Empirical Investigation of Risk Management Framework of Islamic Banks in Pakistan

This article discusses the empirical investigation of risk management framework of Islamic banks in Pakistan. It explores the different types of risks faced by Islamic banks and the characteristics of risk management in Islamic banking. The article also highlights the risk management framework and guidelines for Islamic banks in Pakistan.

Chapter 2
Literature Review:
Empirical Investigation of Risk Management
Framework of Islamic Banks in Pakistan.
.

LIntroductioniterature Review ........................................................................................................4
ISLAMIC BANKING RISK managerial process:....................................................................30
RESEARCH METHODOLOGY...................................................................................................34
REFERENCES..............................................................................................................................60

Introduction
The process of identifying, analysing and accepting or mitigating ambiguity in financial
decisions is called as risk management. Basically, risk assessment takes place as a shareholder or
portfolio manager analyses and tries to measure the potential for risks of an investing, including
a systemic risk, and then, considering the investment priorities and risk perception of the
portfolio, takes the necessary action (or inaction). In the world of banking, risk control exists
everywhere (Farook et.al.,, 2012) . It happens whenever an investor purchases a U.S. where a
mutual fund contracts to hedge his financial risk with currency swaps, because when a bank
conducts a background check through an investor before offering a private credit facility,
government securities over bond funds. Investment bankers use credit default swaps such as
futures contracts, and fund managers use techniques to reduce or efficiently control risk, such as
asset allocation, risk tolerance and role scaling.
In different opinion, risk management is consider the identification, assessment and
prioritisation of risks, accompanied by the adding significant use of assets to minimise, regulate
and evaluate the likelihood of tragic incidents or to maximise the realisation of possibilities. Risk
assessment describes a new form of risk which is 100% likely to exist, but is overlooked by the
company because of a lack of detection capability. These risks lower overall information
workers' efficiency, lower cost-effectiveness, sustainability, operation, output, credibility, market
equity, and output of earnings. Intangible risk assessment helps risk management to generate
instant benefit by recognising and reducing productivity-depleting risks.
The Islamic banking paradigm has grown to one-tier musharaka with various investment
resources. Capital investment reserves take the shape of profit sharing brokerage accounts mostly
on loan portfolio of Islamic banks. Financing accounts may be further defined as regulated and
unregulated, with the latter requiring redemption limits before the settlement date. Current
liabilities in banking institutions or trying to check / debit cards take the shape of qardhasan
(interest-free loans) that are entirely repaid on demand. In the investment property side, banks
should use following sources of financing: murabaha (price-plus or mark-up sale), instalment in
the series sale (medium / long-term murabaha), bai-muajjal (price-deferred sale), istisnaa / salam
(item delayed sale or pre-paid sale) as well as ijara (leasing) but also profit-sharing (musharaka
but also mudaraba). These methods of financing are used asset-side tools, using the concept of
profit-sharing to compensate depositors, are a special characteristic of banking institutions. Such

devices modify the essence of the threats posed by Islamic banks. A few of the critical
challenges confronted by Islamic banks are mentioned below. Credit risk seems to be the
absence of revenue resulting from the default of reimbursement by the counterparty (Tabash,
2018).
As signed and agreed, on moment or in filled. For instance, in murabaha agreements, credit risk
appears in the format of a transaction sovereign default mostly on complete and timely payment
of debts. Non - compliance may be the product of systemic risk (wilful default) or because of
outside organization's objective or company controls triggers. Wilfully default requires to be
identified obviously as Islam doesn't really enable bailout package depending on compensation
payments except perhaps in the scenario of wilfully default. Through the case of strategies of
funding profit-sharing (such as mudaraba and musharaka), the credit risk would be another non-
payment, whenever due, of another bank's portion by the entrepreneur. In such cases, this
difficulty may occur for banks due to the obvious inverted issue of knowledge in which
individuals can not have adequate information mostly on company's expected income.
Market threats, originating from macro channels, may be systemic or unsystematic, being
Assetor specific instruments. Money and equity price threats, for instance, will come under a
coherent method as well as the increase in the markets of goods or securities that the company is
concerned with will come under a particular business risk. The existence of a murabaha seems to
be that, for both the length of the agreement, the mark-up is repaired. Subsequently, the mark-up
values on these mutual fund deals could not be changed if the reference rate increases. Banks are
facing challenges associated from price changes in interest rates as a consequence. In profit-
sharing financial instruments such as mudaraba and musharaka, discount risk may also occur as
the profit-sharing proportion relies, along with other items. In addition, it happens as a result of
borrowing, not the method of trade (Khan, Khan and Tahir, 2017). Unlike mark-up danger, the
dangers of product prices happen as a consequence of the bank's keep, as in Salam, Ijara as well
as mudaraba / musharaka, products or renewable properties. Notice that within a single deal,
both the mark-up threat as well as the uncertainty of the store of value / asset bubble can occur.
In renting, for example, the machinery itself is subjected to the danger of product costs and
mark-up costs are related to deferred or unpaid leases. Liquidity risk emerges either from
problems in raising cash from repayments at acceptable rates (funding liquidity risk) and from
the selling of assets (asset liquidity risk). For Islamic banks, the financial leverage emanating

from both sources is important. Banking institutions are vulnerable to face serious liquidity
threats for a variety of reasons. Second, the securitisations of Islamic banks' current reserves,
which are primarily equity in nature, are subject to a fiqh limit. Second, banking institutions are
still unable to collect funds easily from the investors because of problems of financial products.
This question is getting more serious this is because there are zero cross-Islamic financial
markets for banks. Third, the last-resort borrower (LLR) offers customers with immediate
liquidity facilities if necessary. Existing LLR centres are premised on interest, and Islamic banks
were also thus unable to advantage from them (Rehman and et. al., 2018). The risk of directly or
indirectly failure arising from insufficient or failed organisational procedures, entities, and
technologies or from external incidents is an operating risk. Risk management in terms of
political risk may be severe in such institutions, considering the novelty of Islamic banks. In this
respect, operational risk particularly emerges as banks do not have adequately trained
professionals (capacity and ability) to undertake Islamic business transaction. The computer
programme present on the marketplace for traditional banks might not be ideal for Islamic banks,
explaining the various nature of industry. This relates to technology threats in the production and
application of information systems in the technology. The major activity of Islamic banks is now
in dealing (murabaha) and investment in equity funds (musharaka and mudaraba), new banking
legislation and regulations banning commercial banks from conducting such practises in most
jurisdictions.
Risk Management Framework in Islamic Banking
To start with what is risk management in banks? Some companies will have a particular risk
management framework in place to figure out the existing and the potential risks and to access
how to deal with them if they arise in particular time of making business situation. The
identification of risk, its measurement, mitigation, reporting and monitoring are the six major key
features of an effective framework. Islamic banks is an alternative to conventional banks. This
system was established in early 1970s with the aim of provision of shariah and financial services
such as investments, financing and trade prospect. In such a short period of time it has gained a
good amount of growth. These days some of the financial institutes are doing their activities in a
very risky environment (Ariffin, 2012).

The risks faced by these banks can be financial and non-financial risks. Financial risks can be
referred to as the risks in which the obligations and the liabilities cannot meet to the available
assets. It can be further distributed into market risk and credit risk on the other hand the non-
financial risks are faced by the banks itself which includes the legal, regulatory and the
operational risks. The risks which arise as an instrument or asset in the market is called market
risk and it is further classified as systematic market risk and unsystematic market risk.
Operational risks arise due to technical errors or human error or error in day to day operation of
the bank. Human risks are due to fraud and inefficiency, and technological risk is due to
telecommunication system and program failure. Legal risk is in a financial contract. It is
basically linked to the statues, legislation and regulations which have direct effect on the
requirements of transactions and contract (Abdullah and Khan, 2012).
CHARACTERISTICS OF RISK FACED BY ISLAMIC BANKS:
There is a difference between practical practices and theoretical formulations of Islamic
banking. Theoretically, Islamic banking works according to the Islamic economist that is the
liability of the banks should be limited to the investment. While on the assets side of the bank the
funds must be used in the profit and loss sharing agreements. Therefore if there is any shock on
the assets side will be neglected by the nature of risk sharing agreement of the investment. In this
way the Islamic banks are more stable and systematic as compared to the conventional banking
system. The risks which are related with the business of banks are shared with the account
holders. Islamic banks face some other kinds of risks which are due to the different
characteristics of Islamic banks. The risks which are faced by the Islamic banks includes the
credit risks, bench mark risks, liquidity risks, operational risk, legal risk, withdrawal risk and
fiduciary and shariah risk.
Islamic banking system should elevate the capital adequacy, and also elevate the company’s
assets through the bond, should increase the number of shares or other forms of financing with
these aspects of control it is expected to reduce the credit risk of Islamic banking.
RISK MANAGEMENT FRAMEWORK:

There are five major components which should be under consideration while creating the risk
management framework. These components include risk identification, risk measurements and
assessment, risk mitigation, risk reporting and monitoring and risk governance. The main
essential elements in risk management are its identification, measurement, monitor and the
management of various kinds of risks. This can be effectively implemented through a wider
process (Khalid and Amjad, 2012). For an individual financial institution the risk management is
dependent upon the size of the institution and nature of business. According to basel 2, the credit
risk is managed by standardized approach and internal rating based approach. IRB banks can
access the usage of internal estimation of credit worthiness to figure out the losses in future.
Risk identification: The step in identification of risk a company faces is to define the risk
universe which is list of all possible risks (Zarrouk, Jedidia and Moualhi, 2016). For example IT
risk, operational risk, regulatory risk, legal risk, political risk, strategic risk, credit risk. There are
various kinds of risks faced by the banks or financial institutions. Risk can be defined as the
exposure where the outcome is uncertain. Among the important risks that the banks faced is the
credit risk and it is due to borrower’s inability to meet the predetermined debt. The development
of a sound credit portfolio is only possible if useful precautionary measures are taken to mitigate
credit risk. Risk management in banking can be defined as the way banks deals with the risks and
the related playoffs, including its identification, classification and the methods used to measure,
mitigate, monitor and control risks. Effective and efficient management of risk has become a key
phenomenon for the success of banking business.
Risk measurement: This provides information on either a specific risk exposure or an aggregate
risk exposure, and the average of loss experienced due to those exposures. In measuring specific
risk exposure it is important to consider the consequence of that risk an overall profile of the
organization. Some risks might provide benefits while some may not. Another important point to
be noted is the ability to measure an exposure. Some risks are easier to measure while some are
not. For example market risks can be measured by observing market prices; nut to measure an
operational risk is not an easy task. Common aggregate risk measures includes value at risk,
earning at risk and economic capital.

Risk mitigation: After measuring and analysing risk now the company needs to decide on which
the risks to be eliminated or to be reduced. Risk mitigation can come into consideration through
an outright sale of assets or liabilities, buying insurance, hedging with derivatives or
diversification (Bilal, Talib and Khan, 2013).
Risk reporting and monitoring: It is necessary to regularly have a report on specific and
aggregate risk measure to maintain that the risk levels are at optimal levels. Financial institutions
provide regular risk reports. Other instituyions require less reporting. These risk reports are then
sent to the risk personnel having the authority to adjust risk exposures.
Risk governance: It is a process that ensures that all the company employees are performing
their works in accordance with risk management framework. Risk governance basically involves
defining the roles of all the employees, segregating duties and assigning authority to individuals,
and the board for approval of core risks, risk limits, exceptions to limits and risk reports and the
general overview.
PAKISTAN RISK MANAGEMENT GUIDELINES FOR ISLAMIC BANKS
These guidelines are issued by the SBP for the Islamic banking which are:The Islamic banks
should have a comprehensive procedure of risk reporting and managing, the requires a proper
and senior management over department for identification, measurement, it’s monitoring, for its
reporting and controlling (Daly and Frikha 2016.).They need to establish financing strategies
which are compatible to teaching of shariah.Islamic banks should establish suitable
methodologies for assessment of credit risk which is related with every instrument of Islamic
financing.Islamic banking system should have suitable policy for investment activities like
musharakh and mudarabh.Islamic banks should adopt methodologies which are suitable for the
assessment of potential and impact on the calculation of profit. Both mudarib and musharakh
partners and should mutually agree on the methods used.Islamic banks should have market risk
management framework for its assets. They should have appropriate policies for the liquidity
management.They are required to have framework for management of displaced commercial
risk, wherever required.The Islamic banking system are required to keep the interest safeguard of

all its depositors. They also should ensure the bases for assets, revenue expense and profit
allocation.The Islamic financial industry is basically consists of commercial and investment
Islamic banks, the Islamic companies provide shariah compatible finance services, mutual funds
and index funds. During the short period of time that is from the early 1970s the Islamic banking
have leaded to a tremendous growth in banking industry. But then these banking are exposed to
risks as compared to conventional banking (Rashid et al., , 2017).
So to ensure the presence of efficient risk management framework these guidelines are provided
by state bank of Pakistan in 2008. Over the last few years the Islamic banking is expanding in
Pakistan and creating more challenge to other banks to seek the potential operational risk
exposures. The final system dynamic models evaluates that Islamic banking system has found a
comprehensive method of action for identifying, assessing, understanding, analysing and
monitoring and controlling the operational risk exposures just to neglect any potential loss which
arises. This model also illustrates that the IBI banks in Pakistan came up with the efficient
mechanism to counter or to figure out various risks under the guidelines which are provided by
the regulatory authority (Said, 2013). This model is also helpful for managers, scholars,
shareholders, policy makers and regulators as they provide a useful and helpful in sights to them
which is to make them understand the operational risk management behaviour of Islamic
banking in Pakistan. Moreover this model also provides support to board and senior management
for not only the banks in Pakistan , but to all the Islamic banks around the world for establishing
a comprehensive, effective and efficient operational risk management framework by overcoming
any kind of deficiency in their existing system. This could be concluded by the fact that while
managing operational risk, the Islamic banking system in Pakistan are not throwing caution in
anyway but instead they are playing safe.
Third, the non-standardization of agreements makes it more complicated and expensive for the
whole position to negotiate multiple facets of an agreement. Financial firms are not covered from
threats that could or might not be actionable or that they should not foresee. After the deal is
executed, through use of structured contracts will also make agreements easy to manage and
track. Finally, the absence of Muslim courts capable of administering Islamic contracts raises the
legal consequences of these agreements being used in Islamic banks. Uncertainty over the true
market value of securities is generated by an adjustable interest rate on saving / affects the

results. In order to minimize the risk of failure leading to a smaller rate of return, wealth
retention can be an important consideration in the redemption decision of banks. This presents a
'withdrawal risk' from its standpoint of the banker that is related to the higher return on
investment compared to financial firms (Majeed and Zanib, 2016). Fiduciary risk may be
triggered by the Muslim Bank's violation of contract. For instance, the bank cannot really be able
to totally abide by the terms of individual schedules for sharia. Ability to effectively conform
with Muslim sharia either wittingly or unwittingly refers to a loss of trust among borrowers and
thus causes reserves to be withdrawn. Similarly, where depositor holders view a low rate of
return as breaking an investment contract or lack of funding by the company, a better rate of
interest than the marketplace can often add fiduciary danger. The objective of this essay is to
calculate the extent about which risk management practises (RMPs) and strategies are used by
Islamic banks in Pakistan in struggling with key risks. Design / research methods / method-A
structured questionnaire has been used covering six components: risk management (URM)
comprehension, risk appraisal and interpretation (RAA), risk recognition (RI), risk reporting
(RM), collateral risk assessment (CRA) and RMPs. This analysis finds that banking institutions
are very fairly effective in risk management, in which the most influential factors in RMP, URM,
RM and CRM. The findings of the paper are limited to Islamic banks' RMPs in Pakistan. This
text discusses the Islamic banks' RMPs in Pakistan. The findings can be seen as useful guidance
for developing RMPs in selected Islamic banks but would be of benefit to individuals involved in
the Islamic financial system (Ergeç and Arslan, 2013).
Islamic banking is among the largest rising assets of the global market, with unprecedented
growth in wealth and major bank numbers. The Islamic financial firms' overall assets crossed
US$ 1.8 trillion, with 375 Islamic finance operating worldwide. Throughout the last 4 years,
around 2009 and 2013, the annual growth rate of that same Islamic banking sector was 17.6
percent. Overall, it has been rising faster that banking reserves. Banks are increasingly facing
different forms of threats that can theoretically be harmful the effect on their company. Risk
management’s mission is to mitigate the detrimental impact that uncertainties has on a bank’s
profitability and resources. The relevance of the thesis derives with the need to analyse, from
moment to time, credit risk management throughout the financial sector, as risk management
practises are continuously changing due to the incorporation of diverse marketing strategies.

Increased risk reduction and additional legal standards have been implemented. The research
aims to examine the influence of risk mitigation mechanism components on commercial banks
activities (Ghenimi and OMRI, 2016).
Banks serve as a financial broker (i.e., borrower and debtor) for involved individuals. There have
been two significant explanations for the development of banking, i.e. because they provide
consumers with capital and investment banking. Banks receive consumers' investments and
spend money in lending to anyone in need of capital, while at the same time offering collateral
for the removal of funds. Banks are also responsible for the transformation of short-term
deposits. Any part of it is provided to the borrower on their invested balance of long-term loans
when offering an interest rate. For good banking practise, risk control is fundamental. Without a
mistake, all commercial banks face a huge range of threats today, like market risk, capital
adequacy, exchange rate threat, price risk and liquidity risk that could result in a financial system
collapse. Thus the and for success and stability of banks, effective risk control is utterly
mandatory. Iqbal and Mirakhor (2011) said that impact on bank faced credit and consumer risk
3 decades ago, and yet the financial sector has evolved with period and is already subject to
multiple uncertainties due to entire new which are not historically present (Majeed and Zainab,
2017). Two reasons and developments in the industry, the need for risk control are regarded:
First, following the collapse of the Bretton Woods international exchange rate regime,
heightened financial uncertainty culminated throughout the stability of that same currency
exchange rates as well as the interest payment. Secondly, something like a risk management
mechanism in financial markets to control risks associated with emerging products has been
posed by the accelerated launch of new products throughout the derivatives industry. Thirdly, the
financial system is evolving from a conservative model of financing to a conventional model of
lending activities for fee-earning.
After the international economic meltdown, risk approach has gained intensified interest,
although risk management strategies, procedures and approaches that used traditional and
Islamic banking are definitely becoming a significant topic for debate (Al-Wesabi, 2012). The
global volatility has raised the need to re-evaluate developing and developing nations' financial

structures. In addition, identifying the factors that have resulted in economic crisis is important.
Since the economic meltdown, it was assumed that the collapse of certain financial firms was
attributed to poor risk control procedures, risk assessment limitations, evaluation and reduction
strategies. Moreover, corruption and lack of morals have become the foundation of the entire
banking markets. After the financial crisis, which stresses the Shariah concepts relating to debt,
equity or risk, financial sector is seen as an option. Risk is a condition that, in the context of
business operations, is related to and triggers unlikely, unknown and repeated operations. For
any of this, equity is held within banking as a safeguard that protects the money of the
borrowers. There are many interconnected threats that may have consequences for all other
forms of threats. The weakness of the Basel I and II rules has been figured out by the separate
economic collapse. In addition, the demands and importance of many changes in the financial
risk management activities have been initiated by these emergencies. A really have to establish a
complex risk management system within institutions has been generated by this reconsidering
(Ashraf,et al., ,2016).
An up-to - date analysis of risk management plan, problems and developments in Islamic and
traditional banking industry of Pakistan is given in the present research report. It also reflects on
realistic execution and, from the viewpoint of various risk analysts and professionals, discusses
the diverse risk and risk control activities of banks. This research also shows the shortcomings of
banks working in Pakistan in their risk management activities and procedures. There is a
concurrent banking structure in Pakistan, where traditional and Islamic business operates next to
each other. It really would be important to assess both financial structures' risk management
practises (Ahmed, 2013).
Danger of the Industry
BCBS describes market defined as the probability of damages resulting from market price
volatility in and then off income statement roles (Ghosh, 2012). Risks that occur as a result of
changes in market conditions valuation of interest rates currency exchange premiums and even
adjustments in stock, asset and product markets. In contrast to executives, banks face business

threats in balance sheet and operational dealing. The foregoing are also the possible causes for
the market:
A)Danger of interest rate: danger resulting from the adjustment or fluctuation of the inflation
rate on stocks and bonds or loans. If interest increases, for instance, the price of a bond
decreases, so if the rates fall, the value of the product increases. In general, though, interest
expense is normally calculated according to the length of the bond. The following forms of
exchange rate uncertainties are faced by banks:
i. Base risk: This risk arises where the property yield as well as the liability expense
arises. Various rates are calculated, i.e., for e.g. Bases, LIBOR (London)
Commercial bank rate provided) vs. the prime rate of the US. Such separate
foundations will move in certain cases, which are a factor, different paths and even at
varying rates are Inconsistent sales and expenditure movements (Bhattacharya,
2010).
ii. Yield curve risk: That short-term investment growth level is reduced higher than the
long-term investment inflation rate. The institution typically takes short-term steps,
lending at low inflation and reinvesting in long-term investments, it provides higher
prices. The short-term rate as well as the long-term rate, however, will they vary
significantly to a great extent, which would cause wages and employment volatility
the banks' expenditures (Ghosh, 2012).
iii. Reprising risk: This danger is generated by the repurchase of revenues and expenses
different time points and speeds. If a borrower has a respective marketing, for
instance, if the rates rise, it would produce more revenue for the borrower, but, on
either hand, unless the rates fall, it would be a profit.
iv. Danger of option: this option remains because of the real alternative in certain
properties and assets responsibilities. In mortgage loans, for instance, the risk of
preference exists if the mortgage lender o wing to the adjustments in the interest rate,
transfers are made early. It should, this result in the bank's loss of revenue. It is hard
to find this sort of danger action and oversight (Vyas and Singh, 2010).

The interest rate is impacted by stock market liquidity, commodity fluctuations, monetary
policy, currency exchange rate fluctuations, trends in country’s financial transactions, as well as
expectations for retaining securities. The forecasting of fluctuations in interest rates that can rise,
decrease or stay steady over an amount of time is difficult. It is the duty of the fund's
policymakers to determine the interest rate critically pushing and drawing a roadmap for banking
on fluctuations in interest rates.
B. Foreign exchange risk: the probability of losses market volatility in foreign exchange rates of
trade (Bessis, 2011). Variations in profits as a part of the inflation of profits and expenditure at
currency fluctuations or increase in the level of foreign currency denominated profits and losses.
Often referred to as currency risk or transaction costs, currency exchange value is also referred.
Normally, this form of risk exists in foreign trade companies.
C. Equity risk: this danger of investment valuation decline understanding the dynamics including
its share market allows capital to be lost by some person or company.
D. Commodity risk: This problem has been exacerbated by the uncertainty in the potential
market prices of goods that cause equity market volatility. Grains, metals, minerals, energy etc.
comprise these resources. In resource risks, the forwarding is embodied:
 Price risk
 Quantity risk
 Cost risk
 Political risk
Liquidity risk: In banks, it is perceived to be the biggest risk because whenever a bank seems
unable to repay its obligations owing to the inconsistency between the duration between financial
assets, liquidity danger occurs. Banks most vulnerable to financial risks are those with a sizable
proportion of off-balance sheet products. The institution be able to remain solvent if the
economy unexpectedly changed (Said, Hasnan and Astrom, 2013). This vulnerability is known
as the vulnerability of uncertainty. This is the possibility that, if the funds unexpectedly run dry,
they would not be possible to stay stable. In the aftermath of the global financial market collapse
setting, this is much more relevant now. Funding is not easily accessible and inexpensive
anymore, so they must have a strategy.

Sadly, the possibility of liquidity will still be a weakness of the global banking paradigm.
There will still be at danger when they try to turn the short-term deposits towards long-term cash,
but if it's unavoidable. Creating mismatches among assets and liabilities duration is the secret to
handling credit risks, and also ensuring that those discrepancies hold sufficient funds circulating
in the system to both raise reserves and satisfy commitments as consumers ask about their
capital. Each one of these threats is interrelated, which may make it more complex to handle
them. Economic costs are theoretically inclusive, since the risk of volatility doesn't really exist in
the institution itself, because it comes from credit risks, economic risk, interest rate risk, etc.
Efficient liquidity risk control Bhattacharya (2010, p. 17), It aims to obtain investor trust, to
preserve relationships with creditors by fulfilling their credit conditions on schedule, and to
avoid the selling of properties at low rates in order to raise funds. The acceptable voltage
involves liquidity risk.
Error of financing: error of cash inflow replacement due to sudden losses or investments not
replaced by the borrowers.
Time danger: This danger of non - repayment of planned inflows of resources being paid,
risk of that is, when investments are carried out and transform into stressed assets.
Call chance: Chance of obtaining credit risk and failure to obtain credit risk profitable
market prospects, if desirable.
Operational Risk:
Operational risk is consider the threat of actual and indirect damages based on the non-
performance or adverse incidents of internal procedures, personnel and programmes. These
threats derive from the breakdown of the database infrastructure, the management framework,
the guidelines on appropriate vulnerability assessments and operational protocols for the prompt
introduction of remedial steps (Mohd Zamil, 2014). The threat that arises from inside is
organisational risk. There are the choices they, as a company, make that screw up things
externally, and other decisions taken by workers on a regular basis that can cause challenges for
your company. Insufficient security auditors as well as the responsibility of workers will lead the
bank to significant risks. It is important to demonstrate the reply, but impossible to understand.
Adding further internal policies and transparency may be the solution; however, sadly, the
breaking of internal policies is all too popular in the banking sector. Establishing a sense of
solidarity among the group members could be a beneficial place to begin. The incentive to break

laws is greatly reduced as everybody has a motive to make the bank prosper. It could also greatly
reduce this form of risk by adding surveillance systems to help detect dangerous activity and
bring an end to that as well. It describes that, at the following stages, organisational threats exist:
Human inaccuracies / frauds: this type entails an incompetency, internally or externally
deception and workplace activities resulting in a banking loss;
Processes: Process vulnerability requires insufficient documentation, inspection, decision-
making, governance and strategic systems and procedures.
Deficiencies, technological inefficiencies, etc., which result in bank losses;
Technical: Operational danger involves the mistake of modelling, the execution of the
professional procedures and the absence of appropriate risk measurement instruments in banks
(Yousfi, 2015).
Chance of Off-Balance Sheet
This risk exists because of contingent financial instrument (conditional). Letter of debt, future,
choice, forward deal and derivatives, for example.
Residual danger
Reputational Threat
This is linked with the possibility of harm to the bank's reputation, which would destroy the
value of lenders. The effects of reputational harm are a poor picture of the institution, a fall in the
stock market, less sales, litigation, lack of clients and trading partners, etc. At the control of the
economies, lenders may lose money with their investments while the markets are not behaving
properly. For todays modern banks, handling currency risk is important, particularly given the
volatile reality of the new markets. Managing business risk was never anything new for the
commercial bank, because with the recent economic years, it's really just freshly pressing. A
diversification approach is the safest strategy for controlling market risk. It can greatly reduce
this form of risk by guaranteeing that investments are invested across a wide variety of
investment opportunities (Sadiq, Arshed and Ahmad, 2017).
Chance of Compliance
There is a chance of enforcement due to a refusal to carry out legal practises, laws and legislation
and professional and legal principles.
Danger of the Nation

Constitutional risk is sometimes called national risk. This danger exists due to the entire
government official's intervention in the foreign debtor's failure to pay of the mortgage.
Banking Risk Profile
A research project on UAE commercial financial risk management practises was published by
Al-Tamimi (2002). His results indicate that the most influential risk in local and international
banks is default risk because threat is recognised using "evaluation by department head." In
comparison, there really is no distinction among local and international financial risk
management activities. A research study showed that 70 percent of the overall risk posed by
lenders is financial risk, while the remainder 30 percent is business and operating risk
(Arunkumar and Kotreshwar, 2015). Credit risk is perceived to be the most influential risk
causing bank uncertainty, while a sufficient sum of assets is retained as an efficient means of
protection against the lender's bankruptcy with exchange risk and counter-party risk.
The most significant threats facing UAE banks have been established, like "foreign exchange
risk, liquidity risk, operational risk and financial leverage." They struggle with their results and
claim that the possibility of foreign currency is not among the banking system which gives more
accuracy in trading.
There is no credit bubble with serious challenges in Banking institutions and UAE companies,
since the financial leverage in 2004 was 76 percent that was adequate. In comparison, a study
mostly on risk management plan of the banking sector of Brunei Darussalam was performed and
then the same risk was reported as that found by different economists. However, it is also
established that "default risk, leverage ratio, operating risk, reporting, operational risks and
financial damage" are now the big threats facing Islamic and traditional Bahraini lenders that
refute the results of previous research methods (Hadriche, 2015). In addition, a study found that
the most important threats facing institutions in Pakistan, Bahrain as well as the UAE involves
risk exposures, credit risk, liquidity risk, international risk. Anas and Mounira, (2008) indicated
there have been some requirement to reinforce risk control activities because there is a shortage
of risky financial gear currently on the market for Islamic banks. Financial institutions are not
licensed to always have exposure to short-term borrowing alternatives from both large banks and
financial institutions Islamic banks ought to retain a high degree of money market cash reserves

to satisfy consumer demands for withdrawals of withdrawals from their accounts. In 14 nations,
Ariffin et al. (2009) published a report on Islamic banks. Their results showed that the main risk
posed by banking sector is financial risk, accompanied by financial risks and currency risk. In
comparison, Salam and Istisna'a are much more dangerous than Murabaha and Ijarah, though
Mudarabah and Musharakah are deemed more unsafe than Murabaha, Ijarah and Istisna'a.
Hussain and Al-Ajmi (2012) also determined that the risk level of Islamic and traditional banks
based in Bahrain is not substantially different. Compared to traditional banks, Islamic financial
institutions face greater types of uncertainty (Hussain and Al-Ajmi, 2012). Comparably, Cihak
and Hesse (2008) assume that banking institutions are subject to some significant risks response
to difference in financial insurance transactions, their management and their funding mechanism
and about their legal criteria. Risk assessment relies on the international and domestic world of
banks, which is why threat detection through management must be continuously taken into
account, so that threat must be detected and a determination must be taken. Depending on the
case, whether the defined danger should be mitigated, shifted or acknowledged. Variability
throughout the financial market is triggered by a dynamic macroeconomic climate, with
inconsistent economic growth, unpredictable exchange rates and asset prices. Such an
atmosphere makes it impossible for lenders to accurately measure their capital and total
liabilities, like uncertain macroeconomic environments, leading to a greater possibility of bank
vulnerability to default risk. In addition, unreliable local currencies, which are deficient in a
significant levels of risk sensitivity is illustrated by external convertibility.
About any financial entity, risk control is the most critical practise as it covers all practises that
impact the overall risk (Srairi, 2015). In particular, strategic planning requires risk recognition,
assessment , monitoring as well as regulation to assess the risk is understood by threat
management team, the firm ’s risk tolerance is below the cap, i.e. approved by the court of
Directors, risk-taking judgments are centred on the risk-taking judgments the business's priorities
and strategic plan, the anticipated return mostly on cost incurred should paying off, examining
the experiences must be transparent and accurate and adequate funds should be available as a
risk hedge. Risk assessment is very well-defined as just a determination, assessment and
improvement process. This determination including the risks which are inherent throughout
banking as well as the formulation and execution of the required risk management actions. It is
possible to see risk control in a bank through two perspectives:

 (1) Regulatory standards for activities in risk management
 (2) Banks' cooperative risk assessment banks have also been offered instructions
regarding risk management plan, oversight and regulation by police councils under
government regulations (Sriyana, 2015).Despite the apparent fact which risk skills have
evolved overall, in view of recent legislation or supervisory observations and under brief
time periods, many banks also planned their risk management program. As a result,
changes have also been made using extremely manual methods and suboptimal
techniques, some of which are inefficient and costly to run, particularly in an
environment where transparency remains strong cost. As a consequence, through
rationalising procedures and improving technology, banks are looking for opportunities
to become far more efficient. Nearly three-quarters (73%) plan to boost risk control
performance during the next 3 years. However, new risks are being generated by the shift
to much more structured and much more digitised methods, market models and practises.
In last year's report, the industry had been on the verge of transition, increasingly
transitioning to the use of computer learning and machine learning. Their usage is a
problem for over half (59%) of CROs next year. Although the scale and pace of
regulatory reform is likely to be consistent across nations, there is no question that the
future brings further oversight for institutions operating in developing markets, monetary
and non - monetary. Public opinion, which is increasingly less accepting of bank defaults
and the use of public funds to rescue them, provides much of the momentum. Many
elements of the risk management regulatory system intended to avoid the occurrence of
the financial crash of 2008 are currently in effect in developing economies' stock system
(Rahman and Banna, 2015). But the prospect of external bank templates for the
measurement of capital requirements, and also the possible use of a structured approach
to the measurement of capital requirements. In other ways, too, policymakers are trying
to exert regulatory leverage. Banks are constantly expected to assist in clampdowns on
illicit and corrupt financial activities by spotting signs of laundering money, breaking
sanctions, bribery, terrorist funding and facilitating tax collection. Politicians often insist
that their banks, wherever they work in the country, conform to national regulatory
requirements. Banks working overseas would already cooperate with US bribery, theft,

and tax collection laws, for example. Eventually, legislation covering working policies,
environmental standards and financial integration could be enforced in the same
manner.Conceptualising the risk for the Islamic banking in PakistanThe Islamic
banking in Pakistan is taking a lead and growing its position and as the growth they even
face challenges regarding the fact that the conventional banking in the country is more
penetrative and are on lead by having the larger shares in the economy (Ishtiaq, 2015). If
user learn about the countries like Pakistan, Iran and UAE then they will enables to the
conclusion that these countries are running Islamic banking’s which are only focusing on
Islamic laws and terms while on the other hand the other countries like Malaysia,
Indonesia, Bangladesh, Egypt and Jordan are working on Islamic banking along with the
conventional banking. Foreign countries are also taking part in Islamic banking such as
USA, UK and Australia are leading and trying to explore new avenues in Islamic
banking.
If they try to learn about the Islamic banking then it is basically based on Islamic laws which are
helpful in providing solutions to several financial and non-financial problems. In Islam it is
clearly mentioned or it clearly states that the interest is illicit because it can cause a lot of bad
impact on the society such as poverty etc. In conventional banking, utilization of money in
advance is not essential, the point which they consider is to return money in advance and on the
other hand Islamic banks take risks while venturing that is they do not issue to take any interests
from their clients. Everything they process is based on sharia and with ethical standard of life. It
is entirely a new practice to explore in the country especially for Muslims but non-Muslims are
also taking advantages of Islamic banking and exploring new avenues. As Pakistan is a Muslim
country so it provides a favourable area for Islamic banking and the main objective of this
research is to identify opportunities for Islamic banking in Pakistan (Chattha, Alhabshi and
Meera, 2020).
In literature review we will focus on the ideology, scope, concept, difference between
Islamic banking and conventional banking in Pakistan and the challenges faced by Islamic
banking. Now the introduction to the Islamic banking it was first initiated in Egypt and by the
efforts of Ahmad El Najjar who started saving bank which are based on profit sharing in one of
the town in Egypt in 1963. Slowly within 4 coming years that is in 1967 there were nine more

such banks opened in Egypt. All these banks were practicing in the same manner that is none of
them were paying and charging any interest. These banks were making partnership with many
other institutions or persons and entities. The return which is withdrawal is given to the investors
or depositors. Then in around 1971 Nasir social bank was opened in Egypt which was also
named as ‘interest free commercial bank’ without disclosing any reference to Islamic banking.
Later on in around 1974 Islamic development bank was established in Egypt and this is possible
with the help of organization of Islamic countries and the primary concern for the establishment
of this bank was interest free operations which are based on sharia. The names of several Islamic
banks which were established lately were as follows:
 Philippine Amana bank in 1973
 Dubai Islamic bank in 1975
 Faisal Islamic bank in 1977
 Bahrain Islamic bank in 1979
In Pakistan it is started in 1980 which lend to the changes in banking company’s ordinance.
The principles of Islamic banking we first need to understand some economic terms like
interests, refund, cost of capital, economic growth, theory of interest, risk management while
considering these concept we will also connect to Islamic ideology to have a better
understanding about Islamic banking and its finance.
THE CONCEPT OF INTEREST (RIBA)
It particularly refers to gaining in monetary from the issued loan on a given principle amount and
according to Quran the interest or Riba which is given in order to increase the money of the
person does not increase in sight of Allah, and the zakat you pay to increase the money of the
person, its prayers will increase the wealth indeed.
ECONOMIC GROWTH
Capital formation through the economic growth can be developed. Capital formation can be
created by the following:
Paid up capital, retained earnings, borrowed funds

The first two forms are related to generate profit/loss while the other form that is borrowed funds
or long term debt earns interest. Islam encourages the betterment of society by spiritual and
delivering for economic betterment. Islamic banking proved its success to compete with
conventional banking in Pakistan. Islamic banks also play multiple roles to facilitate the different
stakeholders according to their needs. It provides interest free products to serve the economy
according to sharia principles. Other activities also includes like it also provides consultancy and
hajj services to compete with the conventional banks. This research is listed out the main
functions which are performed by the Islamic banks in Pakistani.Islamic Banking in Pakistan
By March 2014, the wealth foundation of the Islamic banks had crossed Rs. 1 trillion,
which constitutes upwards of 10 percent of total banking reserves and deposits. There seems to
be a opportunity for positive growth throughout the Islamic financial system and this is projected
that perhaps the commercial banks sales volume will double by 2020 (State Bank of Pakistan,
2014). On a monthly basis, the overall assets retained by the full-fledged financial institution and
Islamic Channels showed optimistic growth rates. Though Islamic screens have a comparatively
high level of economic growth particularly in comparison to the full-fledged Islamic bank
(7.4%), reserves were 13.3 percent (National Bank of Pakistan, 2013a). At just the end of 2013,
the Muslims financial sector’s net infection level (Non-performing financing) was 9 percent. In
addition to the actual banking sector, the Islamic financial industry in currently minimum
quantity at 12.1 percent in 2013, opposed to 9.7 percent in 2012 (State Bank of Pakistan, 2013).
Islamic banks have 19 institutions in Pakistan, comprising five full-fledged Islamic institutions
and bank islam given by the existing financial institutions, with such a branches and ATM of
even more than 1300 outlets in Pakistan since about June 2014.
In compliance with Islamic codes and regulations, commercial finance provide a wide
selection of goods and banking items to respective customers throughout the following
categories:
1. Banking for companies, micro and small;
2. Banking for investment;
3. working capital trade;
4. Banking for consumers;
5. commercial bank operations;

According to the notice (IBD Circular 2 of 2008) set by the state Bank of Pakistan, new
technologies are authorised also by Shariah consultant including the Islamic Bank. In addition,
all the modes of development and therefore should be rendered throughout the Halal form of
investment underneath the guidance of that same advisor Shariah. The best accomplished
including the Islamic central bank balance line involves the Shariah styles of investors in the
results of Murabah, Mudarabah, Ijarah, Salaam, Istisna, Wikala, Islamic refinancing of exports,
Musharakah and declining Musharakah again for corporate, industrial and agricultural sectors,
including for the Microfinance market, customers, funding of goods and banking and banking
firms. The responsibility side regarding banking, just from the other side, requires Shariah-
compliant investments in the context of debit card, standard checking account, saving Pay,
principal amount accreditation focusing on various fixed rates, accreditation of capital
expenditure etc. The Murabahah method used to provide customers with saving accounts,
savings account diplomas as well as value of applied, while the debit card is provided on the
grounds of Qard-e-hasna. Commercial finance also are going to offer those certain service
providers such as wealth management, preferred stock, advertising revenue, reinsurance,
transitional government, organised financing, infrastructure projects, acquisitions as well as
buyouts, concern of credit agreement, internet payments, lockers for economic security, ATM,
direct debit, compilation of export bills, E-statement facility, down payment willing to accept
ATMs, mobile financial services and via 24/7 contact centre service, locally and internationally
money transfer exchange, securities and ensures. Al-Baraka Bank (Pakistan) international limited
throughout Pakistan with such a system of 110 branches throughout Pakistan's various cities. The
company's assets securities since about December 2013 have been Rs. 87759.404 million. The
fund's capital structure was 11.97 percent that is in accordance mostly with legal authority
funded by the state national bank predicated on Basel III regulations. During the year, the fixed
asset turnover ratio, the earnings per share and also the non-performing credit ratio were not
available. In 2012, nevertheless, the lender's Payment period was 19.3% (KPMG, 2013), that is
used as a metric for correlation with several other lenders. The NPL proportion of every banking
is big, indicating that the bank lacks risk management practises. The Banking is ranked A and A1
either by Pakistan ratings agency (PACRA) with long- and short-term organisations. Bank Islami
group limited, through 201 locations in 77 major part of pakistan, is the 2nd biggest Islamic bank

focused on a branch and franchise system banks in pakistan. The firm's total resources were Rs.
86856 billion, via an asset yield and equity prices ratios of 0.23 percent and 3.38 percent for
2013, overall. The banks’ capital sufficiency is 15.37 percent, which is greater than that of the
national bank of Pakistan's approved cash reserve criteria. The lender's non-performing
percentage is very low, i.e. 2.85 percent, which would be a sign of effective procedures and
strategies for risk assessment. For both long and short-term entities, the Pakistan ratings agency
(PACRA) has valued A or A1 banks. In respective country, Burj banking corporation has a
product range of 75 outlets researchers in multiple cities. The financial institutions' net assets
have been Rs. 53389 million, with such an assets ratio of 2.25% and a return on assets of 20.06
percent. The lender's return on assets stands at 20.76 percent, which would be better than the
whole of Pakistan's major full-fledged Islamic institutions. This same company's non -
performing loans in 2013 was 5.77 percent, which is 4.3 percent higher than in 2012. For long as
well as short-term individuals, the bank is ranked A and A1 mostly by Bank the Credit Reporting
Agency of Pakistan (PACRA). In Dubai Islamic Banking (Pakistan) Restricted has a distribution
channel of 125 branches throughout the country and settlements. Since about the end of 2013,
the company had valuable alternative of Rs. 80256.612 million. The lender's ROA, ROE and
underperforming credit ratios are not accessible throughout the company's financial statement.
The NPL proportion as a proxy is extracted from a KPMG (2013) study. In 2012, the bank's NPL
ratio was 9.2 per cent, which is greater and shows a provision of sufficient credit risk
management. The JCR-VIS credit rating firm has scored A and A1 again for institution for a
long-term and short-term institution with a favourable and reliable bank worldview.
In Meezan commercial bank operates as a complete fledged Islamic banking with bank
branches of 351 departments in the nation's 103 urban centers. The bank has valuable alternative
of Rs. 329725 percent with such an assets ratio of 1.31 percent and ROE of 23.66 percent, which
is better than most full-fledged within Islamic banks. The financial institution had such a 3.6%
nonperforming loans proportion. The financial institution was valued AA as well as A1 + mostly
with lender's sound productivity by the JCR-VIS creditworthiness limited. Throughout the
economic growth of a country, the banking industry plays an essential role. Particularly in the
banking industry provides to the nation's infrastructure in a constructive way. Subsequently,
during the few decades after 2001, the conventional banks division of the finance market has
been the largest sector to rates of growth exceeding 30 percent. ConclusionThis research,

however, has used the methodology of machine thought to simulate the functionality of a system
by CLD, which visually portrays the full functioning of a complicated process. This concept
assumes that perhaps the basis for comprehending falsehoods in the device’s construction of
interrelationships. The interconnections are also the explanation why we believe for behavioural
behaviours and incidents. This research will analyse not just too full-fledged Islamic institutions,
and also traditional Islamic subsidiary financial institutions, which separates this research from
almost everyone else in the specific setting by providing a holistic visualisation of the total
structure where it functions of Pakistan. In addition, for all interested parties of such a system,
the comprehensive recognition of the operational risk framework of IBIs throughout Pakistan
may be beneficial, as this method makes this method easy to follow. Risk management in
conventional financial could be classified into the following 3 types (2012):
• Operating risk resulting from multiple forms of commercial banks; for all financial institutions,
it is comparable. Credit risk, even so, can also emerge from the preparation of contracts and the
implementation of asset-based regional trading blocs, such as those specific to these product
lines. Islamic law includes risk of lack of compliance as well as non-compliance with Shariah
regulations and laws, which can result in the loss of profits and credibility; or lack of compliance
with legal obligations such as water. Judicial risk resulting from banking activities or because of
legal uncertainty is in the interpretation and compliance of insurance transactions complying
with Shariah. The defined thresholds also are part of operating risk, according to the description
of risk management in Islamic financial institutions (Badaj and Radi, 2018).

RESEARCH METHODOLOGY
The methods of data collection are used primarily for the processing of data. A questionnaire
would be used for the compilation of primary data, while secondary information will also be
included in the purposes and priorities of magazines, documents, journal articles, review of
literature as well as studies by professional bodies, and for having recourse to all such
magazines, e-books as well as journal articles. Different websites including such academic
journals, IEEE, specific science etc. could have been used as data sources. This research would
use practical and theoretical knowledge and therefore use a method that is deductive and
inductive. Different hypotheses are used to analyse the data of inductively analysis. The
researchers can draw a reasonable conclusion with a deductive approach (Sekaran, 2012). A
delegation will be made to Pakistan to contact the executives of various banking sector, to really
get the necessary details about the existing risk management system, and also issues facing
Islamic banks throughout Pakistan. To respond to questions, an interpretativism would be used to
illustrate the comprehension of the gathered data by using different principles and analytical
aspects. However, since the analysis is primary and secondary data, the theory of realism may be
used to analyse the collected data including SPSS.
The rendering of the Asset Ratio (ROA) as well as the ROE ratio is being used to assess
and analysis the financial results of the Islamic Bank. Beta value shows the net benefit
proportion of debt assets that demonstrates the benefit per resource dollar and reveals bank
productivity and success (Akhtar, etc., 2017). A regression analysis can then be used to analyse
the effect of the risk management system on Islamic banks financial results in Pakistan. The
qualitative data obtained from the people would help achieve the study goals. To build and
address the research query, the NIST Risk Management System will be employed. The risk
control is the justice department's incorporation of network security principles and policies part
of the national institutes of Standards and Technology (NIST). It gives recommendations to a
greater degree by reducing the effect of different forms of risk. A mechanism that incorporates
risk mitigation operations into the lifespan of system creation will be developed through all the
risk management processes. In plain terms, risk is volatility that occurs due to unfavourable
benefit and loss fluctuations. Credit danger, liquidity risk, business risk, equity risk, interest rate
risk, exchange rate risk and discrepancy risk are among the key threats facing banking system.
Some of these are discussed underneath.

Transactional Risks: These risks present obstacles for businesses and individuals in working with
complex financial assets, as currency values can adjust over a short amount of time. Through
using financial derivatives as well as other related securities, such impact could be minimised. It
includes some sub parts that are discussed underneath:
Credit risk: The most influential vulnerability throughout the banking sector is credit risk. Credit
losses in financial institutions accounted for 60% of overall risks, according to Drzik et al.,
(2018). Credit danger seems to be the most apparent of the threats, maybe (Al Ali and Naysary,
2014). To assess the possibility that a consumer can start paying what's been borrowed to them,
bankers have to do their utmost. The new bank looks more strongly at systemic risk than at loans
to customers in the view of the new credit crisis. The financial institution would have to decide
how often default risk they are ready to take on a single client. For the particular case, this is
really a query users will have to tackle. Through bank can have clear terms of service under
which it is prepared to work, so they will need to decide what they are, but instead adhere to
them as credit cards consumers are brought in. Credit risk relates to the creditor loan defaults on
debtor or fulfilment of contractual obligations. This is an important component of investing in
limited income, and this is why ratings agencies assess the default risk of develop active and
businesses. The following portion of systemic risk is split through credit risk:
i. Default risk: if a creditor fails to pay forward the single or multiple mortgage sums ( Masood
and Ashraf, 2012). There are some default cases, like delay throughout the settlement of the loan,
bankruptcy of the lender, reorganisation of the monetary system owing to the lender's reduction
in credit status, etc.
ii. Migration risk: consists of direct failure due to all the loan and inventory cardholder's
internally and externally value, and also the possible indirect loss occurs as a result of credit
relocation. This drop does not indicate a penalty on compliance, but it raises the likelihood of
non-payment.
iii. Danger of exposure: It contributes to the elimination of the balance owing to the future
benefits of the group lending money (Bukair, 2019).
iv. Loss in default: applies to a portion of the balance of the debt that is not repaid by the
creditor. The system as shown in figure may be attributed to reimbursements from collateral.

V. Counterparty risk: based on the non-performance including the trading, this risk occurs
with the partner company.
It simply refers to the processes or the techniques which are used to identify, select and examine
the information about a topic. In a research, the selection of methodology permits the reader to
evaluate a study’s entire validity and reliability. More specifically it is about how a person
systematically organizes a study to make sure some valid and reliable results that points the
research aim and objectives. For instance how the researcher works on what data need to be
collected and what needs to be ignored. From whom it needs to be collected and in a research it
is known as “sampling design” then how to collect it which is called as “data collection
methods” and lastly how to analyse or examine it which is known as “data analysis methods” in
a research. Inductive research methods are used to identify an observed event while the
deductive methods are used to verify the observed events. Inductive research methods are related
to qualitative research and deductive research methods are more often associated with the
quantitative research. To address the key research objectives, that is they use both quantitative
and qualitative methods and the combination of primary and secondary sources. In these
researches the qualitative data supports the quantitative data and its results. The research
obtained is sorted since the researcher uses the qualitative and quantitative data types in the data
analysis.
The characteristics of research methodology are:
There need to be a systematic appeal which must be followed for accurate data. Rules, policies
and procedures are functional part of the process which sets the objective. The researchers needs
to follow few ethics and the code of conduct while observations and conclusions. A research is
based on a valid reasoning and includes the combination of both inductive and deductive
methods. The data collected in real time for actual observations in natural settings. There is
proper identification and examination of data so that there are no anomalies in the data
associated with it. A research creates a path for new questions. The existing data helps to create
more opportunities for research. Research is analytical in nature. It ensures the usage of entire
data so that there is no ambiguity in inference.
QUALITATIVE, QUANTITAIVE AND MIXED-METHOD METHODOLOGIES
Qualitative, quantitative and mixed methods are the different types of research methodologies
which are distinguished by whether they focus on words, numbers or both. Qualitative research

is a type of research which focuses on collecting and analysing words and the textual data, while
on the other hand quantitative research focuses mainly on measurement and testing using
numerical data. The mixed method methodologies basically is a combination of both qualitative
and quantitative research that is it tends to combine the best of both qualitative and quantitative
methodologies to integrate perspectives and create a new picture. The basic objective of this
methodology is integration which permits a more complete and synergistic usage of data than to
separate qualitative and quantitative data collection and analysis. Mixed method research are
originated in social sciences and has taken a growth in health and medical sciences includes
fields such as nursing, family medicine, social work, mental health, pharmacy and many others.
It is quite convenient for qualitative methodology to be used when the research aims and
objectives are exploratory. For example it may be used to understand people’s perceptions about
an event that took place, or a candidate. In contrast to this quantitative methodology is used
typically when research aims and objectives are confirmatory. For example, a quantitative
methodology might be used to measure the relationship between two variables or to test a set of
hypotheses.
Key differences between qualitative and quantitative methods: qualitative observation is a
research method that identifies the core characteristics of research variables, while the
quantitative observations are a research method which basically quantifies variables in terms of
statistical and numerical value.
Both quantitative and qualitative observations are used in a research for proper analysation of
data.
Characteristics of quantitative observation method: It is definite like other methods; it derives the
definite results which could be quantified. Therefore, by adapting this data analysis it would help
the researchers to reach out to more précised research outcomes.
Fixed findings –The outcomes from the quantitative observations are always constant. For
instance the freezing point of water is 0 degree c and it will remain constant until the research
variables are constant.
Research sample size-For quantitative observations to be more efficient and effective, the data
size must be large which helps in providing the researchers enough information for objective
findings.

Characteristics of qualitative observation method: In qualitative observation there is no right,
wrong or definite answers. In this method the researcher seeks the varying answers because if the
data sample is more dynamic there will be better research outcomes. A qualitative observation
pays more attention on how the context of research influences the information outcomes, and
findings. It is subjective in nature. It seeks every research process differently
Both quantitative and qualitative observations can be suggested for a research as both of these
have their individual research investigations which can be applied in the given observations
accordingly. Qualitative observation it results in more in depth and descriptive research
outcomes, unlike quantitative observations. As in qualitative observations the researchers pays
more attention on the nature of research variable to discover the true characteristics and
behaviours of these variables in their natural environments, while on the other side the
quantitative research focuses only on the numerical value of research variables without knowing
the actual nature of these variables so therefore it is more appropriate for research processes that
analyses quantifiable data.
Disadvantages of qualitative observations over quantitative observations: Due to it’s in depth
description of research variables, the qualitative observation is more time consuming, capital
intensive and also requires a high level of experts. So it might not be suitable for those
investigations which are set within a short time, whereas the quantitative results in more definite
research outcomes in short period of time frame. The data in quantitative observations can be
quantified easily by numerical parameters, so it derives more precise outcomes than qualitative
observations.
RESEARCH STARTEGY
It introduces the main component of research operations like the research area and focus, the
research perspective, the research designs and the research methods. It basically means how a
person could can answer the following research questions set and how can one implement the
methodology to it. In addition to the existing standards of risk mitigation provided also by
supervisory authorities on Banking Regulation (BCBS) as well as other global class setting
entities, the principles of these guidance are intended. These recommendations on risk mitigation
in Islamic banking offer detailed guidelines on the implementation of a series of principles by
each type of risk based on discussions on market practises. In Islamic Banking, an elaborate
monitoring and risk management mechanism is in place to define, evaluate, track, report and

regulate related risk classes, with adequate top management level supervision. The proceeding
take all reasonable steps into consideration in order to conform with Shariah laws and standards
and to maintain sufficient disclosure to the governing body of risk control in Islamic Banking. As
for every commercial bank, BOD as well as Senior Executive Board monitoring are required for
risk management process of IBIs. The BOD approves risk assessment targets in Islamic financial
institutions as well as the IBI financial situation, risk profile as well as appropriate risk rules,
policy and guidelines. Such permissions shall be passed to any and all IBI rates interested in
Islamic banking application and risk mitigation guidance (Khattak, Ullah and Ullah, 2013).
The BOD assures the presence of a sound risk management framework, including
appropriate measuring, tracking, reporting, including threat-exposure control mechanisms, for
both the performance of IBI operations.
IBIs get a Shariah Specialist in position to monitor that the goods and operations of the IBIs
follow the Shariah rules and standards as recommended by CENTRAL BANK through Shariah
Advisor in compliance with corporate governance structure and CENTRAL BANK 's Fit as well
as Applicable Guidelines for Shariah Advisers. In order to discourage risk concentrations and
insure that IBIs have ample resources against such exposes, the BOD trigger inflammation the
restrictions on aggregated finance and adverse events to investment. The BOD evaluate and,
where required, make relevant improvements in the implementation of regular risk management
operations in Islamic banking.
Continued implementation of BOD 's strategic strategy shall create consistent boundaries of
responsibility and responsibilities for risk assessment, management and planning. Top leadership
maintains that the funding and expenditure activities are well within the limitations accepted.
Respondents are aware that the role of risk mitigation is differentiated from that of risk analysis
and respond directly to either the BOD or top management. The financial planning strategy is
carried through by the employees of an autonomous risk analysis department in islamic financial
institutions in compliance with the scale, scale and sophistication of IBI's core business. There
are four main types of research strategy which are the case study, qualitative interviews,
quantitative survey and action oriented research. These strategies entails us the following
Case study: This focuses on a detailed observation of a single case or a small number of cases. In
case study basically the information is gathered from different contexts and by different kinds of

data such as surveys, interviews and analysis of documents. Case study permits a composite and
multifaceted investigation of a problem.
Qualitative interviews: There are so many qualitative interviews and this is most used method for
collecting data. It allows access to rich information. The interviewers should have a wide range
of skills, good social skills, listening skills.
Quantitative survey: This method is widely used in business research and allow access to large
number of participants. The online sites available provides wide and cheap distribution of
surveys and the organization of the responses.
Action oriented research: This focuses on to the practical business which is towards a change or
production of recommendations for change. This is often carried out by insiders.
RESEARCH APPROACH
These are the plans and procedures for the research which narrowed the steps from broad
assumptions to more detailed ways of data gathering, its analysis and its interpretation. These
plans also involves various decisions which cannot be taken in a way that it makes sense to the
person or the order of their presentation but instead the overall decision should be concerned to
the approach which is used to study a topic. Then the selection of research approach is also
dependent upon the nature of the research problem or the issue which is being addressed, by the
researcher’s personal experiences for the study. The three main approaches to research are
quantitative, qualitative and mixed methods. Research approach can be divided into three types
deductive, inductive and abductee research approach. Discussion regarding research approach is
vital for any scientific study. The qualitative data needs an inductive approach for the analysis.
On the other hand the quantitative data uses the deductive approach. In mixed methods both
inductive and deductive approaches for the analysis are utilized. There must be some sort of
consistency between the methods, methodology and analysis. The liquidity management (CRM)
is among the most vital aspects to be performed by banks to sustain ever-banking competition.
Pakistan’s main banking industry expanded at over 6% in 2016 and was accounted for 3.3% of
its share throughout the gross domestic product (GDP) across same year. As per figures from the
State Bank of Pakistan, Islamic banking reported an even greater rise of about 14 % in 2016.
This study assessed the performance of particularly in the banking business with regard to CRM,
especially in Islamic (IB) and traditional (CB) banks. The task of banking mediators is
performed and the key function of government is for short-term reserves to be transformed

through long-term credit. This leaves banks susceptible to credit risk; lenders can be forced into
liquidity by loss by financial institutions or some other unfortunate circumstance. The banks'
excellent liquidity and/or credit management efficiency thus guarantees the integrity of the
financial institutions and helps to deter default. Therefore, the review of the consumers' financial
records and records is very relevant when taking a credit judgment and a key factor in mitigating
the threat of credit. The control of profits is related to as operating number fraud under the
General Accounting Principles. The research by Abdul Manab et al., (2015) showed that, until
the factor of benefit control was factored, the financial leverage was influential in assessing a
credit risk because after that. It was indeed important for everybody to notice that throughout the
system that was not adjusted for income control, the achieve comprehensive was key, whereas in
the framework which took account of earnings management. Borrowed losses may be triggered
by the bank's competitor failure or by a drop in market value resulting from the banks money or
even the counterparty's credit rating movement. A migration rating credit approach allows to
quantify credit portfolio risk through an overview spread of investment values. Credit risk is
subdivided into another possibility of losing due to change throughout the valuation of loans and
the possibility of losses due to lack of compliance with the transaction financial commitments
(credit default risk), lead to a reduction in the value. Risk management for banking is understood
in terms of how banks treat threats and associated profits, including defining and classifying
banking risks and approaches used for assessing, mitigating, reporting and managing risks. New
measures to assess risk could be identified in the new dynamic banking sector in the area of risk
control. Adequate risk control is a reality that stops the decline of the banking industry. Efficient
and reliable risk control is becoming a phenomenon central to the performance of banking
businesses.
RESEARCH PROCESS
It involves identifying, locating, assessing and analysing the information which is required to
support the research question, and then developing and implementing it in by own ideas. These
are the skills required by a person anytime while writing a report, proposal or to present a
presentation. The research process can be carried out into seven steps, making it easier and
manageable to understand. These steps involves the identification and development of a topic,
finding the background information for it, using catalogues to find books and media related to it,
using indexes to find periodical articles, finding additional internet resources, evaluation of the

content which has been collected and cite whatever been collected using a standard format. The
research processes is an important step towards executing a research or study. Deeper knowledge
of research process will help in identification of similar features occurring in different fields. The
traditional banking sector, nevertheless, is already functioning in Pakistan over the last age 65
and has long connections as a performance of Islamic banks, however, as commercial finance
have fewer bad loans and higher quality investments than financial institutions, trade has
intensified. An operational quality is generally correlated with the everyday business of an
Islamic financial institution. As seems to be the situation for traditional banks, this could still be
evident in the activities of an Islamic financial entity. Academia, professionals and policymakers
believe that successful risk management is crucial to the performance and sustainability of
Muslim or traditional banks, but that its value increases with time, especially after financial crisis
and recessions. Not only does an efficient risk management strategy mitigate the impact of
threats on bank results, but it also prevents the entire financial sector from any significant failure
or crisis.
The goal of the survey is to examine Pakistan's Islamic financial sector's risk management
structure with regard to organizational threat by creating a System Dynamic Model (SDM) via a
new approach towards system thought. The most important threats facing Islamic financial
system are risk identification, and understanding of the interconnections between different
characteristics of financial issues and they control is vital. n In order to evaluate, recognise and
record the materials are going of different liquidity risk management factors in the risk
management program of Pakistani Islamic banking, this analysis uses this information thought
method to formulate the Causal Loop Diagram (CLD) to determine identify, recognise and
record the complex behaviour of different risk management factors throughout the risk
management process of Pakistani Islamic banking industry an d make the system easier. The
SBP is recommended by Islamic financial institutions to consider any risk of disruption to their
operational activities, such as the possibility of losing caused by poor financial reporting,
procedures, techniques, structures as well as people, or external events. Owing to lack of
compliance regarding Shariah but also fiduciary commitments, managers are also expected to
consider possible causes of damages (Grira, Hassan and Soumaré, 2016). In addition, it is
important for everyone and every Muslim institution to recognise main banks. Performance
measures and efficient organisational risk management measures such as transfer of authority,

division of duties, rules of ethics, annual obligatory vacations, customer selling, continuity
planning , management of grievances, salaries of workers, recruiting and preparation, computer
system of diet and physical monitoring, etc., regardless of their magnitude and scope.
ETHICAL CONSIDERATIONS
It can be specified as one of the most important part of a research. If this part is missing in a
research the dissertations may be even come to failure. The ethical considerations can also be
addressed at individuals and societal levels. The way that individuals are affected by the conduct
of others ethical considerations. The most important principles related to ethical considerations
are:
 Research participants should not be subjected to any harm in anyways.
 Respect for the research participants should be prioritized.
 Whole consent should be derived from the participants related to the study.
 The protection of the privacy of research participants has to be ensured.
 Confidentiality of research data should be ensured.
 The anonymity of individuals participating and organisations participants in the research
has to be ensured.
 Communication related to the research should be done with honesty and transparency.
 Any kind of misleading information or representing the primary data findings in a biased
way must be avoided.
 Deceptions or exaggeration about aims and objectives of research must be avoided
Voluntary participation is important in the research and moreover the participants have the right
to derive from the study at any stage if they want to do so. Respondents can participate on the
basis of informed content. The main objective of informed consent is to provide enough
information and assurances about taking part which allows the individual to understand the
results of participation and to get to a fully informed, considered and freely decision regarding
whether to do or not to do so. Also the use of offensive, discriminatory or other languages which

are unacceptable needs to be avoided in the formulation of interviews, questions etc. privacy and
anonymity of the respondents should be prioritized.
DATA ANALYSIS
In other words, the chapter on methodology should explain design decisions by
demonstrating that the approaches and techniques selected are better suited to research goals and
objectives. A good technique for analysis delivers statistically sound results, whereas a bad
technique does not. In order to interpret and clarify the knowledge collected the most critical
aspect of a detailed study is to encourage use of such mathematical methods. In order to provide
the proper understanding of relevant material, this method must be used in research.
Furthermore, a comprehensive data collection approach is powerful to detect the thorough
information of the applicant’s significance to the subject of study. The theoretical definition
which facilitates the comprehension of reporting rules and regulations that are effective in
assisting the declaration is indeed effective for quality data analysis. In order to complete the
respective research different question are asked to 60 respondent living within Pakistan.
Questionnaire
Q1. Do you think IB and ongoing FS is true to the teaching of ISLAM?
Yes
No
Q2.What conformity with the norms of Islam and then in accordance with customer’s
preferences?
Agree
Fully agree
Disagree
Strongly disagree
No comments
Q3. Does IB is focuses Investing in business where there is no Gharar?
Yes
No
Q4. Does IB different from other commercial banks except in complying with Shariah legal
prescriptions with regard to product offering?

In many condition
Totally different
Exactly the same.
Q5. Shariah scholars play their role while issuing different products?
Many time issue create
They follow IB guidelines
Nothing is noted down on paper.
Q6. Do you think IB Do not earn income through unfair means?
Not sure.
Maybe do some other things
Yes
No.
Q7. Are IB in consonance with the principles of fair dealing, justice and benevolence?
Follow Principle
Tries to do thing as per conventional banking
Provide Transparency at every point.
Q8. Does Islamic finance are being achieved by Islamic Banks Promoting sustainable
development projects?
Better future for Pakistan.
Lead to major losses due to lending habit
Developing country in next 20 years
Q9. Does IB focus on enhancing product and service quality?
Yes better services
No
Q10. Do you think following products and services of Islamic finance are really Islamic?
Mudarabah
Musharakah
Sukuk
Ijarah
Takaful
Murabahah

DATA SHEET
Q1. Do you think IB and ongoing FS is true to the
teaching of ISLAM?
Frequency
Yes 40
No 20
Q2.What conformity with the norms of Islam and
then in accordance with customer’s preferences?
Frequency
Agree 15
Fully agree 10
Disagree 20
Strongly disagree 10
No comments
5

Q3. Does IB is focuses Investing in business
where there is no Gharar?
Frequency
Yes 45
No 15
Q4. Does IB different from other commercial
banks except in complying with Shariah legal
prescriptions with regard to product offering?
Frequency
In many condition 30
Totally different 25
Exactly the same. 5

Q5. Shariah scholars play their role while issuing
different products?
Frequency
Many time issue create
15
They follow IB guidelines
30
Nothing is noted down on paper.
15
Q6. Do you think IB Do not earn income through
unfair means?
Frequency
Not sure. 15
Maybe do some other things
20
Yes 10
No. 15

Q7. Are IB in consonance with the principles of
fair dealing, justice and benevolence?
Frequency
Follow Principle 35
Tries to do thing as per conventional banking
15
Provide Transparency at every point.
10
Q8. Does Islamic finance are being achieved by
Islamic Banks Promoting sustainable development
projects?
Frequency

Better future for Pakistan.
35
Lead to major losses due to lending habit
10
Developing country in next 20 years
15
Q9. Does IB focus on enhancing product and
service quality?
Frequency
Yes better services
45
No 15
Q10. Do you think following products and services
of Islamic finance are really Islamic?
Frequency
Mudarabah 10

Musharakah 10
Sukuk 10
Ijarah 10
Takaful 10
Murabahah 10
Statisti
cs
Q1. Do
you
think
IB and
ongoin
g FS is
true to
the
teachin
g of
ISLAM
?
Q2.What
conformity
with the
norms of
Islam and
then in
accordanc
e with
customer’s
preference
s?
Q3.
Does
IB is
focuse
s
Investi
ng in
busine
ss
where
there is
no
Gharar
?
Q4. Does
IB
different
from other
commerci
al banks
except in
complying
with
Shariah
legal
prescriptio
ns with
regard to
product
offering?
Q5.
Shariah
scholar
s play
their
role
while
issuing
different
product
s?
Q6.
Do
you
think
IB Do
not
earn
incom
e
throug
h
unfair
means
?
Q7. Are IB
in
consonanc
e with the
principles
of fair
dealing,
justice and
benevolenc
e?
Q8. Does
Islamic
finance
are being
achieved
by Islamic
Banks
Promoting
sustainabl
e
developm
ent
projects?
Q9.
Does IB
focus on
enhanci
ng
product
and
service
quality?
Q
1
0
.
D
o
y
o
u
t
h
i
n
k
f
o
ll
o
w
i
n
g
p

r
o
d
u
c
t
s
a
n
d
s
e
r
v
i
c
e
s
o
f
I
s
l
a
m
i
c
f
i
n
a
n
c
e
a

r
e
r
e
a
ll
y
I
s
l
a
m
i
c
?
N Valid 60 60 60 60 60 60 60 60 60 60
Missin
g 0 0 0 0 0 0 0 0 0 0
Mean
1.33 2.67 1.25 1.58 2.00 2.42 1.58 1.67 1.25
3
5
0
Median
1.00 3.00 1.00 1.50 2.00 2.00 1.00 1.00 1.00
3
5
0
Mode 1 3 1 1 2 2 1 1 1 1
Std.
Deviation
.475 1.258 .437 .645 .713 1.124 .766 .857 .437
1
7
2
2

a.
Multiple
modes
exist.
The
smalles
t value
is
shown
Frequency Table
Q1. Do you
think IB
and
ongoing
FS is true
to the
teaching of
ISLAM?
Frequency Percent Valid Percent
Cu
mu
lati
ve
Pe
rce
nt
Valid Yes 40 66.7 66.7 66.7
No 20 33.3 33.3 100.0
Total 60 100.0 100.0

Q2.What
conformity
with the
norms of
Islam and
then in
accordance
with
customer’s
preferences?

Frequency Percent Valid Percent
C
u
m
u
l
a
ti
v
e
P
e
r
c
e
n
t
Valid Agree 15 25.0 25.0 25.0
Fully agree 10 16.7 16.7 41.7
Disagree 20 33.3 33.3 75.0
Strongly disagree 10 16.7 16.7 91.7
No comments 5 8.3 8.3 100.0
Total 60 100.0 100.0

Q3. Does
IB is
focuses
Investing
in
business
where
there is no
Gharar?

Frequency Percent Valid Percent
Cu
mu
lati
ve
Pe
rce
nt
Valid Yes 45 75.0 75.0 75.0
No 15 25.0 25.0 100.0
Total 60 100.0 100.0

Q4. Does IB
different
from other
commercial
banks
except in
complying
with Shariah
legal
prescription
s with regard
to product
offering?
Frequency Percent Valid Percent
C
u
m
u
l
a
ti
v
e
P
e
r
c
e
n
t
Valid In many condition 30 50.0 50.0 50.0
Totally different 25 41.7 41.7 91.7
Exactly the same. 5 8.3 8.3 100.0
Total 60 100.0 100.0

Q5. Shariah
scholars play
their role
while issuing
different
products?

Frequency Percent Valid Percent
C
u
m
u
l
a
t
i
v
e
P
e
r
c
e
n
t
Valid Many time issue create 15 25.0 25.0 25.0
They follow IB guidelines 30 50.0 50.0 75.0
Nothing is noted down on
paper. 15 25.0 25.0 100.0
Total 60 100.0 100.0

Q6. Do you
think IB Do
not earn
income
through unfair
means?

Frequency Percent Valid Percent
C
u
m
u
l
a
t
i
v
e
P
e
r
c
e
n
t
Valid Not sure. 15 25.0 25.0 25.0
Maybe do some other things 20 33.3 33.3 58.3
Yes 10 16.7 16.7 75.0
No. 15 25.0 25.0 100.0
Total 60 100.0 100.0

Q7. Are IB in
consonance
with the
principles of
fair dealing,
justice and
benevolence?

Frequency Percent Valid Percent C
u
m
u
l
a
t
i
v
e
P
e
r
c
e
n
t
Valid Follow Principle 35 58.3 58.3 58.3
Tries to do thing as per
conventional banking 15 25.0 25.0 83.3
Provide Transparency at
every point. 10 16.7 16.7 100.0
Total 60 100.0 100.0

Q8. Does
Islamic
finance are
being
achieved by
Islamic Banks
Promoting
sustainable
development
projects?

Frequency Percent Valid Percent
C
u
m
u
l
a
t
i
v
e
P
e
r
c
e
n
t
Valid Better future for Pakistan. 35 58.3 58.3 58.3
Lead to major losses due to
lending habit 10 16.7 16.7 75.0
Developing country in next
20 years 15 25.0 25.0 100.0
Total 60 100.0 100.0

Q9. Does IB
focus on
enhancing
product and
service
quality?

Frequency Percent Valid Percent
C
u
m
u
l
a
t
i
v
e
P
e
r
c
e
n
t
Valid Yes better services 45 75.0 75.0 75.0
No 15 25.0 25.0 100.0
Total 60 100.0 100.0

Q10. Do you
think
following
products
and
services of
Islamic
finance are
really
Islamic?

Frequency Percent Valid Percent
C
u
m
ul
at
iv
e
P
er
c
e
nt
Valid Mudarabah 10 16.7 16.7 16.7
Musharakah 10 16.7 16.7 33.3
Sukuk 10 16.7 16.7 50.0
Ijarah 10 16.7 16.7 66.7
Takaful 10 16.7 16.7 83.3
Murabahah 10 16.7 16.7 100.0
Total 60 100.0 100.0

Analysis- On the basis of above charts and measurement of mean, mode, median this can be
stated that IB can be useful to understand Islam. As well as IB contributes in focusing on
investing. In addition to this, IB is helpful for generating income by unfair means. Majority of
respondents believe that IB plays a key role in order to enhance product and service quality.
Importance of Regression analysis
Regression analysis means the way in which factors could have an effect numerically.
For a small company it is critical that regression analyses help to recognise the variables that
matter so much and that they can neglect and the relationship between these factors. The value of
regression approach is that it offers a powerful mathematical technique which makes it possible

for a company to explore the relation among two or more potential confounders. The process of
regression foresees that two separate variables, recognized as the dependency as well as the
independent, have to be related. Suppose you like to estimate the company's potential revenue
and find revenue rising or decreasing, based on whether the GDP is back and forwards. It is
necessary to recognise that a study of regression is fundamentally a numerical problem. Firms
have introduced many mathematical principles as they could be helpful in allowing an
organisation to recognise a set of critical problems but instead make educated, well-studied
choices on the basis of various areas of evidence. This is perhaps the most commonly used
method of linear regression in the industry and includes predicting potential prospects and risks.
Data maintenance, for example, may include an examination of competition which predicts the
number of products that customers buy in the upcoming. Prescriptive modelling will forecast
with mathematical formulas the number of customers who would go over the banner and using
that to position panels on which shoppers are most visible. And insurance providers utilise
statistical analyses to measure the financial status and the future number of default lawsuits of
policyholders. Also the most experienced and diligent administrators make misconceptions.
Regression research facilitates the detection and reversal of mistakes by administrators and
companies. Suppose for instance a bank manager thinks it can boost profits by increasing
banking hours. The study of regression could indicate that the small rise in revenue does not
suffice to compensate for the increased labour and maintenance costs (e.g. the use of even more
electricity). Using the regression study, a manager may decide that hours decrease just wouldn't
increase earnings. This will help the boss escape an expensive error. Multi-linearity is an issue
which can only occur from many studies of regressions. It refers to a condition in which two or
three of the different variables are strongly correlated. Statistical analysis measurements like the
inflation-factor of variance (VIF) can be used to diagnose this problem. In the case of
multilinearity, the regression equation should be excluded in one of the hugely correlating
variables. Autocorrelation occurs because there is no independence of the remaining elements of
a regression model. (A residual equals the difference between a regression function of Y 's value
expected and Y's real value). Autocorrelation may be observed in residual graphs or by more
formal statistical measures, for example the data of Durbin-Watson. With suitable regression
factors modifications autocorrelation can be removed. Heteroscedasticity means a condition
where there are no equivalent discrepancies between the residues of a linear regression. This

approach can be stated by a track of the remaining materials and data transformations can
periodically be used to solve the problem.

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