Risk management in Islamic finance: Beyond conventional norms

Abstract

At a time when Islamic finance is experiencing rapid growth worldwide, it is essential to better understand and deepen risk management within this sector to strengthen its resilience and stability. The aim of this article is to analyze the specific risks inherent in Islamic finance and the corresponding approaches to risk management. It also examines the relevance and applicability of the Basel prudential accords to the specific context of Islamic banks. Greater harmonization between Islamic financial practices and international regulatory standards will contribute to the emergence of a stronger, more innovative Islamic financial sector, aligned with the ethical principles of Sharia law.

To achieve this objective, our research is based on a theoretical and conceptual approach. To this end, an in-depth literature review is conducted with the aim of clarifying the key underlying concepts and presenting the various risks facing Islamic finance. Historical developments and current risk management methodologies are also reviewed.

The results show that Islamic finance faces a wide range of threats, encompassing both generic risks common to the financial sector and specific risks arising from its religious ethos. While significant progress has been made in terms of risk management, more needs to be done to adapt existing tools and frameworks to the particularities of Islamic participative finance.

The new prudential requirements introduced in Basel III appear insufficiently calibrated to the singularities of Islamic banking. Implications point to the need to develop innovative solutions aligned with Sharia precepts, while regulators are called upon to design a tailor-made prudential framework to support this rapidly expanding sector.

Although limited to the banking sector, this documented research fills a gap in the literature on a subject that is both crucial and little investigated, providing a solid foundation for future academic work and informing the thinking and decisions of industry practitioners.

Keywords: Islamic finance; Conventional finance; Risk; Risk management; Basel accords

JEL Classification: G21

Paper type: Theoretical research