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Risk management in Islamic finance: what are the banks doing?

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islamic risk management, islamic finance, islamic investment, islamic project financing.

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In our previous article on risk management, we examined the nature and extent of the risks facing the Islamic banking industry. In this follow-up piece, we will ask what Islamic banks are doing to minimise these risks, and whether their measures go far enough. Given that the previous article was broken down into four key areas – clarity, transparency, depth and training – it seems prudent to divide this feature along the same lines.
The lack of a common, overarching Sharia’a framework has blighted attempts to standardise Islamic finance practices, and ensure that Islamic banks offer the same policies and packages in different countries. Under the current system, individual services differ widely between Islamic banks; this disparity could expose the Islamic financial system to sharp practice and fluctuations in investor confidence; Standard and Poor has estimated that the sector forgoes about 10 percent in annual growth in the absence of common guidelines for the interpretation of Sharia’a.
It does seem that the industry is belatedly waking up to the risk posed by its unstructured legal framework. Malaysia has now created its own Sharia’a board, and bodies such as Bahrain’s Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) are also working towards common standards. Individual institutions, such as Dubai Islamic Bank and Indonesia’s Karim Business Consulting, offer a dedicated Sharia’a consultancy service to help customers understand the practicalities (and financial implications) of Sharia’a law.
Yet we are still some way off a comprehensive cross-border Sharia’a guidance framework, which will provide a single point of reference for all Islamic financial services in light of Sharia’a doctrine. Furthermore, who is providing guidance to the consultants and regulators? Surely there has to be a core of ‘Sharia’a guardians,’ scholars and religious leaders who ensure that the financial bodies are interpreting the law in the right way.
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