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JRF
13,2 Risk management practices
in Islamic banks of Pakistan
Sania Khalid and Shehla Amjad
148 COMSATS Institute of Information Technology, Abbottabad, Pakistan

Abstract
Purpose – The purpose of this paper is to evaluate the degree to which Islamic banks in Pakistan use
risk management practices (RMPs) and techniques in dealing with different types of risk.
Design/methodology/approach – A standardized questionnaire is used which covers six aspects:
understanding risk and risk management (URM), risk assessment and analysis (RAA), risk
identification (RI), risk monitoring (RM), credit risk analysis (CRA) and RMPs.
Findings – This study found that the Islamic banks are somewhat reasonably efficient in managing
risk where URM, RM and CRM are the most influencing variables in RMPs.
Research limitations/implications – The paper’s findings are limited to the RMPs of Islamic
banks in Pakistan.
Originality/value – This paper explores the RMPs of the Islamic banks in Pakistan. The results can
be used as a valuable feedback for improvement of RMPs in the Islamic banks in Pakistan and will be
of value to those people who are interested in the Islamic banking system.
Keywords Pakistan, Banks, Risk management, Islamic banks, Risk management practices, Islam, Risk,
Risk monitoring
Paper type Research paper

The Journal of Risk Finance
Vol. 13 No. 2, 2012
pp. 148-159
q Emerald Group Publishing Limited
1526-5943
DOI 10.1108/15265941211203198
1. Introduction
Risk is a natural element of business and community life. Risk is a condition that raises
the chance of losses/gains and the uncertain potential events which could manipulate the
success of financial institutions. A well establish risk management practices (RMPs) can
assist banks to reduce their exposure to risks. The key issue in the Islamic principles
regarding banking system is the prohibition of riba, as declared in the Quran
“Allah forbids riba”. Riba means an increase, and within shariah riba refers “any excess
benefit derived on a loan over and above the principal”. The Quran states: “Believers!
Do not consume riba, doubling and redoubling [. . .]” (Zaman and Movassaghi, 2002).
The Islamic banking begins in Pakistan in 1980s. The hard work for changing the
financial system of Pakistan on Islamic shape was carried over 22 years. Although many
studies have been done for RMPs all over the world (Hollman and Forrest, 1991;
Santomero, 1997; Oldfield and Santomero, 1997; Frosdick, 1997; Tchankova, 2002;
Kallman and Maric, 2004; Fatemi and Fooladi, 2006; Laurentis and Mattei, 2009;
Sensarma and Jayadev, 2009), very few studies are for RMPs in Islamic banks (Khan and
Ahmed, 2001; Al-Tamimi and Al-Mazrooei, 2007; Khan and Bhatti, 2008; Al-Janabi,
2008; Hassan, 2009; Rosman, 2009; Sheikh and Jalbani, 2009). The objective of this study
is to assess the degree to which the Islamic banks in Pakistan use effective RMPs.
2. Literature review
Islamic banking has been defined as banking with the culture and value structure of
Islam and governed, in addition to the conventional good governance and risk
management rules, by the values laid down by Islamic Shari’ah. Interest free banking RMPs in Islamic
is a narrow concept denoting a number of banking instruments or operations, which banks of
avoid interest. Islamic banking not only avoids interest-based transactions, prohibited
in the Islamic Shari’ah, but also keeps away from immoral practices and participates Pakistan
aggressively in achieving the goals of an Islamic economy (State Bank of Pakistan
(SBP), 2010). 30 years ago (Iqbal and Molyneux, 2005), Islamic Banking was just an
unusual and strange concept and was considered as “wishful thinking”. Initially 149
foundation of the Islamic banking was a dream and only some people were familiar to
the concept of Islamic Banking, but the passage of time and hard determination
brought the Islamic Banking into certainty (Zaher and Hassan, 2001).
Nowadays, there are more than 500 Islamic financial institutions worldwide, with
estimated assets of US$1 trillion. A wide range of products and services are offered by
those institutions. The increased acceptance of Islamic finance has led many countries
to grant licenses to financial institutions to operate on the basis of Islamic Sharia’ah
principles. Licensed institutions can be found in more than 75 countries, including
Muslim states (e.g. Bahrain, Kuwait, Malaysia, and UAE) and non-Muslim states
(e.g. Singapore and the UK) (Al-Ajmi et al., 2009).
In Pakistan, the SBP issued detailed criteria in December 2001 for establishment of
full-fledged Islamic commercial banks in the private sector. Al Meezan Investment
Bank received the first Islamic commercial banking license from SBP in January 2002
and Meezan Bank Limited commenced full-fledged commercial banking operation
from March 20, 2002 (The Pakistan Accountant: Magazine of the Institute of Chartered
Accountants of Pakistan, 2007). Branch networks of six dedicated Islamic banks have
increased to 480 branches (including sub-branches) with Meezan Bank having a
42 percent share with 201 branches in 54 cities across the country. Islamic Banking’s
share has grown to over 5.5 percent of the total banking industry (SBP, 2010).
Risks are uncertain future events which could manipulate the success of the bank’s
aims and objectives, including strategic, transactional, and economic objectives.
Uncertain future events could include disappointment of a borrower to pay back a credit,
variation of foreign trade rates, imperfect sanctuary documentations, fraud,
non-compliance with shariah laws/principles and other actions due to the failure to
the bank (Khan and Ahmed, 2001; Meyer, 2000). A well-organized risk management
structure can help out Islamic banks to reduce their exposure to risks, and increase their
ability to contribute in the aggressive marketplace (Iqbal and Mirakhor, 2007). Islamic
banks’ disabilities in proper RMPs can lead to short term loans (Hassan and Dicle, 2006).
The risk management theory describes the risk management term as: “the method
through which decisions are prepared” (Frosdick, 1997). Risk management is a two step
method. The first step is to recognize the origin of the risk (Rosman, 2009), i.e. to discover
the primary variables causing the risk. The second step is to develop methods to
quantify the risk by means of mathematical models, in order to understand the risk
profile of the instrument.
Risk management is a foundation of practical banking systems. Islamic banks operate
with many products that do not exist in conventional banks and thus suffer from
increasing risks. Therefore, in the present day unpredictable situation, Islamic banks are
facing a large number of risks such as credit risk, liquidity risk, foreign-exchange risk,
market risk, and interest rate risk, etc. For this reason, efficient risk management is
extremely necessary (Al-Tamimi and Al-Mazrooei, 2007).
JRF Rosman (2009) has proposed a research framework on RMPs and the aspects of
13,2 risk management processes. This framework observes the relationship between RMPs
and the four aspects of risk management process i.e.:
(1) Understanding risk and risk management (URM).
(2) Risk identification (RI).
150 (3) Risk analysis and assessment (RAA).
(4) Risk monitoring (RM).

A remarkable development of risk management in the Islamic banks of

Brunei Darussalam, showed the staff’s ability to pave their way towards successful
risk management (Hassan, 2009). Thus, the evident suggestion is to implement vibrant
risk management techniques in the Islamic banks of Pakistan. The author is not aware
of any other study that specially attempts to assess the RMPs of Islamic banks of
Pakistan. A detail description of the research methodology of the study conducted is
presented first in the next section.

3. Methodology
The following hypothesis is formulated and tested in the study:
H1. There is a positive relationship between RMPs and URM; RAA; RI; RM; and
credit risk analysis (CRA).
The universe of the study consists of six full-fledge Islamic banks working presently in
Pakistan and the sample area selected is Abbottabad, Manshera, Islamabad and
Rawalpindi. The target population includes all the senior staff of the head offices of the
six Islamic banks as well as all the senior staff of the branches of the six Islamic banks.
The study is based on random sampling technique and on primary data that is collected
through the use of a standardized questionnaire. A total number of 135 questionnaires
were distributed, out of which 102 filled questionnaires were received. The screening
process resulted in excluding 12 responses from the study because of missing
data questions. The questionnaire comprises of a number of statements with single
variable (Hassan, 2009; Al-Tamimi and Al-Mazrooei, 2007). It includes RMP as the
dependent variable, and different aspects of risk management as the independent
variables. Questionnaire included 47 questions with five questions about respondent’s
demographic characteristics, eight questions about URM, seven questions about RAA,
five questions about RI, six questions about RM, seven questions about the CRA and
final nine questions about RMPs. Apart from the first five questions, all the questions are
statements and are measured as a five point likert-scale, ranging from strongly agree,
agree, neutral, disagree to strongly disagree. It was pre-tested and modified according to
the feedback of senior officers of Islamic bank.
Reliability of the scales is evaluated by using Cronbach’s alpha. Spearman’s correlation
is applied to measure the direction and strength of the relationship between independent
variables and between independent and dependent variables. A multicollinearity test is
carried out to assess whether there exist the problem of multicollinearity among
independent variables. The regression analysis is applied to estimate the relationship
between RMP and the five explanatory variables as follows: RMP ¼ ƒ (URM, RI, RAA,
RM, and CRA). Incremental regression is applied by removing independent variables
one-by-one from regression model and by assessing the effect on R 2. Statistical Package RMPs in Islamic
for the Social Sciences is used to do all above calculations.
banks of
4. Empirical results Pakistan
4.1 Understanding risk and risk management
Table I shows that the mean of responses on the eight questions regarding URM is
4.09. The respondent’s answers on these eight questions specify, by giving a positive 151
answer to the first question, that the Islamic banks’ staff URM. It also indicates the
relative importance of the eight questions, although Table I does not shows a big
difference between the highest and lowest means of the eight questions.
The highest mean is 4.57 for question four, concerning the importance of risk
management for the Islamic bank’s performance and success. The lowest mean is 3.86
for question six, in which respondents viewed that the objective of Islamic bank is to
expand the applications of advanced risk management techniques. It is obvious that
the Islamic banks staff has a good URM, which gives an indication about the ability of
these Islamic banks to manage risk efficiently in the future course of action. These
results are very similar with Rosman (2009), Al-Tamimi and Al-Mazrooei (2007) and
Hassan (2009). Above all, the standard deviation values of eight questions are small,
which indicates that data points are closer to the mean values.

4.2 Risk assessment and analysis

The outcome of the responses is shown in Table II. The average mean of the responses
to the seven questions is 3.95, which indicates that the Islamic banks are efficiently
assessing and analyzing risk, and represents a positive response to our second research
hypothesis. It can also be seen from Table II that there is not a big difference between
the means of the seven questions, which shows that respondents viewed moderately in
respect of these questions.
The highest mean is 4.06 for question four, indicates that Islamic banks analyses
and evaluates the opportunities to achieve their objectives. This result of RAA is
consistent with Hassan (2009). The lowest mean is 3.77 for question seven, indicates
Islamic banks analyze that the risk includes prioritizing risk treatments where there
are resource constraints on risk treatment implementation. It does not show a big

Questions Mean SD

There is common understanding of risk management across the bank 3.89 0.929
Responsibility for risk management is clearly set out and understood throughout
the bank 3.94 0.826
Accountability for risk management is clearly set out and understood throughout
the bank 3.91 0.882
Managing risk is important to the performance and success of the bank 4.57 0.619
It is crucial to apply the most sophisticated techniques in risk management 4.02 0.703
Your objective of Islamic bank (IB) is to expand the applications of advanced risk
management techniques 3.86 0.894
It is important for your bank to emphasize on the continuous review and evaluation Table I.
of the techniques used in risk management 4.29 0.707 Respondents’ answers
Applications of risk management techniques reduce costs or expected losses 4.27 0.804 on understanding risk
Average 4.093 and risk management
JRF
Questions Mean SD
13,2
IB assesses the likelihood of occurring risk 3.87 0.767
IB’s risk is assessed by using quantitative analysis method 3.91 0.681
IB’s risk is assessed by using qualitative analysis methods 4.02 0.636
Your IB analyses and evaluates the opportunities that it has to achieve
152 objectives 4.06 0.755
Your IB’s response to analysis risk includes assessment of the costs and benefits
of addressing risk 4.00 0.764
Your IB’s response to analyze risk includes prioritizing of risk and selecting those
Table II. that need active management 4.03 0.785
Respondents’ answers Your IB’s response to analyze risk includes prioritizing risk treatments where there
on risk assessment are resource constraints on risk treatment implementation 3.77 0.750
and analysis Average 3.95

difference between the highest and lowest means of the seven questions, which
specifies that participants analyzed the statements of RAA quite similarly. This result
is consistent with the result of the study conducted by Al-Tamimi and Al-Mazrooei
(2007). Almost all the standard deviations are small, which indicates that participants
argued on seven questions of RAA quite equally.

4.3 Risk identification

Table III shows the average value of RI is 3.73, which indicate that Islamic banks
have clearly identified the potential risks relating to their declared aims and objectives.
The answers on the five questions about RI represent that more the staff understand
the risk, the more easily they can identify it.
Table III also indicates the relative importance of each question. The fifth question
obtained the highest mean value of 4.18, signifying that Islamic banks has developed
and applied procedures for the systematic identification of investment opportunities.
The lowest mean is 2.6 for question second, indicating difficulty for Islamic banks to
prioritize their main risk. Islamic banks in Pakistan need to know how to prioritizing
their main risk efficiently. This result on RI is consistent with the result of Hassan
(2009). In Table III, the highest standard deviation is 1.003 for question second, meaning
that the data points are far from the mean value of 2.60, while the lowest standard
deviation is 0.742, meaning that the data points are close to the mean value of 3.99.

Questions Mean SD

The IB carries out a comprehensive and systematic identification of its risks

relating to each of its declared aims and objectives 3.99 0.742
The IB finds it difficult to prioritize its main risk 2.60 1.003
Changes in risk are recognized and identified with the IB’s roles and
responsibilities 3.89 0.827
The IB is aware of the strengths and weaknesses of the risk management systems
of other banks 3.99 0.954
Table III. IB has developed and applied procedures for the systematic identification of
Respondents’ answers investment opportunities 4.18 0.801
on risk identification Average 3.73
4.4 Risk monitoring RMPs in Islamic
Table IV summarizes the responses on RM’s questions. The average of the sample’s banks of
responses on the six questions is 4.05, which indicates that the Islamic banks have an
efficient RM and controlling system. It can also be seen from Table IV that there is no big Pakistan
difference between the means of the six questions, which indicates that respondents
viewed the questions of RM rather equally. The highest mean is 4.18 for question first,
indicating that monitoring the effectiveness of risk management is an integral part of 153
routine management reporting. The lowest mean is 3.93 for third question, showing that
the level of external control by the Islamic banks is appropriate for the risks being
faced. There is not a huge variation between highest mean and lowest mean, which
shows that the questions of RM were responded equally. This result is similar with
Hassan (2009) and Al-Tamimi and Al-Mazrooei (2007). The highest standard deviation
is 0.899, showing small variation between data points. The lowest standard deviation
is 0.680, which shows that the data points have less variation and are close to
mean value 4.18.

4.5 Credit risk analysis

CRA is the important aspect of RMPs. The credit risk is the most important type of risk
within the Islamic banking system. Table V provides information about the responses
to the seven questions. The average mean of the responses is 4.21, which provides
evidence about the efficiency of the management of credit risk in the Islamic banks.

Mean SD

Monitoring the effectiveness of risk management is an integral part of routine

management reporting 4.18 0.680
The level of internal control by the IB is appropriate for the risks that it faces 4.07 0.818
The level of external control by the IB is appropriate for the risks that it faces 3.93 0.790
Reporting and communication processes within your IB support the effective
management of risk 4.13 0.810
The IB’s response to risk includes an evaluation of the effectiveness of the
existing controls and risk management responses 3.99 0.800
The IB’s response to risk includes action plans for implementing decisions Table IV.
about identified risks 3.98 0.899 Respondents’ answers
Average 4.05 on risk monitoring

Questions Mean SD

IB undertakes a credit worthiness analysis before granting loans 4.41 0.806

Before granting loans your IB undertake a specific analysis including the client’s
characters, capacity, collateral capital and conditions 4.52 0.691
IB’s borrowers are classified according to a risk factor 4.37 0.785
It is essential to require sufficient collateral from the borrowers 4.47 0.722
IB’s policy requires collateral for all granting capital or making transaction 4.28 0.765
It is preferable to require collateral against some loans and not all of them 3.40 1.261 Table V.
Level of credit granted to defaulted clients must be reduced 4.03 1.033 Respondents answers
Average 4.21 on credit risk analysis
JRF The highest mean is 4.52 for question second, stating that the Islamic banks should
undertake a specific analysis including the client’s characters, capacity, collateral
13,2 capital and conditions before granting loans. The lowest mean is 3.40 for question six,
which states that it is preferable to require collateral against some loans but not all of
them. The highest variation in standard deviation is 1.261, which tells that data points
are far from mean value 3.40. This result is similar with Al-Tamimi and Al-Mazrooei
154 (2007). The lowest variation in standard deviation is 0.91 for question second, which
indicates that the data points are close to the mean value.

4.6 Risk management practices

In the RMPs, even if the Islamic bank staff URM, and adopt sophisticated methods in
risk assessment and risk analysis, it still may not be the case that RMPs are efficient
and the risk management policies are being followed. Table VI shows the responses of
the sample questions. The mean average of the responses to the nine questions is 4.12,
which indicates that the Islamic bank staffs do RMPs.
The highest mean value is 4.34, which is for the first question. The lowest mean value is
3.93, which is for the fourth question. This result also confirms that Islamic banks intend to
have efficient risk management. There is not a big difference among the means of the nine
questions, which indicates that respondents viewed the questions of RMPs quite similarly.
Question number nine in Table VI is a general question about RMPs, which shows a
mean of 4.22 and thus supports efficient RMPs. This result is quite similar with the
studies conducted by Hassan (2009) and Al-Tamimi and Al-Mazrooei (2007). The highest
variation in standard deviation is 1.015 for fourth question, which tells that data points
are far from mean value 3.93. The lowest variation in standard deviation is 0.687 for
question eight, which indicates that data points are close to mean value 4.02.

5. Reliability of the measures

Reliability of the measures was assessed by employing Cronbach’s alpha. Cronbach’s
alpha allows us to measure the reliability of different variables. In the estimation,
a coefficient greater than or equal to 0.7 is considered acceptable and a good indication

Questions Mean SD

The IB’s executive management regularly reviews the organization’s performance in

managing its business risks 4.34 0.767
Your IB highly effective in continuous review/feedback on risk management
strategies and performance 4.13 0.889
Your IB’s risk management procedures and processes are documented and provide
guidance to staff about managing risks 4.10 0.862
Your IB’s policy encourages training programs in the area of risk management as well
Islamic ethics 3.93 1.015
This IB emphasizes the recruitment of highly qualified people having Islamic
knowledge in risk management 3.94 0.998
Efficient risk management is one of the objective of IB 4.16 0.806
It is too dangerous to concentrate bank’s funds in one specific sector of the economy 4.19 0.833
Table VI. The application of Basel Accord II will improve the efficiency and RMPs in the Islamic
Respondents answers banking in general – your bank in particular 4.02 0.687
on risk management I consider the level of risk management practices of this IB to be excellent 4.22 0.832
practices Average 4.12
of reliability (Nunnally, 1978). Cronbach’s alpha applies to the individual aspect, e.g. URM, RMPs in Islamic
RAA, RI, RM, CRA and RMPs are (0.641), (0.751), (0.439), (0.809), (0.668), and (0.822), banks of
respectively. Results in Table VII show that all of these six aspects are reliable. The overall
Cronbach’s alpha for the six aspects of risk management process is 0.834. It means that Pakistan
there is an acceptable degree of consistency among the responses against each item.

6. Correlation 155
Table VIII reveals the correlation coefficients among the independent variables. The
“rules of thumb” test suggested by Anderson et al. (1990) says that any correlation
coefficient exceeding 0.7 indicates a potential problem. Results show that there is
positive relationship between URM and RMPs, positive relationship between RI and
RMPs, positive relationship between RM and RMPs, positive relationship between
RAA and RMPs and finally positive relationship between CRA and RMPs.

7. Regression model
Regression analysis is used to examine the effect of different independent variables on a
single dependent variable. Table IX shows the regression results. Capital R is the

Sr. no. Risk measurement aspects Cronbach’s a

1 Understanding risk and risk management 0.641

2 Risk assessment and analysis 0.751
3 Risk identification 0.439
4 Risk monitoring 0.809 Table VII.
5 Credit risk analysis 0.668 Six risk management
6 Risk management practices 0.822 aspects and their
Overall reliability of variables 0.834 internal consistency

URM RAA RI RM CRA RMP

URM 1.000
RAA 0.427 * * 1.000
RI 0.354 * * 0.517 * * 1.000
RM 0.534 * * 0.567 * * 0.451 * * 1.000
CRA 0.239 * 0.354 * * 0.317 * * 0.374 * * 1.000
RMP 0.610 * * 0.432 * * 0.383 * * 0.629 * * 0.342 * * 1.000 Table VIII.
Correlation coefficient
Notes: Correlation is significance at: *0.05 level (one-tailed) and * *0.01 level (one-tailed); sample size between independent
n ¼ 90 variables

Model R R2 Adjusted R 2 F Sig.

1 0.713 0.509 0.480 17.408 0.000 Table IX.

Model summary for all
Note: Predictors (constant), URM, RI, RAA, RM, CRA independent variables
JRF multiple correlation coefficients that tell us how strongly the multiple independent
13,2 variables are associated to the dependent variable. In Table IX R is 0.713, which indicates
that 71 percent of variations in independent variable are explained by dependent
variables. Whereas, R 2 is 0.509, indicating that the five independent variables explain
51 percent of the variations in RMPs.
Table X shows the regression results of all independent variable. Where, Beta
156 (the standardized coefficient) compares the contribution of each independent variable
in order to explain the dependent variable. In Table X, RM has largest Beta coefficient
of 0.477, which means that this variable makes the unique and strongest contribution
to the explanation of the dependent variable RMPs. RM is significant at 1 percent as
significant value ( p-value) is 0.000. Hence, there is a positive relationship between RM
and RMPs.
Then URM and CRA have beta coefficients of 0.184 and 0.199, respectively.
Table X shows that the two independent variables URM and CRA have positive and
significant impact on the dependent variable RMPs. URM and CRA are significant
at 5 percent as their p-values are 0.046 and 0.020, respectively. There is a positive
relationship between URM and RMPs and positive relationship between CRA and
RMPs. Table X shows that the values of variance inflation factors (VIF) range from
1.20 to 2.25, suggesting the absence of multicollinearity among the variables of the
model.
On the basis of the abovementioned results it can be concluded that the research
hypothesis of this study is valid. There is a positive relationship between URM and
RMPs, RI and RMPs, RAA and RMPs, RM and RMPs, and finally between CRA and
RMPs.

8. Incremental regression
The robust incremental regression is performed by removing individual independent
variables from the model and by checking the effect on the value of R 2. Incremental
regression test highlights the most important variable of the model.
Table XI shows that among all the variables removed, there is 10 percent decrease
in R 2-value by removing the independent variable RM from the model, as the value
of the R 2 changes from 51 to 41 percent. This extensive decrease in the value of the R 2
shows the importance of RM in the model. This consequence is also highlighted
in the regression result as the value of coefficient of the variable (0.477) is highest
among all the variables. In the case of RM there are three variables: URM, RAA and
CRA, and which are highly significant at 1, 5 and 1 percent, respectively.

Standardized coefficients Collinearity statistics

Independent variables b t-value Sig. Tolerance VIF

Constant 0.371 0.712

URM 0.184 2.029 0.046 0.710 1.409
RAA 0.023 0.203 0.839 0.474 2.110
RI 0.020 0.201 0.841 0.616 1.623
RM 0.477 4.159 0.000 0.444 2.252
Table X. CRA 0.199 2.373 0.020 0.831 1.204
Regression result for all
independent variable Note: Dependent variable: RMPs
 RMPs in Islamic
Model OLS 1 OLS 2 OLS 3 OLS 4 OLS 5 OLS 6
banks of
Constant 0.371 1.633 0.416 0.417 -0.203 1.502 Pakistan
URM 2.029 * – 2.070 * * 2.067 * * 3.257 * * * 1.853 *
RAA 0.203 0.394 – 0.270 2.028 * * 0.668
RI 0.201 0.377 0.269 – 1.135 0.367
RM 4.159 * * * 4.991 * * * 4.734 * * * 4.360 * * * – 4.334 * * * 157
CRA 2.373 * * 2.225 * * 2.476 * * 2.408 * * 2.613 * * * –
R 0.713 0.696 0.713 0.713 0.639 0.690
R2 0.509 0.485 0.509 0.509 0.408 0.476
F 17.408 19.996 21.997 21.998 14.631 19.300
Sign 0.000 0.000 0.000 0.000 0.000 0.000
Table XI.
Note: Significance at: *10, * *5 and * * *1 percent, respectively Incremental regression

9. Conclusions
From the results and analysis it can be concluded that:
.
There is a general understanding of RMPs throughout the Islamic banking
system in Pakistan, and all the aspects of risk management have positive
relationship with RMPs.
.
As the data are nonparametric so spearman’s correlation is calculated between
independent variables and dependent variable and results shows that there is
positive relationship between independent variables such as URM, RI, RAA, RM,
CRA and RMPs.
.
The RM and URM are the most important and most influential variables in RMPs.
.
Linear regression model is used to access the effect of independent variables on
dependent variable. In regression model R 2 indicates that the five independent
variables explain 51 percent of the variations in RMPs. The estimated coefficients
of three independent variables were positive and statistically highly significant in
the case of RM and CRA and 10 percent significant in the case of URM. The
estimated coefficients of RI and RAA had insignificant positive impact on RMPs.
.
Incremental regression is calculated to indicate the change in R 2 by removing
independent variables one-by-one and suggest that by removing RM variable from
the model there is 10 percent decrease in R 2-value. Thus, It is be concluded that RM
is most contributed variable towards RMPs and hypotheses of our research is
confirmed that all of the independent variable has positive relationship with
dependent variable. These results are supported by Rosman (2009), Hassan (2009),
Shafiq and Nasir (2009) and Al-Tamimi and Al-Mazrooei (2007). It also establish
that the Islamic banks are practically efficient in managing risk where RM and URM
are the most influencing variables in RMPs, which means that Islamic banks of
Pakistan need to give more attention towards RM and URM.

Based on results and personal observations it is recommended that the Islamic banks
cannot disregard risk entirely and there is a need to administer it accurately. Islamic
banks should increase its attentions towards RMPs and its aspects. Islamic banking
system should concentrate towards RMPs aspects especially in RI and RAA. Based on
observations and data collected, Islamic banks should build up separate risk
JRF management department and should employ risk management officers for sustaining
13,2 risk management department’s operations.
Islamic banking is still highly nascent when compared with conventional banking.
At national policy level, as we are living in the Islamic era and consumers are converging
towards Islamic perspectives, therefore Islamic banking system should increase in
numbers. Islamic banks need experienced staff. In this early period of Islamic banking,
158 there is a need for experienced and shariah knowledgeable staff for developing products
and in the banking operation region. There is a need to encourage Islamic banks to have
their own Islamic banking training forum, which will enhance the staff quality.

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About the authors

Sania Khalid is a MS (Management Sciences) Student in the Department of Management
Sciences, COMSATS Institute of Information Technology, Abbottabad (Pakistan). During 2007
she did her internship in Askari Bank Ltd (Pakistan). She holds a MBA degree in Finance from
COMSATS Insitute of Information Technology, Abbottabad (Pakistan) and a BA degree from
Government College, Abbottabad (Pakistan). Her interests include Islamic banking and
organizational behaviours. Sania Khalid is the corresponding author and can be contacted at:
saniakhalid2010@yahoo.com
Shehla Amjad is a Chairperson and a Professor, Department of Development Studies,
COMSATS Institute of Information Technology, Abbottabad (Pakistan). From October 2003 to
August 2006 she was an Associate Professor at the Department of Economics, University of
Peshawar. She holds a PhD from the University of Bradford (UK) and did her MA at the
University of Sussex (UK). During 2006, she was a post-doc at the University of Bradford (UK).
She has authored several publications in refereed international conferences and journals and
has also supervised several MS/MPhil dissertations.

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