Mapping the Risks and Risk Management Practices in Islamic Banking

Foreword

This study is a welcome addition to the literature on risk management in Islamic banking. The financial institutions survived the global financial crisis of 2007–2009 relatively unscathed and the more benign financial environment since has witnessed the stabilisation of Islamic finance. However, its market penetration has remained disappointing during the last decade – a likely explanation for this being the failure of the industry to get the message across to potential clients of the significance of risk-sharing for Islamic finance. There remains a widespread perception that Islamic banking is very similar to its conventional counterpart, which discourages clients from switching their accounts and applying for Islamic financing.

Financial regulators, with some notable exceptions such as Bank Negara in Malaysia, often have the same requirements for all banks, including Islamic banks. This, regulators argue, creates a level playing field; but it makes no allowance for the inherent differences of Islamic banks. Regulators must take some of the blame for Islamic banks not distinguishing themselves as there is a disincentive to introduce more innovative financial products that might thrive more in a more liberal regulatory environment. At present Islamic banks are subject to the same requirements for managing risk, whereas light touch regulation of the sector could facilitate its development.

Dr Eid and Professor Asutay examine the different types of risks banks face including ...