Risk Management in
Islamic Financial Instruments
106
Type of risk Definition Institution Depositors
Bank Shareholders
Demand Investment
Transparency
risk
Transparency
risk is the risk
of
consequences
of decisions
based on
inaccurate or
incomplete
information
which is the
outcome of
poor
disclosure
Losses may occur as a result of bad decisions based on inaccurate
or incomplete information
System
Risks
Business
environment
risk
Business
environment
risk is the risk
of poor broad
institutional
environment
including legal
risk whereby
banks are
unable to
enforce their
contracts.
Business
environment
risk increases
banks’ exposure
to counter -
party risk as
weak contracts
are not easily
enforceable
Institutional
risk
Institutional
risk is the risk
of divergence
between
product
definition and
practices
Institutional
risk exposes the
bank to counter
-party risks due
to the unsettled
nature of the
contract
Regulatory
risk
Regulatory risk
is the risk of
non -
compliance
with
regulations
due to
confusion, bad
management
or mistakes
Banks may be
penalized for
non-complying
with the rules or
regulations. It
could be an
issue with the
regulator or
supervisor
Source: Adopted from Haawari, Grais and Iqbal (2003)