Prepared by: Noor Fadhlika Mohd Ramlan 0723118 Nursyakilla Lokman 0823280 Nur Suhailah Mohd.

Safaai 0823796 Nurul Izzati Mohd. Aminuddin Zaki 0838968

INTRODUCTION

 Unique

characteristics of Islamic Banks:

profit-sharing loss-bearing

Transparent

in reporting risks because Investment Account Holder (IAH) need to: Monitor their investment Assess potential risks and rewards Protect their interest

Prohibition of Gharar 2 dimensions of risks Freedom of contract - Excluding riba and gharar

Gambling

Risk taking

Creation of risks for chance of very high gain Zero-sum game (create no wealth)

Part of the real economic activity that creates economic value Permissible and desirable

Credit Risk Liquidity Risk Currency Risk Interest-rate Risk Risk of trade and investment

Asymmetric information problem Capital Impairment Risk

Cannot hold return-producing cash equivalents Lack of sufficient Sharia compliant liquid instruments

Currency fluctuations

Not Applicable

Fiduciary Risk operational risk or the risk of breach of the Mudaraba contract or misconduct or negligence Displaced commercial risk rate of return risk

RESEARCH METHODOLOGY

Sample 28 Islamic banks in 14 countries

Questionnaire survey & contacting the banks directly (email or post)

How does the risk perception of Islamic bankers differ from conventional bankers with respect to the market in which Islamic banks typically operate?

Do Islamic banks use the more technically advanced risk measurement techniques?

RESEARCH QUESTIONS Apart from using similar risk mitigation approaches as in conventional banks, do Islamic banks widely use Shariahcompliant risk mitigation approaches?

Which risk mitigation process used by conventional banks are not used by Islamic banks?

Proposition 1 Salam and Istisnaa are perceived as more risky than Murabaha and Ijarah

Proposition 2 Profit-sharing contracts (Musharaka and Mudaraba) are perceived as more risky than mark-up based contracts (Murabaha, Salam, Istisnaa, and Ijarah)

Proposition 3 Not many Islamic banks use the more technically advanced risk measurement approaches

Proposition 4 Islamic banks use a number of risk mitigation methods that are different from methods used by conventional banks, as they are designed to be Sharia compliant

FINDINGS

SUB-SECTIONS
(1) RISK PERCEPTIONS (2) RISK MEASUREMENT (3) RISK MANAGEMENT

 Using

the 5-Likert scale,

 Link

the type of risks with the products

Operational Mudaraba Musharakah MMQ Ijarah Istisna Murabahah Sukuk Salam

Market

Credit

Liquidity

 Link

the type of risks with the products

 Finding

shows that;

PROPOSITION 1 is supported by the findings since both Salam and Istisnaa contracts are riskier than Ijarah and Murabahah. PROPOSITION 2 is partly supported by the findings because Mudarabah and Musharakah is perceived to be riskier than Murabahah and Ijarah and Istisnaa, not to Salam. Mudarabah and Musharakah contribute to the banks earnings, but they attract more risks to the banks. I. Rate of return risk; II. Liquidity risk; III. FOREX risk; and IV. Operational risk

 Link

between the risks and countries

 All

countries opinion that credit risk is the most important risk.

Consistent

with the study in conventional banks. Basel Committee reports, weak credit management practice and poor credit quality are major factors of bank failures and banking crises.
Malaysia
Match

consider operational risk is important as credit risk.

with emphasis in Basel 2 on operational risk in banks and the collapse of several companies.

 Majority

of the Islamic bankers prefer to use traditional risk measurement. Minority of them use more technically advanced risk measurement except for the internal-based rating system(46%) and estimates of worse case(43%). The finding supported the argument in PROPOSITION 3.

 Islamic

banks use similar methods of risk management as the conventional banks. Less usage of Shariah compliance techniques is due to the different interpretation by the Shariah scholars, and Salam and Istisnaa is not fully practiced by the banks. Thus, PROPOSITION 4 is not been supported by the finding.

CONCLUSION

 Different

contracts have different implications for the importance of each risk Each risk should be assessed separately to facilitate appropriate risk management. Islamic banks perceived to use less technically advanced risk measurement techniques Islamic banks are not fully using the Sharia compliant risk mitigation method