Islamic Banking at risk

Islamic finance institutions are not giving sufficient notice to risk management

July 1, 2011- Despite that Islamic banking has flourished in recent years, mainly following the Global Financial Crisis in 2007, institutions undertaking these services are subject to further risks pertaining to investment activities, Al Akhbar daily quoted an economist as saying.

According to Al Akhbar report, although Islamic banks’ practice favors avoiding financial operations of high risk, such banks are not giving sufficient notice to risk management. It said the absence of relevant financial tools, approved by the Islamic fiqh, makes the business more prone to risks. However, it is possible to fine-tune the ‘Options Contracts’ to the jurisdictions of the Sharia law in order to include it within Risk Management tools, the report said.

The shortage of risk management has somewhat limited the activity of Islamic Banking to secure or low-risk funding, the daily said. Funding modes as “Murabaha” and “Ijar” account for the vast share of assets of financial institutions operating according to the Sharia laws, it said. The two financing techniques, adopted by Islamic banks, entail the sale of goods at a price, - including a profit margin agreed by both parties- which the bank earns allowing the buyer to pay the price of the commodity at a future date.

Islamic banks were authorized in the country in 2004. Figures released by Central Bank officials put the share of assets of Islamic banks at less than one percent of the total assets of conventional banks operating in the country.