Abstract
Islamic banking is interest-free banking which makes it necessary for Islamic banks to take active part in the operations of the business, i.e. share profits as well as losses. Banks including Islamic banks prefer to take minimum risk. On the surface, it may seem that Islamic banks face more risk and hence, will have more volatile or even negative returns on their assets. This paper analyzes the risk management procedures of Islamic banks by giving a differential analysis of risk management discussing only the unique characteristics of risk management in Islamic Banking. The usual credit assessment procedures and BASEL are not discussed. This paper looks at the comparative performance of Islamic banks and conventional banks by using ROE as the benchmark.
Highlights
Background of the StudyIslamic Banking was first introduced in 1959 in Egypt. Since Islamic Banking is growing rapidly throughout the world and has been introduced in more than 60 countries of the world so far
This research paper discusses the adequacy of specific risk management procedures of Islamic Banks combined with an empirical study of comparing profitability of Islamic and conventional banks
Besides the usual capital adequacy ratios proposed under BASEL, followed both by conventional and Islamic banks, there are some distinct features of risk management under Islamic Banking
Summary
Islamic Banking was first introduced in 1959 in Egypt. Since Islamic Banking is growing rapidly throughout the world and has been introduced in more than 60 countries of the world so far. The specific risks analyzed include reputations risk, exchange risk, price risk, operational risk, default risk, religious risk, concentration risk and liquidity risk. Journal of Independent Studies and Research MSSE n How do they manage exchange risk when currency options and currency swaps are not allowed in Islamic banking?. N How do they manage concentration risk as 60% of the financing provided by Islamic Banks is by way of Murabiha facility?. Islamic Banking in Pakistan was introduced during General Zia's regime in the 1980s. According to the State Bank of Pakistan Strategic Vision 2010 Report published in March 2009, it is expected that Islamic banking in Pakistan will capture 12% of the banking industry assets and deposits by 2012
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