Risk Management Methodologies: An Empirical Macro-prudential Approach for a Resilient Regulatory Framework for the Islamic Finance Industry

Certain risks are unique to the operation of Islamic banking and require a tailored risk approach and framework to address them. Currently, each Islamic bank uses a different risk approach due to regional, regulatory, legal, product and operational requirements that may dictate a certain approach to manage the associated risks. This paper provides an in-depth insight of assessing these risks for the Islamic banking system, within the sophisticated financial market in the U.K. This subject is important for two reasons: the survival of the Islamic banking model is hugely dependent on its risk management approach, and a bank must be able to manage those risks and challenges without compromising Shari’ah requirements. The study collects its data by using the method of a case study to obtain first-hand knowledge. The study concludes that identifying and managing key risks is crucial for the survival of the Islamic banking system and suggests a five-step risk management framework, with some analysis on measuring Shari’ah non-compliance risk and its impact on the liquidity of an Islamic bank.