Frontiers and Mechanics of Risk Management in Islamic Banking System - Policy Measures for Effective Risk Mitigation

Abstract

The paper provides an insight for assessing risk management frameworks for implementation by the Islamic banks. Considering the dynamic nature of ever-increasing internal and external forces from which diverse banking risks are emanating, it becomes imperative to continue updating the risk management mechanisms. This is absolutely necessary in order to ensure full compliance with the relevant Sharī`ah principles, strengthen depositors’ protection, engender consumer confidence, minimize the impact of failure, improve quality of services, reduce costs of operation, provide greater competitive advantage, create new markets for investments, and attract more customers. Although the risk management mechanisms cannot be generalized because Islamic financial institutions are not the same in their operational activities, sizes, personnel and sophistication, but the frameworks outlined in this paper can provide useful clues for effective and comprehensive risk management and mitigation. Keyword: Islamic Bank, Risk Mitigation, Supervision, Shari’ah-compliance, contract.