Risk Management in
Islamic Financial Instruments
110
Table 5.5: Challenges in Risk Management
Problems 1 2 3 4 5
Lack of understanding 5.6 5.6 0.00 50.0 38.9
Rate of return of IFI 5.6 16.7 22.2 27.8 27.8
Islamic money market 0.00 5.6 16.7 50.0 27.8
Derivative 0.00 5.6 22.2 33.3 38.9
Legal system 0.00 11.1 16.7 33.3 38.9
Regulatory system 0.00 5.6 11.1 44.4 38.9
Notes: 1 = Critically Unimportant, 2 = Unimportant, 3 = Neutral, 4 = Important, 5 =
Critically Important. Values are in Percentage (%).
5.2.2 Major Challenges Facing IFIS
Among six different problems, Table 5.5 shows that a lack of understanding is the major
challenge facing IFIs. Lack of understanding is directly connected to availability of efficient
human capital for IFIs. One of the major components of operational risk is the unavailability of
efficient Islamic bankers. This is a true reflection of the most important type of risk, as
operational risk was seen as most important. The next problem is the absence of Islamic
money markets in many regions. In the absence of such markets, IFIs will face liquidity
shortages. Hence, this coincides with the third most important risk for IFIs, liquidity risk.
Finally, the absence of efficient regulatory frameworks to deal with problem borrowers and
guide other general banking activities is the third most important problem. This problem is
connected to credit risk, which is the most important risk.
Figure 5.1: Influence of Low Return in IFI on Deposit
39%
50%
11%
Most of them will
withdraw
A fraction will withdraw
None or very few will
withdraw