Risk Management in
Islamic Financial Instruments
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for the bank. It is also important for IFIs to seek permission from the SSB for new product
introduction. This is an integral part of the ethical identity of the IFIs. Over half of the IFIs did
not use securitization to capitalize on existing assets. Securitization can be a highly risky
activity if human error cannot be controlled. The recent global financial crisis was primarily
started when banks engaged in securitization of their good and bad loans that had been pooled
together. Having an investment risk reserve is common. In order to manage displaced
commercial risk, IFIs are recommended to keep a reserve of funds in order to pay the
investment account holders the difference between the rate of conventional and IFIs. If the
reserve is not kept, IFIs will fail to keep the customers.
In order to understand the effectiveness of the internal control system and to identify new
challenges, IFIs must establish an active research institute. Banking is a sophisticated industry.
It involves a unique set of macroeconomic, regulatory and international regimes. To maintain a
healthy financial condition, IFIs are required to engage in active research, organize research
seminars to share the findings from research, and motivate researchers to undertake research
on the relevant issues by offering them funds and research scholarships. These initiatives can
be part of the bank’s corporate social responsibility policy, or simply can be taken as an
initiative to identify the risk inherent in IF system. Figure 5.8 illustrates the active use of
research in risk management. One third of the banks did not have a research component. This
may have severe influence on risk management effort of these IFIs.
Figure 5.8: Actively Engaged in Research to Manage RM Problems
Figure 5.9: Requirement of Basel Committee Equally Applicable to IFIs
No
33%
Yes
67%
No
18%
Yes
82%