TYPES OF RISKS

FACED BY ISLAMIC INSTITUTIONS

 Islamic Banking Activities

Source : Nor Hayati Ahmad, AbMalek Foad and Yazid,M. (2012). Risk Management
Practices of Malaysian Islamic Banks. INCEIF-UUM Research Report
 Type Definition

Credit Risk risk that arises from counterparty failure to meet their obligations in
accordance with agreed terms.
Liquidity risk risk that arises from a banks inability to meet its obligations because of
difficulties in obtaining cash at reasonable cost from financing or sale of
assets
Funding risk risk that bank will encounter difficulty in realizing assets or otherwise
raising funds to meet commitments associated with banking products.
Market risk risk of losses in on and off balance sheet position arising from market prices
changes
Rate of return risk a reduction in profitability resulting from holding fixed return asset such as
Murabahah that are financed by investment account, the holder of which
expect rate of return risk in line with benchmark risk.
Displaced commercial is a special risk for Islamic banks. It is a risk of paying profit out of equity
risk when actual rate of return are lower than expectation or the prevailing rate
of return offered by competitors.
Withdrawal risk risk that arises when depositors withdraw their funds in the case they
received a lower return compare to conventional bank.
Solvency risk the risk that a bank can become insolvent where the market value of its
assets fall below the market value of its liabilities
ALM risk risk arises from mismatches between assets and liabilities of banking
institutions
Operational risk risk of loss resulting from systems, people and process defaults
Reputation risk impact of adverse information about bank
Commodity price risk risk that arises from holding assets either for sale in Salam, Murabahah,
Mudharabah and Musyarakah contracts or lease under Ijarah contract.
Shariah risk risk that arises due to the failure to comply with Shariah rules or due to non
standard practices in Shariah principles because of differences in
interpretation of Shariah law.
Fiduciary risk risk that arises from banks failure to perform fiduciary responsibilities
towards depositors and shareholders
 Capital
Reserve

Balance Sheet Structure of islamic Bank

LIABILITIES AND EQUITIES (Uses of
ASSETS (Sources of Funds) Funds)
Cash & Short Terms Funds Deposits from customers &
Sources of Fund institutions
Statutory Deposits Profit Equalization Reserve
Investment in Securities Uses of Fund
Financing & Advances Other Liabilities
Other Assets
Capital
Reserves
Total Assets Total Liabilities & Equities
 MUSYARAKAH, MUDHARABAH
(PLS sharing transactions)
Types of Risks
Equity investment risks: when
the project is not
making profits
Credit risks: when profit
payments are delayed or
not paid at all. Credit risks are
very high because the project
is long term and secondly
there is no collateral
Risk Mgt & Issues
First is to set up a strong
analysis frameworks and
strictly control and monitor
processes. Proper
evaluation of project must
be done. Ongoing
monitoring must be done to
reduce
misrepresentation of
profits,
 MUSYARAKAH, MUDHARABAH
(PLS sharing transactions)
TYPES OF RISK RISK MGT & ISSUES
Operational risks: due to Major losses due to
complexity of contracts and
difficulties in implementation
operational risks can be
Mark-up risks: due to covered by takaful (Islamic
fluctuations in the market rate of insurance)
return
liquidity risks: depending on the
size and nature of the funding. If At a more general level,
funding e u d g u d g comes from diversification is essential,
investment deposits and the
depositors cannot take out across countries, regions,
money until maturity, then industries
liquidity risk is reduced.