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J. Risk Financial Manag. 2019, 12(1), 37; https://doi.org/10.3390/jrfm12010037

Developments in Risk Management in Islamic Finance: A Review

1
Department of Finance, Faculty of Economics and Administration, King Abdulaziz University, Jeddah 21589, Saudi Arabia
2
La Trobe Business School, La Trobe University, Melbourne, VIC 3086, Australia
3
Department of Finance, Faculty of Business and Management, Universiti Teknologi MARA, 85000 Segamat, Johor, Malaysia
*
Author to whom correspondence should be addressed.
Received: 4 January 2019 / Revised: 4 February 2019 / Accepted: 12 February 2019 / Published: 20 February 2019
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Abstract

The purpose of this study is to review recent developments pertaining to risk management in Islamic banking and finance literature. The study explores the fundamental features of risks associated with Islamic banks (IBs) as compared to those associated with conventional banks (CBs) in order to determine the extent to which IBs engage in effective risk mitigation. The study includes a consideration of the major studies in which the fundamental features of Islamic banks and finance (IBF) and the main characteristics of risk management in IBs are analyzed in comparison with those of CBs. Specifically, these two kinds of banks are compared in relation to the types of risks faced, the characteristics of those risks, and the nature and extent of exposure to those risks. A tabular methodology approach is used in concert with a comparative literature review approach for the analysis. The results show that there is weak support for Shariah-based product development due to the lack of risk mitigation expertise in IBs. The conclusion presented is that in comparison with CBs, IBs are more risk-sensitive due to the nature of their products, contract structure, legal costing, governance practices, and liquidity infrastructure. Furthermore, the determinants of the credit risk of Islamic banks in Malaysia (MIBs) are examined. Overall, bank capital and financing expansion have a significant negative impact on the credit risk level of IBs in Malaysia. View Full-Text
Keywords: Islamic banks; conventional banking; risk mitigation; Shariah jurisdiction Islamic banks; conventional banking; risk mitigation; Shariah jurisdiction
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Al Rahahleh, N.; Ishaq Bhatti, M.; Najuna Misman, F. Developments in Risk Management in Islamic Finance: A Review. J. Risk Financial Manag. 2019, 12, 37.

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