Risk Management in
Islamic Financial Instruments
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5.1.2 Methodology
Khan and Ahmed (2001) conducted a rigorous survey on the risk management perception of
the IFIs in various countries. This study undertakes a similar approach. The survey
questionnaire used in Khan and Ahmed (2001) has been modified for this study. The
questionnaire includes questions/ statements on six different areas that include the severity of
risk in various contracts, risk reporting standards, the risk management environment, risk
monitoring, and the presence of strong internal mechanisms that help IFIs deal with
challenges.
A total of 18 banks have been surveyed. Senior officials responsible for risk identification,
measurement and management took the survey. In order to keep the sample unidentified, a
regional category is reported. Out of a total of 18 banks, 12 banks were from the MENA region,
two banks were from South Asia, and three banks were taken from the South East Asian
region. One bank was surveyed from the Central Asian region, which was coded as ‘others’.
MENA is the largest region in terms of the number of Islamic banks and the volume of Islamic
activities. Malaysia, Indonesia and Brunei drive Islamic banking operations in Southeast Asia.
Pakistan and Bangladesh are strongly contributing to Islamic financial operations in South
Asia. Appendix C shows the list of banks that were used in this analysis. Appendix D gives the
questionnaires used in this study.
It was initially planned to distribute multiple questionnaires to IFIs of the OIC member
countries. However, due to a number of limitations inherent in the methodology and with the
cooperation from the IFIs, the study limits its coverage within the successful banks in the
selected countries. The study used a structured questionnaire. Using the Surveymonkey.com
web survey mechanism, 18 survey questionnaires were ultimately received. These range
across three different regions: MENA, Southeast Asia and South Asia. More importantly, they
are from 14 different countries, and the participating IFIs have been highly successful in their
operations. The unit of analysis is individuals. These individuals were responsible for risk
management and/or risk monitoring and credit departments. A list of these individuals was
collected from authors of past studies and other academic sources in order to feed the list into
surveymoneky.com for data collection. A total of 37 individuals were asked to participate
voluntarily, of which nearly 50% were returned. Due to the anonymity principle of the survey
research, this study will not reveal an individual identity of the participants and their banks.
We have conducted the analysis, however, using the regional categorization of the IFIs. A
number of frequency distributions and cross-tabulations have been used to explain the
contract specific perception of risk and the strengths and weaknesses of the IFIs with respect
to managing that risks.
5.2 RISK PERCEPTION
5.2.1 Risks in Different Modes of Financing
Risk is the uncertainty that outcomes will not match those that are expected. Table 5.2 shows
the risk perceptions of the risk managers of the IFIs in selected banks. There are six categories
of contracts with respect to four major types of risks that are analysed. If we consider the