Analysis the Risk Management of Islamic Banks

ANALYSIS THE RISK MANAGEMENT OF ISLAMIC BANKS

INTRODUCTION

Nowadays we can see that Islamic banks exist and are operating in many countries. The number of Islamic financial institutions worldwide has risen to over 300 today in more than 75 countries concentrated mainly in the Middle East and Southeast Asia (with Bahrain and Malaysia the biggest hubs). In Malaysia itself, there are 16 Islamic banks which consist of 10 domestic Islamic banks and 6 foreign Islamic banks, with its first Islamic bank is Bank Islam (M) Bhd which was established in 1983. Starting in year 1993, other conventional banks were allowed to offer Islamic banking services and products since the government decided that it will be the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame (Bank Negara Malaysia, 1994 & 1999).

Initially the main purpose of its establishment was to fulfill Muslim’s need of halal income. Islamic financial products are aimed at investors who want to comply with the Islamic laws (sharia’h) that govern a Muslim's daily life.But nowadays it is spreading and being widely accepted even by non Muslim customers.

METHODOLOGY

Islamic banking is recognised as one of the fastest growing areas in banking and finance. Since the opening of the first Islamic bank in Egypt in 1963, Islamic banking has grown rapidly all over the world. Besides, Islamic banking has now gained universal acceptance that offers deposits and financing services based on Islamic principles. Islamic banking institutions which follow the rule of Shariahplay a vital role in Malaysia as its profitability contribute to the growth of the economy. Therefore, we might want to know how they manage the risks in order to be competitive and to sustain in the industry; how they face any uncertain future events that could influence the achievement of the banks’ objective.

This analysis covers seven...