In addressing the various forms of risk that IBs are exposed to, the guiding principles set forth the methodologies required in order to balance concerns between both the internationally agreed standards of the BCBS and Shari’ah compliance issues that are fundamental to the operation of these specialized institutions.
In general, according to IFSB (2005), IBs shall have in place a complete risk management and treatment process, including proper board and senior management oversight, to recognize, measure, observe, report and control related categories of risks and, where suitable, to hold sufficient capital against these risks.
The process shall take into account appropriate steps to comply with Shari’ah rules and principles and to ensure the adequacy of relevant risk reporting to the supervisory authority “Theory of financial explains that the risk control has become the main concerns of financial institutions.
They require for sufficient arithmetical tools to compute and foresee the amplitude of the probable moves of financial markets is visibly expressed, in exacting for derivative markets., however, classical theories are based on easy assumptions such as Gaussian statistics and lead to a regular dryness of real risks.”(Bouchaud and Potters 2000) “This article guide to take financial risk management decisions.
The inner theme of risk management is that the risk faced by the managers in financial institutions and the methods and markets through in which these risk are managed are becoming gradually more similar whether and financial institutions is acting as noncommercial bank and commercial banks, investment bank, saving bank or loan providing and insurance companies.
even though the rational nature of each sectors such as quality securitization, international banking off balance sheet banking”.(Saunders, Cornett et al.
Apart from that, the contractual role of various stakeholders in relation to risk is also been highlighted.
According to IFSB, the primary aim of releasing its risk management standard stems from the recognition that although “certain issues are of equal concern to all financial institutions” (IFSB, 2005) some risks are localized to IBs and as such, these principles “serve to complement the BCBS guidelines in order to cater the specificities of IBs” (IFSB, 2005).
Moreover, Iqbal and Mirarkhor (2007) explain that the context of risk management in IBs covering the aspect of the needs for risk measurement, management and controls in IBs and highlight the comprehensive risk management framework for each unique risk with the references of IFSB standards.
Greuning and Iqbal (2007) discuss the three major modification of theoretical balance sheet of an Islamic bank that has implications on the overall risk free of the banking environment.