Name: MUHAMMAD DANIEL BIN ROSDY

Id Matriks: 62211222084

LITERATURE VIEW

Islamic banks' asset and liability sides each have distinct risk characteristics. The one-tier
mudaraba with a variety of investment options is the current state of the Islamic banking
paradigm. Savings and investment deposits are held in profit-sharing investment accounts on the
liabilities side of Islamic banks. Restricted investment accounts fall under this category. with
limits on withdrawals made before the maturity date, and unfettered.

In Islamic banks, demand deposits or checking or current accounts have the same characteristics
as qard hasan, or interest-free loans that are fully repaid upon demand. On the asset side, banks
use ijara (lease), murabaha (cost-plus or mark-up sale), instalment sale (medium/long-term
murabaha), bai-muajjal (price-delayed sale), istisnaa/salam (object postponed sale or pre-paid
sale), and musharaka and mudaraba (profit-sharing types of financing).

The goal of Shari'ah, which is to safeguard human welfare, is expressed in the comprehensive
perspective on risk and its management. In defining maqasid al-Shari'ah as "promotion of the
people's well-being, which lies in safeguarding their faith (din), their self (nafs), their intellect
('aql), their lineage (nasl), and their wealth (mal),"

Islam offers full instructions for handling a variety of hazards in a broad sense, including
criminal assault risk, health risk, financial risk, economic risk, and others. It's interesting to note
that Islam also orders its followers to avoid hazards of a spiritual kind, such as fornication,
idolatry, apostasy, and other kinds of sins. However, this paper's discussion of risk management
focuses on risk in economic and financial transactions.

‫يا رسول هلال أترك ناقتي وأتوكل أو أعقلها وأتوكل ؟ قال بل اعقلها وتوكل‬

“O the Messenger of Allah…Should I leave my camel untied and trust in Allah, or should I tie
it?” The Holy Prophet (p.b.u.h.) replied: “Tie your camel and then trust in Allah” (Al-Tirmidhi,
1998).

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Even though a Muslim must put his trust to Allah (s.w.t), the hadith proves that a Muslim should
not be passive and fatalistic. The hadith does not only illustrate how a Muslim should deal with
his fate, but it also instructs to manage the risk of calamities and losses. It is worth mentioning
that risk management is not against the concept of tawakkul (trust in Allah). Tawakkul is to
choose appropriate means toward achieving the goals first, then entrusting Allah for the better
result (Usmani M. T., 1999).

Except in the case of deliberate default, Islam does not allow debt restructuring based on
compensation. In the case of profit-sharing models of financing (such as mudaraba and
musharaka), the credit risk is the entrepreneur's failure to pay the bank's share when it is due.
This issue may develop for banks in certain instances due to the asymmetric information
problem, in which they lack sufficient information about the firm's true earnings.

Market risk

Market risks can be systematic, resulting from macroeconomic factors, or unsystematic, resulting
from asset or instrument-specific factors. Currency and equities price risks would come under the
systematic category, whereas price movement in commodities or assets handled by the bank
would fall under market risk. Below, we analyze one noteworthy systemic risk and one
unsystematic risk essential to Islamic banks.

Commodity/asset price risk

Murabaha price risk must be separated from commodity/asset price risk. As previously stated,
the basis of the mark-up pricing risk is variations in LIBOR. It emerges as a result of funding
rather than commerce. Commodity price risk, as opposed to mark-up risk, comes as a result of
the bank holding commodities or durable assets, such as salam, ijara, and mudaraba/musharaka.
It should be noted that both mark-up risk and commodity/asset price risk might exist in the same
contract.

Legal risk

Legal hazards for Islamic banks are also considerable and can emerge for a variety of reasons.
For starters, because most nations have adopted either a common law or a civil law framework,
their legal systems lack specialised laws/statutes that support the distinctive features of Islamic

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financial instruments. Financial institutions are not safeguarded against unknown or
unenforceable threats. After the contract is signed, the use of standardised contracts can also
make transactions easier to administer and monitor. Finally, the lack of Islamic courts capable of
enforcing Islamic contracts raises the legal dangers associated with employing these contracts.

‫ كان العباس بن عبد المطلب إذا دفع ماال مضاربة اشترط على صاحبه أن ال يسلك به بحرا وال ينزل به‬:‫عن بن عباس قال‬
‫واديا وال يشتري به ذا كبد رطبة فإن فعله فهو ضامن فرفع شرطه إلى رسول هلال صلى هلال عليه و سلم‬

“Whenever Abbas ibn Abdul Muttalib (may Allah be pleased with him) handed over his assets
[camels] for mudarabah to his partner, he stipulated that he should not take the assets across the
sea, nor take them down to the bottom of a dry riverbed, nor trade them for live animals. If he
were to do any of these, he would have to bear the compensation. Word of al-Abbas stipulation
reached Rasulullah (p.b.u.h.) and he allowed it” (AlDaraqutni, 2004).

This hadith allows for the stipulation of criteria in mudarabah transaction in order to avoid
unnecessary dangers. Aside from that, this hadith served as the foundation for the judgement of
restricted mudarabah, which allows capital providers to impose constraints on management
regarding where the fund should be invested.

Some risks, which cannot be removed or transferred, must be borne by banks. The first is related
to the risk's complexity and the difficulty in separating it from assets. Second, financial
organizations take risks since it is important to their business. These risks are allowed because
banks specialize in dealing with them and are appropriately compensated. Credit risk inherent in
banking book activities and market risk inherent in bank trading book activity are two examples
of these hazards. The following are some challenges with risk management in Islamic banks.