Risk Management in
Islamic Financial Instruments
109
Extending Table 5.2 into Table 5.3, which offers a regional distribution of the perceptions of
credit risk, the study reports that credit risk are more important in Mudarabah, Musharakah
and Ijarah modes of financing. A separate analysis conducted for liquidity risk shows a
different picture. According to geographical categorizations, Murabahah is the most important
mode of financing that faces operational risk, followed by Mudarabah, and Musharakah
contacts. Operational risk was also important for the Ijarah mode of financing; however,
operational risk was found to be the least important for the Salam mode of financing.
Table 5.3: Regional Distribution for Perceptions of Credit Risk
Region Murabahah Mudarabah Musharakah Ijtisna Ijarah Salam
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
MENA 0 2 2 3 3 0 0 2 2 7 0 1 2 1 7 2 1 1 3 4 1 2 1 2 5 0 2 1 4 4
SA 0 0 0 1 2 0 0 0 1 2 0 0 0 1 2 0 0 0 1 2 0 0 0 1 2 0 0 1 0 2
SEA 0 0 0 3 0 0 0 0 2 1 0 0 0 1 2 0 0 0 2 1 0 1 0 2 0 0 0 0 3 0
Others 1 0 0 0 0 1 0 0 0 0 0 0 0 1 0 0 0 0 1 0 0 0 1 0 0 0 0 0 0 1
Notes: 1 = Critically Unimportant, 2 = Unimportant, 3 = Neutral, 4 = Important, 5 = Critically Important. Values are in
frequencies. SA = South Asia, SEA = Southeast Asia
Table 5.4: Operational Risk and Presence of Risk Management System
Have Formal RM
System
Murabahah Mudarabah Musharakah Ijtisna Ijarah Salam
3 4 5 4 5 3 4 5 3 4 5 2 3 4 5 3 4 5
No 0 0 1 1 1 0 1 1 0 0 2 0 0 1 1 0 1 1
Yes 5 8 3 11 5 2 8 6 3 8 5 1 2 8 5 2 6 8
Notes: 1 = Critically Unimportant, 2 = Unimportant, 3 = Neutral, 4 = Important, 5 = Critically Important. Values are in
frequencies. RM = Risk Management.
Table 5.4 further extends the analysis of important types of risks in different modes of
financing. This table sheds light on operational risk. Most of the IFIs have a formal risk
management system. Only two IFIs argued that their system is yet to take a complete shape.
According to the ‘important’ and ‘most important’ responses, the Mudarabah mode of
financing faces mostly operational risk, which is followed by the Murabahah and Musharakah
modes of financing. The analysis of credit risk on a similar ground also finds similar results.
Hence, it is safe to conclude that the chronology of the risks in order of importance starts with
operational risk, and extends to credit risk, liquidity risk and mark-up risk. In terms of the
most challenging modes of financing, Mudarabah is most pronounced, followed by Murabahah
and Musharakah.