Risk Management of Islamic Banking: An Islamic Perspective

K M Anwarul Islam,Orobah Ali Barghouthi

doi:10.46281/ijibfr.v1i1.35

Abstract

The financial services industry of Islam consists of an increasingly vast number of institutions, such as investment and commercial banks, investment companies and mutual insurance companies. In Islamic banks effective risk management deserves special attention. However, it has numerous drawbacks that are required to be understood better. Risk management is about the attitude towards paying off and the strategies in dealing with them and the risks associated with it in relation to modern banking. As an operational problem, risk management is about the classification and identification of methods, processes and risks in banks to supervise, monitor and measure them.In comparison to conventional banks, Islamic banks face big difficulties in identifying and managing risks due to bigger complexities emerging from the profit loss sharing concept and nature of particular risks of Islamic financing. This research investigates in detail the need for risk management in Islamic bank (Ilias, S. E. B. 2012).

Highlights

The fact that deposits in Islamic banks are not treated as a liability on the balance sheet does not mean that they should not have a minimum capital requirement and improved corporate governance as Emphasis on improved corporate governance and having minimum capital requirement go hand in hand with the need for improvements in risk management standards
Basel II has been accompanied by re-examination of the legal and regulatory frameworks for Islamic banking, in particular of those parts related to the incidence and management of banking risks and the role played by capital
As a result of the particular nature of their activities, the risks borne by Islamic banking institutions differ to a greater or lesser extent from those outlined in Basel II

Summary

Introduction

The fact that deposits in Islamic banks are not treated as a liability on the balance sheet does not mean that they should not have a minimum capital requirement and improved corporate governance as Emphasis on improved corporate governance and having minimum capital requirement go hand in hand with the need for improvements in risk management standards. The risk management system in Islamic institutions need to be able to address the unique characteristics and attributes associated with Islamic financing operations involving financial contracts and instruments which may give rise to other risks besides credit risk. The complexities of the respective risks in the Islamic financial instruments need to be fully explored and quantified to provide for their effective assessment and management.

Results

Conclusion