014; Shaukat & Mirakhor, 2017)
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