The practice of IFSB guiding principles of risk management by Islamic banks: International evidence
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 14 September 2015
Abstract
Purpose
The purpose of this study is to examine the nature of the risk management practices of Islamic banks as recommended by the Islamic Financial Services Board (IFSB) in managing their unique risks. This study also explores the differences in risk management practices based on the country, size, type and age of the bank.
Design/methodology/approach
A questionnaire was developed to investigate the risk management practices. The main reference for the questionnaire was the IFSB Guiding Principles of Risk Management and the respondents were either the chief risk officers or holders of other senior positions involved in risk management in the Islamic banks. A non-parametric test was then conducted to explain the difference in mean scores for the unique risk management practices by the Islamic banks.
Findings
A lack of effective risk management practices was found in relation to liquidity risk, displaced commercial risk and equity investment risk by Islamic banks. However, Islamic banks were comparatively good in managing operational risk/Shari’ah non-compliance risk. The study found that there was a significant difference in the practice of equity investment risk management based on the size, type and age of the Islamic bank. In addition, a significant difference was found between the Islamic banks in the Middle Eastern and North African (MENA) and Asian countries concerning the practice of both displaced commercial risk and operational risk/Shari’ah non-compliance risk management.
Research limitations/implications
In spite of the limitations in non-parametric analysis, this analysis was preferred inasmuch as the data were measured on an ordinal scale with a small sample size.
Originality/value
This study is among the few studies that examine and explore the risk management practices of Islamic banks internationally by explaining the unique risks encountered in Islamic finance.
Keywords
Citation
Rosman, R. and Abdul Rahman, A.R. (2015), "The practice of IFSB guiding principles of risk management by Islamic banks: International evidence", Journal of Islamic Accounting and Business Research, Vol. 6 No. 2, pp. 150-172. https://doi.org/10.1108/JIABR-09-2012-0058
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited