Risk Management Practices in Islamic Bank: A Case Study of Islami Bank Bangladesh Limited

Islamic banking industry has been growing rapidly for last three decades. As risk is inherent in banking business it is necessary to develop a comprehensive risk management framework and process. In this paper, a humble attempt has been made to study and analyze risk management practices of Islami Bank Bangladesh Limited (IBBL), one of the leading Islamic banks in Bangaladesh. Annual reports of IBBL and 7 other full-fledged Islamic banks, Bangladesh Bank, the central bank of Bangladesh, publications and guidelines on risk management, secondary data collected from various published papers and Datastream are used to analyze and support the findings of the study. It is found that the bank has developed an extensive risk management framework and process. The bank is found to be moderate to low risk taker in terms of investment exposures. The bank has been generating sustainable earnings from its depositors fund but lower return on shareholder’s fund due to lack of shari’ah compliant financial instruments in Bangladesh. Even though the bank mobilizes funds on profit and loss sharing principle, but study indicates that all risks are actually borne by the bank e.g., financing impairment is charged to shareholders only like conventional banks. Physical assets constitute a significant portion of the bank’s balance sheet and evidently these assets are funded by shareholders fund. Currently, the bank does not use any derivative instruments as they are not available in the financial market of Bangladesh. Income gap analysis of the bank shows that its rate sensitive assets are higher than rate sensitive liabilities which seem unfavorable in decreasing interest rate environment, consequently, bank’s profitability declined over the year. In spite of that, the spread between funding cost and financing income is above 5%. It can be argued that the inclination towards murabaha financing is evident from the analysis and 72% of the exposure of the Bank lies under the Risk weight category of 50% or below, which is considered to be one of the significant strengths of IBBL. Moreover, displaced commercial risk and excess liquidity risk tend to affect significantly the bank’s efficiency and profitability.