Mapping the Risks and Risk Management Practices in Islamic Banking

CHAPTER 1Introduction: Research Background and Motivation

Risk knows no religion

—Michael Ainley, Head of Wholesale Banking, FSA (2007)

Was Michael Ainley right when he assumed that risk management is similar across different cultures and religions, in this case Islamic and conventional banks? Are Islamic banks just like any other bank that provides financial services, and hence have similar risk management requirements?

The subject of risk management in Islamic banking has many facets. On the surface, the frequently repeated story that Islamic banks are more resilient than conventional ones is attractive in a world torn by a financial tsunami. Unfortunately, at least in the current form in which Islamic banking is practised, this is not entirely true. The assumption at one point early in the crisis was that the Islamic market would be entirely unaffected and would sail through the crunch; and people thought that the financial crisis would be the lift-off platform for Islamic banks. On the contrary, the crisis exposed a number of areas in Islamic banking that needed to be dealt with.

This study examines different aspects of risk management issues in Islamic banking. At the heart of this book is the question of whether Islamic banks are more or less risky than their conventional peers. A review of the existing literature does not provide a clear-cut answer to this question. The majority of the relevant literature gives conflicting views using theoretical arguments rather than ...