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slump of 54.1% in 2008, due to the global financial crisis, sukuk growth rebounded from 2009
onwards, achieving a CAGR of 60.1% through the end of 2012.
While conventional insurance goes against Shariah, due to the elements of gharar and riba in
insurance contracts, takaful embraces Islamic the principles of cooperation and mutual help.
Takaful is the smallest Islamic asset class with USD 15.2 billion in 2011 and, thus, represents
only 1.1% of global Islamic finance assets. Between 2007 and 2011, the global takaful market
had a CAGR of 19.1%.
Islamic microfinance is a burgeoning field with the potential to a have great economic and
social impact. A global CGAP survey estimated there to be 380,000 customers of Islamic
microfinance in 2007. Operations are currently concentrated in Indonesia, Bangladesh and
Afghanistan.
CHAPTER 2: RISKS IN FINANCIAL INSTITUTIONS AND
MARKETS
This report attempts to aggregate and discuss the myriad of risk-related challenges to Islamic
finance. It aims to examine the issues in the context of Islamic banking and IFIs both from
theoretical and practical standpoints. Risk pervades Islamic banking in ways similarly to
conventional finance; however, the idiosyncratic risks associated with Islamic finance, as well
as the constrictive nature of the sector, due to the confines placed on it by the Shari’ah, add
complexity. Accordingly, the purpose of this writing is to allow the reader to focus on risk as it
applies to Islamic financial activities. Islamic risk management strategy, still in its incipient
stages, will find guidance from this compilation and be able to reference the texts used in this
paper’s production.
The amalgam of entities involved in the financial services sector seems unending. Having said
that, as the Islamic finance industry has and continues to develop within the context of the
global financial sector, effective regulatory and other methods of stability become increasingly
important. This holds especially true for risk-related practices, which are vital to the industry’s
continued success. From risk measurement to risk management, there are a myriad of ways by
which financial service institutions and professionals mitigate risk. At its core, Islamic banking
vehicles aim to avoid any and all excessive risk. In fact, the fundamental differences between
Islamic and conventional finance are rooted in the fact that maysir (speculation) and gharar
(excessive risk) in all forms, both direct and indirect, are non-permissible elements that cannot
be present within any Islamic business transactions. During the sector’s incipient stages,
misinformation and a lack of full-scale effectiveness regarding practices concerning risk was
expected. However, as a one trillion dollar-plus sector, the proper coalescence amongst Islamic
financial institutions, policymakers, and regulatory agents in order to create a maintainable
risk management industry sub-sector is necessary for the Islamic financial services industry
(IFSI) to sustain growth.