Risk Management in Islamic Banking

Abstract

Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic and recently in non-Islamic countries. Risk management is a crucial element in Islamic banking due to the nature of its operations. This paper stud ies the risk management system of the Islamic banks operating in Lebanon. Partic ularly, a survey was conducted to assess the status of all Islamic banks in Leba non. A statistical approach was followed to evaluate the degree of adoption of t he recommendations set by the Islamic Financial Services Board (IFSB) and the Ba sel Committee on Banking Supervision (BCBS). Those recommendations include the princ iples related to the responsibilities of the board of directors in formulating a clear and comprehensive risk management strategy. They also tackle the tools us ed by these banks to identify, monitor, control, and mitigate the main types of risks. The data collected showed that the degree of adoption of these principles varies from one bank to another; however, in general, the Islamic banking indus try in Lebanon lacks important regulations and procedures related to risk manage ment.