Abstract

Islamic banking and finance has become a US$100 billion industry and is estimated to grow at a rate of 15% per annum. The essential feature of Islamic banking is that it is interest-free. As a result of this, the Islamic financial system is primarily equity-based. Islamic banks therefore conducts business on a profit-/ loss-sharing principle. Under this arrangement, the provider of capital and the entrepreneur share in the risks and rewards of a venture. To remain competitive, it is important for Islamic banks to find out what their risks are, control them, and monitor them routinely. The objective of this paper is to overview the guidelines for risk management in Islamic banking. Issues related to the nature of risks arising from the use of funds of Islamic financial institutions and their implications on the banking book of Islamic financial institutions are also to be considered in this paper.