Adapting Risk Management for Profit and Loss Sharing Financing of Islamic Banks

Irawan Febianto

.

DOI: 10.4236/me.2012.31011                

Abstract

The low level of participation of the Islamic banks in profit and loss sharing (mudharabah and musharakah) financing models has become one of the problems in the development of the industry. These arrangements are unique to Islamic banking and account for its superiority over conventional banking on grounds of ethics and efficiency, but the majority of Islamic banks have limited themselves to less risky trade-financing assets, that tend to be a shorter maturity. This paper intends to analyzes why Islamic banks are reluctant to indulge in mudharabah and musharakah financing. Finally, it explores the risk management concept that might solve the problems.

Keywords

Islamic Banks; Profit And Loss Sharing Arrangements; Risk Management

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	M. Iqbal, “A Guide to Islamic Finance,” Risk Books, London, 2007
[2]	S. A. Rosly, “Critical Issues on Islamic Banking and Financial Markets,” Dinamas, Kuala Lumpur, 2005.
[3]	M. Obaidullah, “Islamic Financial Services,” Islamic Economics Research Center, King Abdul Azis University, Jeddah, 2005.
[4]	M. T. Usmani, “An Introduction to Islamic Finance,” Idara Isha’at-E-Diniyat (P) Ltd., New Delhi, 2005.
[5]	V. Sundararajan and L. Errico, “Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead,” IMF Working Paper WP/02/192, Washington DC, 2002.
[6]	H. V. Greuning and Z. Iqbal “Banking and the Risk Environment,” In: S. Archer and R. A. A. Karim, Ed., Islamic Finance: Regulatory Challenge, John Wiley and Sons, Singapore, 2007, pp. 11-39.
[7]	INCEIF, “CIFP Part 1 Study Material, Islamic Economics and Finance: Theory and Ethics,” INCEIF, Kuala Lumpur, 2006.
[8]	INCEIF, “CIFP Part 1 Study Material, Deposit Mobilisation and Financing Management,” INCEIF, Kuala Lumpur, 2006.
[9]	Islamic Financial Services Board, “Exposure Draft No.1: Guiding Principles of Risk Management for Institutions (Other Than Insurance Institutions) Offering Only Islamic Financial Services,” IFSB, Kuala Lumpur, 2005.
[10]	T. Khan and H. Ahmed, “Risk Management: An Analysis of Issues in Islamic Financial Industry,” IDB/IRTI Pub- lisher, Jeddah, 2001.
[11]	E. Banks and R. Dunn, Richard. “Practical Risk Management: An Executive Guide to Avoiding Surprises and Losses,” John Wiley & Sons, West Sussex, 2003.
[12]	C. L. Culp, “The Risk Management Process,” John Wiley & Sons, Hoboken, 2001.
[13]	V. Sundararajan, “Risk Characteristics of Islamic Products: Implications for Risk Measurement and Supervi- sion,” In: S. Archer and R. A. A. Karim, Ed., Islamic Finance: Regulatory Challenge, John Wiley and Son, Sin- gapore, 2007, pp. 40-68.
[14]	M. Ariff, “Economics and Ethics in Islam, Readings in the Concept and Methodology of Islamic Economics,” CERT Publication, Kuala Lumpur, 2005.
[15]	M. U. Chapra, “Objectives of the Islamic Economic Order, an Introduction to Islamic Economics and Finance,” CERT Publication, Kuala Lumpur, 2005.