Risk management is a part of process reducing

more risk involved and taking a precaution action

to avoid unnecessarily risk in order to get higher
return with more safety investment.
Investopidea define Risk management is a process
identification, analysis and either acceptance or
mitigation of uncertainty in investment decision-
making
I) Al-Quran :

And he said, "O my sons, do not enter from one gate but enter from
different gates; and I cannot avail you against [the decree of] Allah at all.
The decision is only for Allah; upon Him I have relied, and upon Him let
those who would rely [indeed] rely."
(Surah Yusuf: Verse 67)
2) Sunnah

(Hadith from Prophet Muhammad S.A.W)

Prophet (peace be upon him) once asked a Bedouin who left his camel
untied, Why do you not tie your camel? The Bedouin answered, I put my
trust in God. The Prophet PBUH then said, tie up your camel first then put
your trust in God.

According to Ibn Taymiyyah
risk is divided into two types
Commercial risk :
Risk which is normally faced by a trader
who buys goods from producer or supplier
and sells them to the customer.
The goods cannot be sold solely.
Associated with the wealth creation
activities.
Gambling risk:
No additional wealth created
Zero sum games (Maysir)
Inevitable Risk

Deeds are
accompanied by
risks or risk that
cannot be
avoided.
Insignificant

Focuses on the
degree of risk
involve while
doing good deeds
Unintentional

Which is focusing
of normal
activities on
value creation
and not the risk
required.
All activities and
products are in
conformity with
Shariah principles.
Recognized as a
type of risk which
can contribute to
significant losses.
Risk faced by
Islamic
Financial
Institution
EQUITY
INVESTMENT
SHARIAH
NON-
COMPLIANCE
PRICE RISK
REAL ESTATE
RATE OF
RETURN
DISPLACED
COMMERCIAL
CREDIT RISK
OPERATIONAL
Rate of
return risk
Equity
investment
risk
Displaced
commercial
risk and
Reputation
risk (for non-
compliance
with Shariah
principle).
For example, an Islamic bank may expect
to earn 5 percent on its assets, which is
passed on to the investors-depositors.
Islamic banks to offer a higher rates to
their investors
Entering into a
partnership for the
purpose of undertaking or
participating in a
particular financing or
general business activity
as described in the
contract.
The provider of finance
shares in the business
risk.
Considering that
conventional commercial
banks do not invest in
equity based assets.
Profit equalization reverses (PER) and
Investment risk reserve (IRR).
To manage displaced commercial risk
the Islamic banks create reserves such
as:
Avoid interest,
Gambling, and speculation;
steer clear of investing in prohibited industries;
Complying with
minimum
requirements:
Any product sent to regulators for consideration
is, without a doubt, shariah-compliant.
Developing
compliant products
Conducting regular shariah audits to look for any
possible noncompliance that may undermine the
firms reputation
Keeping transactions
and operations in
compliance
financial instrument
that derives
its value from the
value of some
underlying assets
and
the product of
financial
engineering and
innovation
In hedging purpose :
to mitigate risks
such as fluctuations
in interest rates,
movement in share
prices, adverse
foreign exchange
rate changes
and variability in
commodity prices.
They ask you about wine and gambling. Say, "In them is
great sin and [yet, some] benefit for people. But their sin
is greater than their benefit." And they ask you what they
should spend. Say, "The excess [beyond needs]." Thus
Allah makes clear to you the verses [of revelation] that
you might give thought.
(Surah Al-Baqarah: Verse 219)

Derivatives are used
to separate risks
from traditional
instruments and
transfer these risks
to parties willing to
bear these risks.
The fundamental
risk involved in
derivative business
includes:
Credit Risk

This is the risk of
failure of
counterparty to
perform its
obligation as per
the contract. Also
known as default
or counterparty
risk.
Market Risk

Market risk is a risk
of financial loss as
a result of adverse
movements of
prices of the
underlying asset/
instrument.
Liquidity Risk

-The inability of a
firm to arrange a
transaction at
prevailing market
prices liquidity risks
-Related to liquidity
of separate products
-Related to the
funding of activities
of the firm including
derivatives.
Income must be derived
as profits from shared
business risk rather than
guaranteed return.
Islamic finance can
produce close
equivalents to equity,
mortgages, and
derivatives known in
conventional finance.
Relies on structural
arrangements of asset
transfer between borrowers
and lenders to emulate
traditional interest-bearing
financial contracts.
Forward/ future contract Salam
contract

Option contract Urbun contract

A number of instruments/contracts exist in
Islamic finance that could be considered a basis
for forward/futures contracts within an Islamic
framework.

Each of these contracts concern deferred
transactions, and would be applicable for
different situations. The first and probably the
most relevant of these to modern day
forward/futures contracts would be the Salam
Contract.

When viewed solely as a promise to buy or sell an asset at a
predetermined price within a stipulated period, shariah
scholars find nothing objectionable with options.

It is in the trading of these promises and the charging of
premiums that objections are raised.

Options have generally been examined under the fiqh
doctrine of al-khiyarat (contractual stipulations) or under
the bai-al-urbun concept. Urbun being a transaction in
which a buyer places an initial good faith deposit.

Barings Singapore
reported SIMEX trade
losses of GBP 850
million
In July 1992, Leeson
was instructed to open
accounts for BFS
error.Leeson used the
account for his
unauthorized trading.
End of September
1992, on account 88888
of loss of S $ 8.8
million Leeson began to
deal in Japanese
government bonds .
Despite losses
accumulated in the
account 88888 , Leeson
continued to bet big on
the Nikkei index in the
hope that it will not
fall below 19,000
points in January 1995.
On February 23, 1995,
a senior clerk
placement of the
headquarters of Barings
noticed discrepancies
in Leeson's account.
Leeson was found
guilty for his action of
fraud and forgery,he
has been imprisoned by
Singapore authorities
for six and half year.