Risk Management in
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 Islamic bank credit and asset growth were at least twice as high as that of commercial
banks during the crisis, suggesting a growing market share going forward and larger
supervisory responsibility. External rating agencies‘ re-assessment of IBs‘ risk was
generally more favorable or similar to that of CBs.
A.3.3 Lessons learned
Ali (2007) is one of the early studies to analyze financial distress in the Islamic banking sector
in Turkey during the 2001 banking crisis. Some causes of financial distress in Islamic banks are
very unique to the nature of the contracts permissible in Islamic finance; however, Islamic
banks are also prone to the causes that are common to their conventional counterparts. Ali
(2007) analyzes the factors behind the failure of Ihlas Finans House in Turkey during the
banking crisis of 2001 and reveals the following:
 A combination of liquidity crunch and exchange rate shock and lack of confidence among
the depositors caused a run on Ihlas Finans before it collapsed.
 Lack of appropriate regulatory system for Islamic finance was an important cause for
Special Finance Houses (SFH) collapse.
 As the deposits of Islamic banks are not protected by the Central Bank guarantee, Islamic
banks should be more prudent in raising funds and investing them.
 Islamic banks should set aside a higher proportion of assets in liquid form to accommodate
some withdrawal requests.
 Banks should have some crisis management plan that should consider various possible
scenarios and possible actions from the managers in such situations.
 Managers in Islamic banks should be aware of the macro-economic factors that affect both
Islamic and conventional banks. As the size of Islamic financial industry grows, its
exposure to macro-level shocks also increases.
Habib Ahmed (2010) analyzes different facets of the 2007 global financial crisis and puts
forward a set of policy and practice recommendations that may enhance the stability and
resilience of the Islamic finance industry. Habib Ahmed (2010) summaries that:
 With few exceptions, most of the Muslim countries have adopted Western legal models
that do not support the unique features of Islamic financial activities. In this context,
Muslim countries need to formulate and initiate legal changes that should support the
Islamic financial contracts. In addition, for the development of Islamic capital markets and
sukuk markets, in particular, bankruptcy laws and disclosure requirements need to be
promulgated by the regulatory authorities.
 Regulators should also provide appropriate guidelines for liquidity management in Islamic
banks that plays a crucial role in managing the liquidity risk during the financial distresses.
The regulators also need to ensure the protection of consumers and investors through an
alternate arrangement, similar to the deposit insurance shields in commercial banks.
Otherwise, the managers in the Islamic banks should maintain more balance in cash and liquid
assets.