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In general, Islamic banks in KSA have a higher cost of funds and lower efficiency, which is
reflected in lower ROEs.
8 Islamic banks from United Arab Emirates are considered for the analysis. Average total
assets of the U.A.E. Islamic bank sample is 8,004 million USD, with average deposits of 6,137
million USD. Islamic banks, on average, employ 87 employees and have 8.89 branches. Asset
Quality for the Islamic banks’ loan portfolio is rather poor, compared to that of their
conventional counterparts. The higher Net Interest Margin of the conventional banks
represents cheaper sources of funding that the conventional banks maintain over their Islamic
banking counterparts. Conventional banks have also a higher dividend pay-out.
6 Islamic banks from Bangladesh listed in the BankScope database are used in the analysis.
Average total assets of the Bangladesh Islamic bank are 1,584 million USD, with average
deposits of 1,398 million USD. On average, Islamic banks in Bangladesh maintain 639
employees and have 28.67 branches. Asset Quality for the Islamic banks’ loan portfolios is
rather poor, compared with that of their conventional counterparts. The Lower Equity/Tot
Assets ratio for the Islamic banks, compared with that of the conventional banks, represents
higher risk exposure and possibly capital adequacy problems for the Islamic banks. Higher Net
Interest Margins for the conventional banks represent cheaper sources of funding for the
conventional banks. This is also reflected in higher ROAs and dividend pay-outs for the
conventional banks. The average Interbank Ratio for Islamic banks of 128.04% is higher than
that of the conventional banks of 57.97%, which suggests that Islamic banks maintain
additional liquidity.
CHAPTER 5: RISK MANAGEMENT PRACTICES IN IFIS
Islamic financial institutions (IFIs) work in accordance with the Islamic Shari’ah. Islamic
Shari’ah strictly prohibits all sorts of risky and speculative financial activities. Charging
interest, or Riba, is completely prohibited. All forms of unsocial and unproductive investments
are also strictly prohibited. The system promotes partnership and risk sharing among
participants. This study analyses the risk management practices of 18 IFIs from across 14
countries of the MENA region, Southeast Asia and the South Asia. The most important risk is
operational risk, followed by credit risk, liquidity risk and mark-up risk. These risks are
relatively more important in the Mudarabah, Murabahah, and Musharakah models of financing,
when compared to the Ijarah, Ijtisna, and Salam modes of financing. Regional differences in the
risks are difficult to explain, due to limited sample size. However, the banks in the developing
MENA and the Southeast Asian countries reflect better risk management practices and policies,
when compared to other regions. Lack of understanding, the unavailability of Islamic money
markets, and the limited regulatory framework in handling problem loans have been identified
as the three major problems. These problems are closely connected to the types of risks IFIs
are facing. Consequently, IFIs will face higher amounts of defaults in their financing and
depositors are more likely to withdraw their funds.
The IFIs did not follow uniform risk reporting standards. Most of these banks did not report
country risk, price risk from commodities, or the operating risk from human resources,