Risk management practices of conventional and Islamic banks in Bahrain

The purpose of this paper is to report empirical evidence regarding the risk management practices of banks operating in Bahrain.

A sample of bankers was surveyed through a questionnaire and the results used to examine if the risk management practices are significantly associated with the type of bank (conventional or Islamic) and if those practices are positively affected by understanding risk, risk management, risk identification, risk assessment analysis, risk monitoring and credit risk analysis. Several statistical and econometric methods were used to the test the hypotheses.

Banks in Bahrain are found to have a clear understanding of risk and risk management, and have efficient risk identification, risk assessment analysis, risk monitoring, credit risk analysis and risk management practices. In addition, credit, liquidity and operational risk are found to be the most important risks facing both conventional and Islamic banks. Furthermore, the risk management practices are determined by the extent to which managers understand risk and risk management, efficient risk identification, risk assessment analysis, risk monitoring and credit risk analysis. Islamic banks are found to be significantly different from their conventional counterparts in understanding risk and risk management. The levels of risks faced by Islamic banks are found to be significantly higher than those faced by conventional banks. Similarly, country, liquidity, and operational, residual, and settlement risks are found to be higher in Islamic banks than in conventional banks.

The results may have been influenced by the current economic global crisis. Although the response rate is very high, there is no evidence of non‐response bias, and there is high internal consistency within the responses. The reliance on survey methodology introduces the possibility that respondents expressed their beliefs and did not necessarily describe their actions.

Bankers, depositors, investors and regulators are likely to benefit from the results of the study when taking decisions related to the banking industry.

This is the first published attempt to investigate empirically the risk management practices of banks operating in Bahrain and to compare the practices of conventional and Islamic banks.