INTRODUCTION

History

As we know initially people exchange their needed items with others under barter system but due
to excessive complications it became difficult to operate under this system & evolution of coins
from precious metals (gold & silver) were started to use but counting & keeping those heavy
coins was difficult so paper money & bills were introduced. People felt need to place their extra
money somewhere so it could be kept safe & then comes banks in existence. The word bank
derived from an Italian word banco (means-bench). Benches were used in the market place for
exchanging money by Jews of Lombardy. The banker who failed to deal with money,his bench
had to be broken by people the concept of bankrupt derived from here. In Barcelona, Taula de la
ciutat was the first commercial bank opened.

Banks

Any establishment that is engaged in receiving deposits & advancing loans along with certain
interest & responsible for financial stability in the country is known as bank.

Banks are categorized as Commercial & Islamic Banks. Although both performs the functions as
described above so why do we distinguish a commercial bank from Islamic. It is on the basis of
shariah compliance, islamic banks are interest free & guided according to the Islamic laws &
limitations.islamic banks are required to meet religious requirement, ensure fair & just
distribution of resources along with acceptance & execution of dealings from shariah point of
view. These banks does not provide loans in form of money rather, they deals in assets &
commodities .their asset side products include murabaha , ijarah ,istisna ,salam ,musharakah,
diminishing musaharakah, mudarbaah, tawwarruq, commodity murabaha. Due to which it is
observed that islamic banks possessed higher risk rate in its dealings so they must have proper
management against it.

Risk

Risk can be defined as an uncertainty or chances of loss or deviation from expected outcomes .it
involves probability of occurrence of uncertain happenings.

Risk Management

Risk management is a process of taking calculated risk, it does not involve lessening of risk but
its optimization to the level where the maximum profit can be earned along with the possibility
of losses. It is a process of identifying, measuring, reducing & controlling, reporting &
monitoring the risk bearing activities.

Banking organizations bear several kinds of risks but these risk are increased in case of islamic
banking .It includes additional risk such as
Rate of return risk : unexpected & frequent changes in return

Non compliance risk: execution of contracts with non abiding islamic rules & if so they are
declared as haram or makrooh.

Equity investment risk: share of financer in risk, arise due to entering in a partnership according
to the nature of business

Displaced commercial risk: when profit is greater & financer claims to be entitled for bank
forgoes its part or whole share on order to retain the fund provider.

Inventory risk: in case if murabahah & ijarah contract inventory is to be hold by the bank unless
handling over the complete commodity to the buyer.

Risk management process is important in islamic banks as most of their products are pls
dependent & in order to avoid banks reputation risk, their goodwill market image & ensuring
profitability along with shariah compliance their risk management must be strong enough to get
higher return for high risk.

Problem Statement:

HOW DO ISLAMIC BANKS MANAGE THEIR RISKS WHILE OFFERING SHARIAH

COMPLIANT ASSET SIDE PRODUCTS?

Hypothesis:

IS THERE A STRONG IMPACT OF RISK ON ISLAMIC BANKS.