Risk Management in
Islamic Financial Instruments
105
Type of risk Definition Institution Depositors
Bank Shareholders
Demand Investment
Liquidity risk Liquidity risk
is the risk of
bank’s inability
to access liquid
funds to meet
its obligations
The bank is
exposed to risk
of failure to
honor requests
for withdrawals
from its
depositors
They face
the risk of
not being
able to
access their
deposits
when they
need to
Hedging risk Hedging risk is
the risk of
failure to
mitigate &
manage the
different types
of risks
This increases
the bank’ s
overall risk
exposure
Governance
Risk
Operational risk Operational
risk is the risk
of failure of
internal
processes as
related to
people or
systems
The bank incurs
losses due to
occurrence of
that risk hence
may fail to meet
its obligations
towards the
different
stakeholders
This risk
adversely
affects return
on equity
This risk
adversely
affects
return on
assets
Fiduciary
risk
- Fiduciary risk
is the risk of
facing legal
recourse action
in case the
bank breaches
its fiduciary
responsibility
towards
depositors and
shareholders.
- Risk of loss of
reputation
Legal recourse
may lead to
charging the
bank a penalty
or
compensation.
This may lead to
withdrawal of
deposits, sale of
shares, bad
access to
liquidity or
decline in the
market price of
shares if listed
on the stock
exchange