Risk Management and Mitigation in Islamic Finance”, International Journal of Research in Finance and Economics
Kumaran, Dr Sunitha . 2012
RISK MANAGEMENT AND MITIGATION TECHNIQUES IN ISLAMIC FINANCE
A conceptual framework
Dr. Sunitha Kumaran
Abstract
Studying risk management issues of the Islamic Financial industry is an important but a complex subject. The paper discusses and analyzes a number of issues on risk management and mitigation strategies and challenges in the Islamic Finance Industry. First, it presents an overview of the concepts of risks and nature of risk in Islamic Financial Industry. Second, the unique risk of the Islamic Financial services industry and its products has been explored. Third, challenges concerning risk management in the Islamic financial services industry have been discussed. Finally, risk management and mitigation techniques for selected Islamic financial products, has been suggested. The study concludes that financial markets liberalization is associated with an increase in risks and financial instability. 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 suggests a number of risk mitigation measures available to overcome three major types of risks namely: Credit risk, Liquidity risk and Market risk. There is a great need to enhance the process of consensus formation on a priority basis so that the Islamic financial institutions can develop Sharī‘ah compliant risks management systems as early as possible.
Key words: Risk, Risk Management, Islamic Finance, Conventional Banking,
Financial Products, Risk Mitigation Measures
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RISK MANAGEMENT AND MITIGATION TECHNIQUES IN ISLAMIC FINANCE
A conceptual framework
Dr. Sunitha Kumaran
…