Record Detail Back
RISK MANAGEMENT AN ANALYSIS OF ISSUES IN ISLAMIC FINANCIAL INDUSTRY
- Share to:
Islamic financial industry has come a long way during its short history.
The future of these institutions, however, will depend on how they cope with the
rapidly changing financial world. With globalization and informational
technology revolution, scopes of different financial institutions have expanded
beyond national jurisdictions. As a result, the financial sector in particular has
become more dynamic, competitive, and complex. Moreover, there is a rapidly
growing trend of cross-segment mergers, acquisitions and financial
consolidation, which blurs the unique risks of the various segments of the
financial industry. Furthermore, there has been an unprecedented development in
computing, mathematical finance and innovation of risk management
techniques. All these developments are expected to magnify the challenges that
Islamic financial institutions face particularly as more well established
conventional institutions have started to provide Islamic financial products.
Islamic financial institutions need to equip themselves with the up-to-date
management skills and operational systems to cope with this environment. One
major factor that will determine the survival and growth of the industry is how
well these institutions manage the risks generated in providing Islamic financial
services.
Studying risk management issues of the Islamic financial industry is an
important but complex subject. The present paper discusses and analyzes a
number of issues concerning the subject. First, it presents an overview of the
concepts of risks and risk management techniques and standards as these exist in
the financial industry. Second, the unique risks of the Islamic financial services
industry and the perceptions of Islamic banks about these risks are surveyed
through a questionnaire and analyzed. Third, the main regulatory concerns with
respect to risks and their treatment with a view to draw some lessons for Islamic
banks are discussed. Fifth, a number of Sharī‘ah related challenges concerning
risk management are identified and discussed. Finally, conclusions and policy
implications are summarized.
The study concludes that financial markets liberalization is associated
with an increase in risks and financial instability. Risk management processes
and techniques enable financial institutions to control undesirable risks and to
take benefit of the business opportunities created by the desirable ones. These processes are of important concern for regulators and supervisors as these
determine the overall efficiency and stability of the financial systems.
The study shows that the Islamic financial institutions face two types of
risks. The first type of risks they have in common with traditional banks as
financial intermediaries, such as credit risk, market risk, liquidity risk and
operational risk. However, due to Sharī‘ah compliance the nature of these risks
changes. The second type is of new and unique risks that the Islamic banks face
as a result of their unique asset and liability structures. Consequently the
processes and techniques of risk identification and management available to the
Islamic banks could be of two types – standard techniques which are not in
conflict with the Islamic principles of finance and techniques which are new or
adapted keeping in view their special requirements.
Due to their unique nature, the Islamic institutions need to develop more
rigorous risk identification and management systems. The paper identifies a
number of policy implications the implementation of which can be instrumental
in promoting a risk management culture in the Islamic financial industry.
i. The management of all banks need to create a risk management
environment by clearly identifying the risk objectives and strategies of
the institution and by establishing systems that can identify, measure,
monitor, and manage various risk exposures. To ensure the effectiveness
of the risk management process, Islamic banks also need to establish a
proficient internal control system.
ii. Risk reporting is extremely important for the development of an efficient
risk management system. The risk management systems in Islamic
banks can be substantially improved by allocating resources for
preparing a number of periodic risk reports such as capital at risk
reports, credit risk reports, operational risk reports, liquidity risk reports
and market risk reports.
iii. An Internal Rating System (IRS) is highly relevant for the Islamic
banks. At initial stages of its introduction the IRS may be seen as a risk
based inventory of individual assets of a bank. Such systems have
proved highly effective in filling the gaps in risk management systems
hence in enhancing external rating of institutions. This contributes to
cutting the cost of funds. Internal rating systems are also very relevant
for the Islamic modes of finance. Most Islamic banks already use some form of internal ratings. However, these systems need to be strengthened
in all Islamic banks.
iv. Risk-based management information, internal and external audit, and
asset inventory systems can greatly enhance risk management systems
and processes.
v. Substantial risks faced by the Islamic banks can be reduced if a number
of supporting institutions and facilities are provided. These include a
lender of last resort facility, deposit protection system, liquidity
management system, legal reforms to facilitate Islamic banking and
dispute settlement, uniform Sharī‘ah standards, adoption of AAOIFI
standards and establishing a supervisory board for the industry.
vi. The Islamic financial industry being a part of the global financial
markets is effected by the international standards. It is thus imperative
for the Islamic financial institutions to follow-up the process of standard
setting and to respond to the consultative documents distributed in this
regard by the standard setters on a regular basis.
vii. Risk management systems strengthen financial institutions. Therefore,
risk management needs to be assigned a priority in research and training
programs.
TARIQULLAH KHAN HABIB AHMED - Personal Name
First Edition
9960-32-109-6
NONE
Management
English
LOADING LIST...
LOADING LIST...