Contemporary Islamic Finance: Innovations, Applications and Best Practices

CHAPTER 22

Risk and Derivatives in Islamic Finance

A Shariah Analysis

DR. MUHAMMAD AL-BASHIR MUHAMMAD AL-AMINE

Group Head, Shari'ah Assurance Department, Bank Al Khair

Risk management is at the heart of any financial intermediation process, in particular at a time when volatility in financial markets is affecting Eastern and Western markets and when economic crises are heating different parts of the world. Islamic financial institutions are no exception. Similar to their conventional counterparts, they face many challenges in adequately managing these risks.¹ Yet the issue of risk management was at the center of the Islamic finance industry even before the crisis. This could explain the fact that among the first standards to be issued by the Islamic Financial Services Board (IFSB) is the standard on risk management, a vivid sign of the importance of the issue for Islamic financial institutions.

More importantly, while addressing the risk issues, the IFSB pointed to an important regulatory factor that needs to be taken into consideration by industry players. It noted that regulating risk issues for Islamic financial institutions would not be achieved while working in isolation of the wider international financial system. Thus it has been clearly noted that, “While the Basel Committee on Banking Supervision (BCBS) has published documents setting out sound practices and principles pertaining to credit, market, liquidity and operational risks of financial institutions, the present ...