Islamic risk management and its role in defending from the global financial crises : useful practices for traditional banks

Stability is a basic requirement for the proper functioning of the banking system and a key to its contribution to growth and development. During the 1980s, the failure of banks became a common phenomenon that preceded economic crises. Bank insurance funds in countries with deposit guarantee schemes have lost substantial amounts, causing the loss of taxpayers’ money. The hope was that the crisis would be restricted to financial markets, with few repercussions on the real economies. This hope was shattered in September 2008 as the crisis entered an acute phase, with strong downward fluctuations in the stock markets and reduced rates of economic growth. Despite the financial crisis of 2008 is nearly five years behind us, yet its impact on financial markets persists. Financial institutions face a “New Reality” of lower returns, higher volatility and increased scrutiny from boards and regulators. In the meanwhile, Islamic finance has been experiencing a rapid acceleration worldwide. According to reports, which conducted a worldwide survey of the development of Islamic financial institutions comparing to traditional financial institution during 2009, it shows a two-digit growth by the Islamic industry despite the severe impact of the global financial crises of 2008 and 2009. While Islamic financial institutions have successfully qualified the robustness test by exhibiting greater resilience during the recent global financial crises, regulatory regimes are under review in the wake of the financial crisis as regulators seek to bolster financial stability and avoid a repeat of the problems that led to the current situation. The financial crisis has demonstrated the need for an integrated approach to risk management and one that encourages risk managers to think in terms of scenarios. In my research, I will discuss the challenges and opportunities of implementation the Islamic financial engineering methods that may assist conventional institutions facing in a changing market environment and frequent financial crisis