Risk Management In Islamic Banking Essay

University of Management & Technology

INSTITUTE OF ISLAMIC BANKING

NAME TALHA AMMAR BIN MOHSIN

STUDENT ID 14006130003

PROGRAM MS ISLAMIC BANKING

SEMESTER 2 ND (BATCH 06)

INSTRUCTOR DR. TALAT HUSSAIN

COURSE ISLAMIC LAWS OF CONTRACTS

COURSE CODE IB-735

PROJECT # TERM PAPER

Risk Management Procedures & Differential Analysis of Risk Management in Islamic & Conventional Banks

ABSTRACT:

The concept of Islamic banking is interest free banking which makes it very important for Islamic banks to look in to the operations actively which is sharing both "Profit and Losses". Islamic and conventional banks used to take a minimum risks. But it appears

Here we will discuss these distinctive features of risk management in Islamic banking. Islamic banking main characteristics is that they do an asset-backed financing. While the conventional banks deal in money and documents. Profit is generated only when something is sold which have an intrinsic value. In Islam financing is always done on the basis of liquid assets. Shariah gave the instrument of financing which is mudarabah and musharakah in which investor contributes his money in these mode it is bound to convert in to real assets which have a inherent utility. Through this mode of investment profits are generated. Financing which is done in istisna and Salam also create genuine

Islamic risk management framework is shown below by Diagrammatically.

Hypothesis Testing:

As mentioned in the objective of study, the main theme of this study is to see the comparison of profitability of islamic and conventional banks and this association assessed the reverence to procedure of risk management

Null Hypothesis is as follows:

Ho: r>0.5

H1:r is taken to be 0.5, as risk management alone is not expected to define more than 50% of the relationship.

Data Analysis:

Return on Equity (ROE) ratios of two Islamic and two conventional banks (one public sector and private sector) for five years starting from are given below.

Bank Alfalah Bank of Khyber Bank Islami Meezan Bank

2010 4.83% 10% 0.99% 16.64%

2011 16.36% 9% 8.29% 28.18%

2012 19.42% 10% 5.78% 24.34%

2013 18.04% 10% 3.38% 23.69%

2014 18.86% 10% 5.35% 22.20%

Both Islamic bank and conventional bank Return on Equity is taken here for the comparison, correlation and regression. ROE Conventional ROE Islamic

2010 7.42% 8.82%

2011 12.68% 18.24%

2012 14.71% 15.06%

2013 14.02% 13.54%

2014 14.43%