Empirical evidence on the risk management tools practised in Islamic and conventional banks

Purpose - The paper aims to gain an insight into the risk management tools practised in Islamic and commercial banks in Malaysia, and selected Islamic banks outside Malaysia. The study also examines the level of adequacy of risk management tools and systems of these banks. Design/methodology/approach - The study employs primary data collected using a questionnaire survey. Findings - There are significant differences in the level of extensiveness of the usage of market value at risk (VaR), usage of stress testing results, the usage of credit risk mitigation methods and also the level of extensiveness of the usage of operational risk management tools between Islamic and conventional banks. The findings further show that risk management tools and systems for Islamic banking are inadequate, particularly in the critical areas of “IT professionals with relevant expertise in process integration and risk analytics”, “IT systems to cater for each Islamic instrument” and also the “capacity of human capital in the highly technical areas of risk measurement.” This implies that more innovations and product developments are needed for Islamic banking in managing risks. Originality/value - Since there are relatively few studies conducted in this area, specifically among Islamic banks in Malaysia, this study will broaden the scope of the literature by providing novel empirical evidence.