Risk Management in
Islamic Financial Instruments
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Perhaps the most important aspect of an Islamic financial institution is the Shari’ah advisory
board. The Shari’ah board is a major governance component of an Islamic financial institution,
as it ensures the institution’s practices are consistent with the principles of Islam. Encouraging
successful Shari’ah oversight is therefore and important driver of the Islamic finance industry.
The role of Shari’ah governance should be to acknowledge and implement all rulings on
Islamic finance issues. In addition, Shari’ah boards can provide standard contracts for Islamic
financial products and services. Establishing proper governance and Shari’ah practices will
help insure the strength of the industry and insure the public trust.
In addition, encouraging more diversified Islamic financial institutions can help the overall
growth of the industry. The conventional finance industry has begun to shift towards non-bank
financial intermediation, due to advantages in technology and regulation. The Islamic finance
industry stands to benefit from perusing more diversified practices as well. The diversification
of the Islamic finance industry can involve expanding the products and services offered as well
as engaging in non-bank actives such as Mudarabah and Takaful firms. A more diverse Islamic
finance industry will not only help the industry grow, but will also better service the economy
by offering more robust products and creating more stable institutions.
Another key to industry growth is providing for more efficient and accurate information. There
has often been criticism with regards to the availability and accuracy of information related to
Islamic financial institutions. Hence, there is a need for the production of more accurate
reporting from Islamic financial institutions. Improvements in the reliability and availability of
reported data can help practitioners better manage Islamic financial institutions and increase
the public trust in reported statistics.
Finally, the Islamic finance industry needs to continue to demonstrate the value of Islamic
finance in order to encourage its continued growth. Islamic finance has some distinct benefits.
The most obvious benefit is the use of Shari’ah principles to guide the operations of Islamic
financial institutions, which is a valuable service for Muslims around the world. However,
Islamic finance has value beyond simply being Shari’ah compliant. The additional benefits of
Islamic finance include more closely linking financial activities with the real economy, a focus
on overall economic stability, and a desire for socially beneficial financial outcomes. It is
important that the Islamic financial industry successfully communicates and promotes these
benefits. Islamic finance has the capacity to benefit society beyond the Muslim world, and
successfully communicating those benefits can drive industry growth.
6.9.4 Encourage Efficiency and Innovation in the Islamic Finance Industry28
Another key initiative for the Islamic finance industry going forward is the continued
promotion of innovation and efficiency within the industry. For example, national credit
bureaus can help both conventional and Islamic financial institutions make more informed
financial decisions. Thus, establishing credit and business rating institutions can help drive
improvements in Islamic financial institutional efficiency. In addition, promoting technical
28 Islamic Research and Training Institute (2014): Islamic Financial Services Industry
Development: Ten Year Framework and Strategies, A Mid-Term Review