continued... - Islamic Finance News

Islamic Finance news Guide 2008
Page 58
Risk Management in Islamic Banking: Key Issues (continued...)
In countries where Islamic banking is permitted along with
conventional banking there is more confusion due to the
absence of specifi c provisions. For example, there is confusion
regarding the capital certainty of deposit in several countries,
especially in the UK.
“Risk management in Islamic
banking is more complex and
needs broad analytical capabilities.
There is a defi nitive need for fully
integrated analysis solutions rather
than silo solutions, because risks
in IB are woven together and hence
are not suitable for analysis by silo
solutions.”
However, efforts are being made to create specifi c provisions
and clauses to support Islamic banking. Tax reforms are
needed in order to answer the issues related to double
taxation, especially while dealing with sale and purchase
transactions as originating in a typical Murabahah contract.
Another issue of concern is ambiguity related to unresolved
fi qhi issues. Deferred payment for sale transactions, liabilities
of partners related to third parties, the treatment of residual
value of asset in Ijarah, sale of debt assets and the treatment
of derivatives remain unclear, causing serious hurdles in the
process of consolidation and progress of Islamic banking.
Opportunities and growth
Risk management practices in Islamic banking are developing
rapidly. This will require core banking applications, risk
management solutions, rating and scoring models. With the
increasing complexities of the Islamic banking products and
more stress on transparency, there is a growing need for better
data for which a robust core banking system is a necessity.
As discussed, risk management in Islamic banking is more
complex and needs broad analytical capabilities. There is a
defi nitive need for fully integrated analysis solutions rather
than silo solutions, because risks in Islamic banking are
woven together and hence are not suitable for analysis by
silo solutions. The true picture of risks can only be created by
solutions offering unifi ed enterprise-wide risk views.
On the other hand, rating needs dedicated and organized
efforts and should result in some standardization. There are
www.islamicfi nancenews.com
some efforts to set up Islamic rating services; for example,
the Islamic International Rating Agency, with shows some
success but still has a long way to go. And last but not least,
Islamic banking comes close to universal banking — a general
trend that has been accelerating since the repeal of the Glass-
Steagall Act in the US.
Concluding remarks
Islamic banking is now a force to reckon with. It blends well
with conventional banking and is rapidly gaining ground.
It has crossed the boundaries of religion and faith and is
now fi nding support among non-Muslim customers and
countries. However, the rapid growth has been unplanned
and uncontrolled, and hence has left several open issues.
Qualifi ed manpower, core banking systems, integrated risk
management systems, Shariah issues and compliance are
some of the important issues faced by Islamic banking today.
Most critical among them is risk management. Risk in Islamic
banking is more complex and diffi cult to measure and manage.
Islamic banking requires a fully integrated risk management
solution since most of the risks are correlated.
Dr Sunil Kumar is head of risk management,
Middle East, for IRIS integrated risk management
ag in Dubai, the UAE. He can be contacted via
email at sunil.kumar@irisunifi ed.com