Risk Management in
Islamic Financial Instruments
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6.8.2. IFSB Risk Management Implementation
The Islamic Financial Services Board (IFSB) compiled 15 principles for the Islamic financial
services industry.26 Many of these recommendations are crafted based on the Basel Committee
on Banking Supervision (BCBS) sound practices and principles, but are augmented to confirm
the tenets of Islamic Shariah. We argue that the Regulatory and Supervisory authorities can
implement these guidelines to build up a competent risk management infrastructure in OIC
member countries to deal with specific risks in these countries. We reproduce these
guidelines under separate risk categories below:
1. General Requirement
Principle 1.0: IIFS shall have in place a comprehensive risk management and reporting
process, including appropriate board and senior management oversight, to identify, measure,
monitor, report and control relevant categories of risks and, where appropriate, to hold
adequate capital against these risks. The process shall take into account appropriate steps to
comply with Shariah rules and principles and to ensure the adequacy of relevant risk reporting
to the supervisory authority.
2. Credit Risk
Principle 2.1: IIFS shall have in place a strategy for financing, using various instruments in
compliance with Sharī`ah, whereby it recognizes the potential credit exposures that may arise
at different stages of the various financing agreements.
Principle 2.2: IIFS shall carry out a due diligence review in respect of counterparties prior to
deciding on the choice of an appropriate Islamic financing instrument.
Principle 2.3: IIFS shall have in place appropriate methodologies for measuring and reporting
the credit risk exposures arising under each Islamic financing instrument.
Principle 2.4: IIFS shall have in place Sharī`ah-compliant credit risk mitigating techniques
appropriate for each Islamic financing instrument.
3. Equity Investment Risk
Principle 3.1: IIFS shall have in place appropriate strategies, risk management and reporting
processes in respect of the risk characteristics of equity investments, including Muḍārabah and
Mushārakah investments.
Principle 3.2: IIFS shall ensure that their valuation methodologies are appropriate and
consistent, and shall assess the potential impacts of their methods on profit calculations and
26 Islamic Financial Services Board (IFSB), “Guiding Principles of Risk Management for Institutions
(Other than Insurance Institutions) Offering only Islamic Financial Services, December 2005