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Operational risk in Islamic banks: examination of issues

Author

Listed:
  • Marliana Abdullah
  • Shahida Shahimi
  • Abdul Ghafar Ismail

Abstract

Purpose - The purpose of this paper is to assess key issues in measurement and management of operational risk in Malaysian Islamic banks. Design/methodology/approach - Descriptive, analytical, and comparative analyses are used to discuss the issues of operational risk in Islamic bank through the implications associated with the Islamic banks' operational risk as well as the implications on risk measurement, risk management, and capital adequacy. Findings - Discussion on operational risk in Islamic banks is significant and becoming more complicated compared with conventional banking because of the unique contractual features and general legal environment. While basic Basel II core principles of effective banking supervision apply equally well and ideally suit the Islamic banking institutions, risk measurement, and risk management practices still need specific adaptations to Islamic banks' operational characteristics. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the applicability of the Basel II methodology for Islamic banks. Research limitations/implications - This study has important implications for the understanding of operational risk, particularly the specific issues of the Islamic banks' operational risk that arise from the different nature of the financing and investment activities of the banks. With regard to measuring operational risk capital charge, the banks have to choose the right and effective method to ensure the operational risk capital charge will be more in line with the banks' actual risk profile and thus will provide the adequate capital and an improved buffer once the losses are announced. Originality/value - The paper will fill the gap to the existing literature of operational risk in banking institutions especially Islamic banks, by showing the needs of specific adaption of operational risk measurement and risk management practices due to the nature of Islamic banks.

Suggested Citation

  • Marliana Abdullah & Shahida Shahimi & Abdul Ghafar Ismail, 2011. "Operational risk in Islamic banks: examination of issues," Qualitative Research in Financial Markets, Emerald Group Publishing, vol. 3(2), pages 131-151, June.
  • Handle: RePEc:eme:qrfmpp:v:3:y:2011:i:2:p:131-151
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    References listed on IDEAS

    as
    1. Khan, Tariqullah & Ahmed, Habib, 2001. "Risk Management: An Analysis of Issues in Islamic Financial Industry (Occasional Paper)," Occasional Papers 2001, The Islamic Research and Teaching Institute (IRTI).
    2. Reza Djojosugito, 2008. "Mitigating legal risk in Islamic banking operations," Humanomics: The International Journal of Systems and Ethics, Emerald Group Publishing, vol. 24(2), pages 110-121, May.
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    Cited by:

    1. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS
    2. Sorwar, Ghulam & Pappas, Vasileios & Pereira, John & Nurullah, Mohamed, 2016. "To debt or not to debt: Are Islamic banks less risky than conventional banks?," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 113-126.

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