General Requirements There is a comprehensive reporting process and Risk Management in Islamic Banking, including appropriate board and senior management oversight, to identify, measure, monitor, report and control relevant categories of risks. The process shall take into account appropriate steps to comply with Shariah rules and principles and to ensure the adequacy of relevant reporting of risk management in Islamic banking to the supervisory authority. Such approvals shall be communicated to all levels in the IBI involved in the implementation and guidelines of risk management in Islamic banking.
I had this conversation recently until the wee hours of morning, and although I never thought a lot about it, I have come to the conclusion that there cannot be an exact replica of the Risk Management in the conventional sense.
Risk Management is a tool used by all conventional banking institution in the name of good governance, risk mitigation and prudent practice. It looks at financial exposures and its inherent risks to the business, and deeply believe in the risk-rewards pay-off within the generally accepted risk appetite of the organisation.
To a large extend, the risk management framework employed by the conventional banking businesses can be easily adapted by Islamic Banking counterparts.
The components are the same, and there is little argument on its applicability under Shariah law. It cannot just be seen as a replica of the conventional business; the foundation of Islamic Banking is definitely different.
There are a few divergence in the reason an Islamic Banking institutions should ideally follow. This is an on-going argument on the fact while Islamic Banking claims to be a different business model, but it is still engineered by the rules of a conventional organisation.
But what are these divergent reasons for setting up an Islamic Banking business? The lending of money to make money is forbidden. This may seem like a trivial thing for Islamic Banking as many will say there is no difference between profit and interest.
But for us practitioners, there is a big difference in its concept. Because of this difference, the way we think about how a product can be structured is paramount. To validate a transaction, all tenets and requirements in an Islamic contracts must be met or else it becomes an invalid transaction and any gains from it must be given to charity.
There are specific Shariah requirements that takes Islamic Banking beyond banking. Traditional banks struggle to understand issues of ownership of assets, risk and loss sharing, purchases of commodity and rental of assets.
These activities are beyond traditional banking, and may become an operational risk issue if it is not fully embraced. Islamic Banking should be more closer to a venture-capitalist, crowd-funding model than traditional banking. The fundamental requirements for earning a profit and to a bigger extent, how much we can earn from a transaction is the element of risk sharing, which mean both customer and financier takes some form of the risks of the venture.
The amount of risk taken under an Islamic contract can be higher for contracts such as Mudharabah or Musyaraka financing but it must be reflective of the economic reality and available assets. The risk assessment of an Islamic contract must then be enhanced to behave similarly to what a venture capitalist can accept.
There will be direct risks on equity, investments and returns. There will be corresponding returns as well. But such concepts will be difficult to digest if the bank is set up based on traditional banking fundamentals, which caters for a totally different profile of stakeholders.
As far as possible, the Shariah committee draws a line for transparency, fairness, and justice. Islamic Banking should be an extended but integral part of economics.
Islamic Banking is supposed to be more than a bank. It shoulders a broader responsibility to the people by looking at needs and providing products that serve a purpose.
The idea of responsible financing, transparency and customer service should be the by-word of an Islamic Bank. Corporate Social Responsibilities also play a role. In this repect, the Shariah committee plays an important role as gatekeepers to the products and services on offer.Risk Management in Islamic Banking can be defined as a forecasting of financial risks and applying necessary procedures to minimize their impact, while practicing the Islamic Banking.
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Nowadays in European, American and most westernized markets, financial institutions such as Credit Swiss. Risk Management is a tool used by all conventional banking institution in the name of good governance, risk mitigation and prudent practice.
It looks at financial exposures and its inherent risks to the business, and deeply believe in the risk-rewards pay-off within the . Risk Management in Islamic Banking 1. RISK MANAGEMENT IN ISLAMIC BANKING By: Camille Paldi CEO of FAAIF 2.
BANKING RISKS Common to both Conventional and Islamic Banks, we have market, interest rate, credit, liquidity, operational, and legal risk. 3. Islamic financial institutions face these risks, too, along with a slew of concerns that most conventional firms do not, such as equity investment risk, displaced commercial risk, rate of return risk, and sharia noncompliance risk.
Financial firms must devote a lot of time, attention, and money to risk management if they want to stay in business. Risk Management in Islamic Banks By Mohamed Helmy Ahmed Efficient risk management in Islamic banking has assumed particular importance as they try to cope with the challenges of globalization.
This paper highlights the special and the role of Islamic banking .