Risk management practices and their impact on the performance of Islamic banking institutions: A systematic literature review

The purpose of this study is to assess the behavior of Islamic and conventional banks towards the improving risk management. This study is focused on survey and comparative of risk management practiced by Islamic and conventional banks in Pakistan. The study also examines the adequacy level of risk management and managerial practices by these banks. Five types of risks faced by both Islamic and conventional banks including market risk, liquidity risk, credit risk, operational risk and risk management practices have been taken into the scope of this study. In order to assess the behavior of these banks towards the attentiveness of minimization of operational risks and following the aforementioned tools, exploratory approach has been adopted by developing a questionnaire for data collection. For this purpose, the concerned managerial level employees of 5 Islamic and 5 conventional banks have been selected. By the analysis of data collected, it is concluded thatcompared to conventional banks, Islamic banks in Pakistan place a greater emphasis on risk management practices to reduce operational risks.However, conventional banksare more focused on credit risk, liquidity risk and risk management practices than Islamic banks while the focus on risk management practice is shared by both types of banks. A conducting of survey and comparative analysis of risk management practices has important implications for improving organizational risk resilience, guiding policy and regulatory decisions, fostering best practices, and promoting overall market stability. Organizations can use the insights to refine their risk management processes, while regulators and policymakers can leverage the findings to enhance industry standards and safeguard public interests.

The main aims of this paper are, firstly, to investigate the extent to which Yemen’s banks, in particular its Islamic banks, are applying Risk Management Practices (RMPs) and related techniques to deal with various types of risk, and secondly, to compare and distinguish between the RMPs used in Islamic, national and foreign banks. Semi-structured interviews were conducted to identify the current RMPs in Yemen. The main research instrument was a questionnaire, divided into two sections. The first section covered the following five aspects: understanding risk and risk management, risk identification and analysis, risk monitoring, RMPs, and credit risk analysis. The second section consisted of four aspects: methods of risk identification, risk management, credit risk management, and types of risk. Multinomial regressions and other statistical tools were applied to determine whether there are differences between Islamic banks and other banks in Yemen. Our results revealed that there are significant differences between Islamic and national banks in terms of their understanding of risk and risk management, risk identification and analysis and credit risk analysis. However, there are no major differences found between national and Islamic banks in terms of risk management and RMPs. For Islamic and foreign banks, however, there are significant differences in terms of understanding risk and risk management and risk identification and analysis, but no differences between their risk management, RMPs and credit risk analysis.

This study explores the contingency theory to explain the risk management practices in Islamic and conventional banks in Kazakhstan, an emerging Islamic banking hub of the Central Asia. The outcome of this study helps identify the contingency variables that explain the risk management challenges faced by Islamic bankers in Kazakhstan with respect to other Islamic markets, such as Indonesia and Malaysia. In order to explore the contingency variables influencing the risk management process and performance, this study utilised multiple layers and sources of information. Firstly, using semi-structured protocols, we interviewed top, middle and operation-level risk managers from large and small Islamic and conventional banks of Kazakhstan. We extended the surveys to Indonesia and Malaysia to learn from already established risk management system. Secondly, we find that several risk related financial ratios to strengthen our findings. Risk management system is influenced by the type of risks and a number of contingency variables. Credit, operational and market risks are the three major risks for Islamic banks in Kazakhstan. Limited know-how of risk management and limited use of technology are the two most important firm specific contingency variables. Limited secondary market, limited regulatory assistance, and limited use of derivatives are the three most important industry specific contingency variables that have great influence on the risk management of Islamic banks. The influence of industry-specific factors is apparently bolder than the influence of firm-specification limitations. We also find that the size of the market influences all the stages of enterprise risk management, which has been identified as a contingent variable by previous studies on non-financial sector. The results are vitally important for Kazakhstan as the country is planning to turn the economy into a hub of Islamic finance in the Central Asia. Management of Islamic banks that are planning to invest in Kazakhstan can learn from the challenges and gaps explained in this study. The Central Bank of Kazakhstan may take an active role in establishing prudential regulations to ensure investment in human capital, technology- and customer-centric banking operation, and innovation to tackle risk management challenges. This study is one of the preliminary studies that discusses about risk management of Islamic bank in Kazakhstan, and compares the risk management practices and performance with established banks from other countries. We have redrawn the contingency framework for risk management in Islamic banks.

Risk management practices (RMPs) are important for Islamic banking institutions (IBIs) mainly because they represent the risk exposures that may affect their financial stability. The fact that RMPs is not a new activity in IBIs but still attract significant numbers of studies indicate the relevancy of the subject matter. For instance, weak risk management will hamper IBIs’ performance and eventually the stakeholders and industry at large. There are still lack of evidence on the effects of RMPs specifically on the IBIs given the nature and unique characteristics of the risks faced by these institutions. This systematic review article focuses on the effects of the RMPs on the performance of IBIs. Systematic literature review (SLR) is used in this study as it produces quality evidence on RMPs with more significant results on the effects of the IBIs’ performance. It defers greatly from the conventional literature review because the development of the systematic review is based on the main research question and utilized advanced search provided in the online journal databases. This study used eight (8) electronic journal databases and applied Preferred Reporting Items for Systematic review and Meta-Analysis (PRISMA). Based on the 39 primary studies related to RMPs and performance of IBIs, a total of 16 themes and 17 sub-themes were identified. The study finds that IBIs with good risk mitigation practices, risk management environment, policies and procedures, and risk monitoring have better financial performance. Hence, IBIs must ensure that RMPs a priority within the institutions to increase the financial performance and improve the overall competitiveness in the Islamic banking industry. Keywords: financial stability; risk management principles; risk mitigation; risk monitoring

PurposeThe purpose of this study is to critically evaluate how conventional and Islamic banks trade off risk, efficiency and financial performance in their business models, to investigate how patterns of risk and efficiency vary between conventional and Islamic banks and to critically evaluate how the profitability of conventional and Islamic banks varies following the financial crisis.Design/methodology/approachThis study uses univariate and multivariate statistical techniques by investigating 12 Islamic banks and 34 conventional banks operating in the Gulf Cooperation Council (GCC) region has been studied over the period 2011–2018.FindingsThe results suggest that Islamic and conventional banks differ not in the levels of efficiency, risk and profitability, but rather in how risk and efficiency influence banks’ financial performance. Islamic banks are found to be less influenced by the adverse effects of credit risk, which is consistent with the risk-sharing nature of Islamic financing. However, the results only hold for return on assets (ROA) and return on equity (ROE) while the net interest margin is observed to be negatively influenced by credit risk. Lower cost-income efficiency is also found to boost ROA and ROE of Islamic banks which could be attributed to a larger share of non-interest revenues due to Sharīʿah-compliance.Research limitations/implicationsFrom a theoretical point of view, this study helps to understand the risk, efficiency and financial performance of Islamic banks in comparison with conventional banks.Practical implicationsThe results of this study can serve bank managers, regulators and shareholders. Policymakers should encourage a more risk-sharing structure of Islamic financing as it brings less adverse effects of credit risk and increases income sustainability for Islamic banks. The present study may help bank managers to improve the financial performance of their firms by controlling risk and efficiency. The study results also have implications for shareholders and depositors of Islamic and conventional banks as they should have a predetermined position about the level of credit risk and efficiency in each banking system.Originality/valueThe foremost contribution is that this is one of the few studies to compare risk, efficiency and financial performance of Islamic and conventional banks in the GCC region. By using the latest data, this paper hopes that the findings will be more relevant than previous studies to the current situation of the banking industry in the region.

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

Risk management is of strategic importance for banks whose operations are largely based on risky transactions. Islamic banks face almost all risks exposed in conventional banks. Risks are further diversified and complicated in Islamic banks. In this respect, risk management in these banks requires some unique risk measurement, risk mitigation and risk management systems. Also, Islamic banks cannot use some of the methods used by conventional banks in risk management. Therefore, there is a need for unique methods compliant with Shariah principles. In this paper, a detailed literature review has been conducted on studies investigating risk management in Islamic banks and the theoretical framework of the subject was established. Then, a qualitative research was conducted in order to identify the main risks encountered in Islamic (Participation) banks operating in Turkey. The risk management techniques of these banks were examined and compared with conventional banks. Also, main problems in risk management were determined and possible solutions were recommended in this context. Within the scope of the research, the data obtained by the interview method was interpreted by descriptive analysis method. According to results, risk management in Islamic banks is largely similar to conventional banks. On the other hand, different types of risks encountered in these banks and the obligation to comply with Islamic principles differentiate Islamic banks in the risk management process.

Although risk management in Islamic banking is one of the major as well as controversial issues of the sector, it is still an under-researched area of study. A lot of uncertainties still exist in risk management in Islamic banking, for which the answers are not yet necessarily clear, but which will play a part in shaping the industry’s future. Effective risk management in Islamic banking, thus, deserves priority attention: unless the industry develops its own genuine risk management architecture, it cannot achieve the dynamism that provides the viability needed for a more resilient financial system than the failing Wall Street model. Therefore, the study of risk management issues of the Islamic banking industry is an important but complex area. This study, hence, explores and analyses risk management practices in the Islamic banking industry through the perceptions of participants who were drawn from the banking and finance industry. The research maps out the opinions and attitudes towards risk and locates the practices of the industry related to risk management. This study provides an up-to-date overview of current market practices, issues, and trends in risk management for Islamic banks. It focuses on practical applications and discusses a wide range of unique risks facing Islamic banks from the perspective of different range of practitioners. To fulfil the aims of the research study, first, the present thesis analyses a number of issues concerning the subject using secondary data. Second, the unique risks facing Islamic banks and the perceptions of banking professionals regarding these risks are surveyed through a questionnaire. The final survey sample comprised 72 surveys from 18 countries. The data were analysed using various statistical analysis techniques ranging from simple frequency distribution analysis to the more advanced analyses such as non-parametric statistical analysis, factor analysis, and MANOVA multivariate analysis of variance. Third, semi-structured interviews were subsequently conducted with 33 leading Islamic banking professionals from 9 countries in order to develop an in-depth understanding of the underlying issues. Focused coding technique is used to analyse and sort the findings. In general, the findings from this study identified weaknesses and vulnerabilities among Islamic banks in the area of risk management and governance. Risk management, monitoring, reporting, and mitigation need to be enhanced across the entire industry. The study has also shown that the majority of respondents consider liquidity, asset-liability management, and concentration risks as the top risks facing Islamic banks. In addition, regional risk perceptions were crystallized by conducting inferential statistical analysis. The findings also show that, although Islamic banks have shown resilience, they are not immune to financial shocks. The study asserts that the root drivers of the prevailing financial system have to be challenged and replaced by a more transparent and ethical alternative, for which Islamic finance is a serious yet underdeveloped option. The real issue in Islamic banking is the excessive reliance on form at the expense of substance. It should also be noted that the findings of the study have policy-making implications which could benefit regulators, policy makers, Shari’ah scholars, practitioners, academia, and institutional stakeholders. Furthermore, this study has filled a gap in the literature by empirically exploring risk management issues from an Islamic banking perspective.

This paper examines the financial performance of Islamic and commercial banks in the United Arab Emirates (UAE). The paper gives an empirical insights and comparisons between the performance of Islamic and conventional banking sectors. The sample of the study consists of 5 fully-fledged Islamic banks and 14 conventional banks working in the UAE under the period 2011-2014. The study uses descriptive analysis, correlation, independent sample t test and multiple regression analysis to assess the performance and to compare between both types of banks. The Return on Assets (ROA) is used as proxy for profitability for both types of banks while bank size (log A), liquidity, capital adequacy, financial risk and operating efficiency as proxies for financial performance for both types of banks. The results showed that there is no significant difference between Islamic banks and conventional banks in terms of profitability (ROA) while there is a significant difference between Islamic and conventional banks in terms of liquidity, operation efficiency, capital adequacy, and financial risk. Further, the results indicated that the Islamic banks have higher operating efficiency, bank size and more liquidity than their counterparts of UAE. However, conventional banks are found to have better capital adequacy ratio than Islamic banks. In terms of financial risk, Islamic banks are found to have higher five times than conventional banks which may reflect challenges in the area of risk management in Islamic banks.
 Keywords: Financial performance, Islamic banks, Conventional banks, ROA, UAE.
 JEL Classification: A10, E60, G21

Purpose This study aims to investigate the distinctive characteristics of credit risk management in conventional and Islamic banks, with a particular focus on the role of internal corporate governance mechanisms. It also explores how risks are identified, accessed, monitored and controlled within these banks, whether they have effective risk monitoring and control systems, and how they manage risks in general. This research is motivated by the fact that effective risk management is critical to the stability of financial institutions. Design/methodology/approach This study uses data from a total sample of 65 banks over the period 2016–2022. The empirical analysis begins with an assessment of the full sample, followed by a decomposition into two subsamples representing conventional and Islamic banks. Initially, static panel data models are used to analyze the impact of corporate governance on credit risk. To ensure robustness, quantile panel regression is used to capture potential nonlinear and heterogeneous relationships between governance mechanisms and credit risk. Findings The results reveal significant disparities between conventional and Islamic banks in terms of how internal corporate governance affects credit risk. For conventional banks, effective governance mechanisms are associated with a notable reduction in credit risk. In contrast, in Islamic banks, these mechanisms show no significant impact on credit risk, suggesting that other specific factors may play a more prominent role in their risk management practices. Originality/value This study contributes to the literature by offering a comparative analysis of the influence of internal governance mechanisms on credit risk across bank types. It provides insights into governance factors uniquely relevant to Islamic banks and offers practical recommendations for aligning governance frameworks with risk management strategies to enhance institutional resilience.

Purpose: MFIs are subject to financial risks, just like all other financial institutions. This is intimately tied to their primary businesses of managing credit and accepting deposits. Therefore, risk management is crucial for MFIs in order to maximize their return on investment. The current study sought to establish the effect of financial risk management practices on financial performance of microfinance institutions in Kiambu County, Kenya. The study focused on establishing the effect of liquidity risk management practices, operational risk management practices, credit risk management practices, and market risk management practices on financial performance of microfinance institutions in Kiambu County, Kenya. The theories anchoring the study comprised of Risk Management Theory, Extreme Value Theory, Credit Risk Theory, and Capital Market Theory.
 Methodology: A descriptive survey research design was adopted in the study. The target population comprised of 31registered microfinance institutions operating in Kiambu County. The unit of observation comprised of Risk and Compliance Manager, Finance Manager, Operations Manager, Credit Manager, and Business Development Manager from each of the microfinance institution making a total of 155 respondents. A census approach was adopted in the study where all the registered microfinance institutions were involved in the study. Both primary and secondary data was employed in the study where 5-point Likert scale questionnaires were employed to gather primary data while a secondary data collection sheet was utilized to gather secondary data. Both descriptive and inferential statistics were used to analyze the collected data. The statistics were generated by help of Statistical Package for Social Scientist and MS Excel.
 Findings: The results of the analysis revealed that Liquidity Risk Management Practices, Operational Risk Management Practices, Credit Risk Management Practices, and Market Risk Management Practices positively and significantly affects financial performances of microfinance institutions in Kiambu County, Kenya as shown by beta values of 0.401, 0.309, 0.497 and 0.351 and significant values of 0.000. 0.001, 0.000 and 0.006 respectively.
 Unique contribution to theory, practice and policy: The results implies that when each of the independent variable is increased with one unit, financial performance of the microfinance institutions increases with the respective beta value of the independent variable. The results led to conclusions that liquidity risk management practices, operational risk management practices, credit risk management practices, and market risk management practices bears appositive and significant effect on financial performance of microfinance institutions in Kiambu County. The study provided recommendations to the management of the microfinance institutions to enhance their practices in areas of liquidity risk management, operational risk management, credit risk management, and market risk management to improve financial performance to a positive and significant level.

Purpose: This study aims to add to the existing literature on Islamic finance by explaining the ways in which Shariah committees can improve and strengthen their influence over Islamic banks’ risk management practises. This research attempts to break down the complexities of Saudi Arabia’s risk management and identify the crucial role that Shariah committees play in ensuring compliance with Shariah law. Design of study: A qualitative research method was adopted conducting semi-structured interviews. Purposive sampling was used to choose 34 individuals. The data were analyzed using thematic analysis, with the use of NVivo software, which made it easier to identify patterns in the Arabic answers. Following the ethical norms established by RMIT University, obtaining participants’ explicit consent, and guaranteeing anonymity are all of the top priority. Findings: Several factors determine Saudi Islamic Bank Shariah Committee risk management. An effective regulatory framework, Shariah committee-bank leadership communication, and learning of Islamic financial ideas can aid in Shariah compliance. However, interpreting complex financial services within Shariah, inconsistencies between Islamic principles and standard risk management methodologies, and a shortage of competent Shariah scholars with banking and risk management knowledge may slow development. Research is needed to understand Saudi procedures. Originality: The current research comprehensively documented potential factors that facilitate or resist the involvement of Shariah Committees in practices of risk management in Saudi Arabia’s Islamic banks.

Purpose This study aims to compare types and levels of risk and risk management practices (RMPs) including the recognition, identification, assessment, analysis, monitoring and control of risk in both Islamic and conventional banks. Design/methodology/approach A questionnaire survey was conducted among the Islamic and conventional banks in Qatar, together with an analysis of archival data extracted from the Thomson Reuters Eikon database for the period 2009-2018. Data were analysed using descriptive statistics, ANOVA and regression analysis. Findings Islamic banks encounter unique types and levels of risk that are not encountered by conventional banks. In Islamic banks, risks such as those of operation and Sharia non-compliance are perceived to be higher, while in conventional banks other risks such as those of credit and insolvency are higher; other risks, for example, liquidity risk, are faced by both. RMPs are determined by understanding risk and risk management, risk identification, risk monitoring and control and credit risk analysis, but not by risk assessment and analysis. However, the RMPs of the two types of bank are not significantly different, except in the analysis of credit risk. Research limitations/implications The study contributes to the debate in the literature by developing a better understanding of the dynamism of risk management in Qatari banks, which can be extended to similar contexts in the region. However, the relatively small sample size in only one country limits the possibility of generalizing the findings. The survey methodology is based on the perception of bankers rather than their actual actions and does not provide in-depth analysis for each type of risk, especially credit risk. However, using archival data, in addition to those from the survey, minimises the bias that would result from depending on one source of data. Practical implications The study provides valuable insights into the different types and levels of risk, as well as the RMPs in Islamic and conventional banks, which can help in guiding the future development and regulation of risk management in the banking sector of Qatar and its region. Originality/value The study helps to explain the mixed results of previous studies that compare types and levels of risk and RMPs in Islamic and conventional banks. Using different types of data and analysis, it provides evidence from one of the fastest growing economies in the world. It also addresses the concerns over RMPs in banks since the global financial crisis.

The study sought to determine how bank financial performance (BFP) was affected by credit risk (CR), liquidity risks (LR), operational risks (OR), financing risks (FR), market risks (MR), in the presence of risk management (RM) as a moderator in conventional and Islamic banks in the Middle East and North Africa. To this end, stratified random sampling and systematic sampling methods were used, with a sample size of thirty conventional banks and thirty Islamic banks from the Kingdom of Saudi Arabia and the Arab Republic of Egypt acting as the unit of analysis. 344 participants that were targeted had completed questionnaires that could be analyzed. The database of the target banks was used to quickly and affordably choose samples. Structural equation modeling was done in conjunction with a tool named Smart PLS 4 (SEM). A 92% reliability coefficient was used to evaluate the instrument's dependability. By assessing study variables using commonly used terminology and consulting with subject matter experts on the research issue, the content validity of the findings was confirmed. PLS 4 was one of the clever analytical approaches used to characterize the study's findings. The following describes the relationship between risk management practices and BFP when utilizing a modified variable (RM): "The study showed that CR does not positively affect BFP in conventional banks when employing a modified RM variable. The study demonstrated that the risk ratio had no positive influence on BFP in Islamic banks using a modified RM variable. It has been established by study that LR has no positive impact on BFP. The study also demonstrated that the LR has no positive effects when the variable RM rate is used in conventional banks. The study's findings demonstrated that the OR does not change when the variable RM rate is used. It is advantageous for BFP in traditional banks. The study discovered that there is a negative correlation between OR and BFP in Islamic banks and that OR has no beneficial effect on BFP when the RM rate variable is included. The study's findings demonstrated a favorable correlation between OR and BFP. The research indicates that in typical banks, FR does not positively increase BFP when employing the adjusted RM variable. The study discovered that there is no correlation between FR and BFP in Islamic banks when the modified RM variable is used. Rather than suggesting a good association between FR and BFP, the results pointed to a negative investigation.

Islamic banks in Indonesia must implement good corporate governance and adhere to the principles of corporate social responsibility to have good financial performance and gain customers' trust. This study aims to determine the impact of Islamic Corporate Governance (ICG) and Islamic Corporate Social Responsibility (ICSR) on financial performance based on the Islamic Performance Index of Indonesian Islamic Banks from 2015-2019. The study population included Islamic commercial banks registered with the Financial Services Authority (OJK) from 2015-2019. The sample size was determined by targeted sampling to obtain 9 Islamic banks. This study used a descriptive quantitative approach. The descriptive analysis aims to demonstrate that the ICG, ICSR and financial performance data are relevant and valid concerning the development of the Islamic banking industry from 2015-2019. Quantitative analysis to justify the proposed hypothesis uses the multiple linear regression method. The results show that (1) Islamic corporate governance (ICG) has a positive and significant impact on the financial performance of Indonesian Islamic banks; (2) Islamic Corporate Social Responsibility (ICSR) has a positive and significant impact on the financial performance of Indonesian Islamic Banks. Implementing the principles of good corporate governance, including transparency and openness, following sharia principles helps to increase the financial performance of Islamic banks in Indonesia. Sharia theory of corporations suggests that social responsibility is a form of human accountability to God. The primary goal of disclosing information to corporate stakeholders can minimize information asymmetries about the extent to which an institution is fulfilling its obligations to all stakeholders.