Risk Management Practices in Islamic and Conventional Banks of Bangladesh: A Comparative Analysis

Abstract

Risk management is said to be a cornerstone of prudent banking practices. Banking sector in today’s complex economic system has been facing a number of potential risks. The major ones are liquidity risk, credit risk, interest rate risk, investment risk, operational risk, and strategic risk which may threaten a bank’s survival and success. Banks are, therefore, required to follow some prescribed procedures for identification and assessment of risk. Risk management in banking sector of Bangladesh has already shown increasing efficiency in governing banks. In an era of Globalization and Liberalization when remarkable expansion in the banking sector is seen, risk is a vital issue to focus on. Two categories of banks are operating in Bangladesh - Islamic (i.e. profit and loss sharing based) and conventional (i.e. interest or predetermined claim based). This paper aims at examining the risk management practices in both types of the banks in Bangladesh. The study reveals that regarding awareness among the bank personnel, there is a significant variation between the Islamic and conventional banks. Again, with respect to risk identification and understanding, management practices in conventional banks seem better than the Islamic ones. The study also indicates that the conventional banks relay mostly on advanced techniques of risk management. This study contributes in identifying the ways to estimate the efficiency of Risk Management.