RISK MANAGEMENT IN ISLAMIC FINANCIAL INSTITUTIONS: THE CASE OF ISLAMIC DEVELOPMENT BANK

Abstract

This study aimed to explore Shariah compliancy is impacting risk management techniques by studying the case of the Islamic Development Bank. The study identified the type of financial instruments and products that are used by Islamic financial institution. the major riskk faces in its operation and the risk management techniques it uses for each of those risks. A comparative analysis is carried out to compare case of Islamic development bank with a conventional financial institution of similar kind that is the world bank. The results revealed that there was a consistency in financial products and services of Islamic and conventional financial institutions and the risks they usually face are also similar but because of the underlying Shariah principles which structures the Islamic financial transactions in a modified way considering the ethical perspective behind it, so the risk mitigation techniques are accordingly taking a different shape that free from any unlawful deal or transaction in financial product, resulting in a fair shariah compliant risk management. Hence, there was a difference observed between the risk management techniques used by conventional and Islamic financial institutions. In addition, difference in risk management techniques of common risks, Islamic has a unique Shariah compliant or Shariah reputational risk that is due to consideration of Shariah (spirituality) and Islamic development bank also addresses this risk.