Risk management in islamic banking

1. Risk Management In Islamic
Banking
By: Jannat Soomro
Roll # 17s-MBA-Bs13

2. What Is Risk?
• Risk in islamic term is “GHURM”
• Risk are uncertain future events that could
influence the achievement of bank’s objectives.
• Uncertain future events could be:
 Failure of a borrower to repay a financing.
 fluctuations of foreign exchange rates.
Fraud in documentations.

3. What is Risk Management?
• Risk management is same as for all banks.
• Objective is to prevent unwanted changes.
• Islamic banks need a formalized risk
management framework to:
 Identify
Measure
 Control

4. Dispelling some myths:
• Islamic banks are exposed to interest rate risk.
• Islamic banks can use financial instruments to
transfer away some types of risk.
• Risk sharing does not mean risk seeking.

6. Generic Risk In Islamic Banking:
1. Operational Risk:
Risk arise from human and technical
Errors.
2. Credit Risk:
Also known as defualt risk, Credit risk is most
simply defined as the potential that a bank
borrower or counterparty will fail to meet its
obligations in accordance with agreed terms.

7. Generic Risk In Islamic Banking:
3. Market Risk:
Market risk can be arising from macro sources
or micro sources.
4. Liquidity Risk:
Liquidity risk is the risk that a company or
bank may be unable to meet short term
financial demands.

8. Unique Risk In Islamic Banking:
1. Shariah Non Compliance Risk:
Risk arise from failure to comply with the
shariah rules and principles
2. Rate Of Retrun Risk:
The potential impact on retruns caused by
unexpected change in the rate of return

9. Unique Risk In Islamic Banking:
3. Displaced Commercial Risk:
Islamic financial institutions don’t provide fixed returns in
exchange for their customers’ deposits or investments.
Instead, people who provide funds expect to share profits
and losses with the firm. As a result, Islamic firms face
displaced commercial risk; they’re forced to pay returns to
fund providers even if the underlying assets don’t earn
profits.
4. Equity Investment Risk:
Islamic financial firms offer instruments based on equity
investments. The two contracts generally used for these
instruments are mudaraba (partnership) and musharaka
(joint venture partnership). Equity investment risk arises
because of a potential decrease in the fair value of the
equity position held by the Islamic firm.

10. Risk Managing Techniques:
• Risk avoidance
• Risk reduction
• Risk sharing
• Risk controlling

11. Thank you