Integration of Islamic bank specific risks and their impact on the portfolios of Islamic Banks

Abstract

Purpose This study aims to propose a risk management framework for Islamic banks to address specific risks that are unique to Islamic bank settings. Design/methodology/approach A unique methodology has been developed first by exploring the dynamics and behaviors of various risks unique to Islamic banks. Second, it integrates them through a series of diagrams that show how they behave, integrate and impact risk, returns and portfolios. Findings This study proposes a unique risk-return relationship framework encompassing specific risks faced by Islamic banks under the ambit of portfolio theory showing how Islamic banks establish a steeper risk-return path under Shariah compliance. By doing so, this study identifies a unique “Islamic risk-return” nexus in Islamic settings as an explanation for the concern of contemporary researchers that Islamic banks are more risky than conventional banks. Originality/value The originality of this study is that it extends the scope of risk management in Islamic banks from individual contract-based to an integrated whole, identifying a unique transmission path of how risks affect portfolio diversification in Islamic banks.

Islamic Financing Effects on Small Medium Enterprises Competitiveness

“…Islamic finance has become a part of the international financial services sector and is gaining prominence as an innovative financial tool to provide a solution to recurring economic uncertainty in general and the funding needs of SMEs in particular (Adelekan, 2021;Sonita, Miswardi & Nasfi, 2021;Shah, Sukmana & Fianto, 2021;;Bazza & Daneji, 2014;Lawson, 2012). Iqbal (1997) stated that Islamic Finance is based on restricting any fee or receipt of any fixed, guaranteed return payment.…”

“…Islamic finance is similar to the conventional financial sector in terms of goods and services. Still, its functions are primarily driven by a collection of values and beliefs that define what is morally obligatory (right), indicating acts and dealings that benefit the social interest, and 'wrong,' indicating activities and dealings that are harmful to the general welfare (Shah, Sukmana & Fianto, 2021;Diallo & Gundogdu, 2021;Hassan, Rabbani & Abdulla, 2021;Babajide, 2012). Describing the Islamic financial system as interest-free does not give a complete idea of the process and can lead to misunderstanding.…”

“…As a result, in today's business environment, the idea E ISSN 2798-1304 P ISSN 2798-1207 of Islamic financing has been designed based on offering zero-interest loans, and benefit and loss sharing, ownership of products, active participation in the exchanging, financing, and building collective bargaining agreements phase between the investment firm and the entrepreneur (Adelekan, 2021;Sonita, Miswardi & Nasfi, 2021;Buksh, 2006). The Islamic financial concept has risen in importance globally over the last three years due to the significant benefits it provides, such as investment expansion and the potential to draw and enhance a nation's incentive to invest (Shah, Sukmana & Fianto, 2021;Diallo & Gundogdu, 2021;Osman 2012;Ahmad, 2008). This is shown by the Islamic financial industry's substantially high compound annual growth rate, which coincided with the global COVID-19 pandemic (Hassan, Rabbani & Abdulla, 2021;Octrina & Mariam, 2021;Adams, 2020).…”

“…When micro and informal businesses are factored in, the funding gap widens even further. Nearly about 70% of all SMEs in emerging economies do not have access to finance (Adelekan, 2021;Sonita, Miswardi & Nasfi, 2021;Shah, Sukmana & Fianto, 2021;Diallo & Gundogdu, 2021;Abdesamed & Wahab, 2014).…”

“…Numerous variables affecting the success of SMEs have been established through a thorough analysis of the literature (Shamsudeen, Keat, & Hassan, 2016). Although these elements have given valuable information into the predictors of SMEs' success, only a few studies have considered the possibility that Islamic financing could drive SMEs' competitiveness, especially in Nigeria (Adelekan, 2021;Sonita, Miswardi & Nasfi, 2021;Shah, Sukmana & Fianto, 2021;Bazza & Daneji, 2014).…”