Empirical Investigation of Risk Management Framework of Islamic Banks in Pakistan

2.Programme of Research
2.1 Title of the proposed investigation (to appear on the certificate unless later modified via an R9):
Empirical Investigation of Risk Management Framework ofIslamic Banks in Pakistan.
2.2 Aim(s)and objectives of the investigation(bullet points only):
Study Aim:
 The aim of the study is to empirically investigate risk management framework of Islamic banks in Pakistan.
Study Objectives:
 To briefly discuss the risks faced by Islamic banks and describe the difference between the risk faced by
Islamic and conventional banks
 To empirically analyses and investigate the relationship between financial performance and risk management
of Islamic banks.

 To identify the main techniques and practices of risk management in Islamic banks of Pakistan.
 To investigate the efficiency of risk management structure of Islamic banks in Pakistan.
 To discuss the challenges faced by Islamic banks in Pakistan regarding risk management.
2.3 Give an account of the proposed plan of work for the research to be undertaken for theMPhil and/or PhD. Include its
relationship to previous work, with references, and its intended outcomes (between 1000 and 1500 words).Please
include word count.(1487)
Introduction
The modern Islamic banking system is different as compare to conventional banking system(AlimshanFaizulayev, 2011)and the
history of modem day's Islamic banking system isnot as older as conventional banking system(Shabbiretal.2012).In the
1970s, the first ever current Islamic banking system was introduced in the Middle East (Ali,2015). After the tremendous success of
the Islamic banking system since its introduction to the world. The only purpose of the bank was to implement sharia principles
(Alam and Rizvi, 2017). The projected assets of the Islamic banks will be worth $3.5 trillion by 2020 with the estimated
growth of between 10-12% over the last 10 years and more than 622 Islamic financial institutions has been established
worldwide(arabianbusiness,2016). There has been a significant growth of 35% in 2017 of Islamic banking industry in Pakistan.
As per The State Bank of Pakistan, there was an increase in profit before tax by Islamic banking sector amounting to Rs.23

billion in 2017. By the end of 2017, there were about 21 Islamic banking institutions out of which 5 were fully based on
Islamic banking system and 16 were conventional banks with Islamic banking windows (Abdul Rahman, 2018).Islamic banks
in Pakistan need to pay more attention towards its risk management structure in order to keep its growth consistent every
year or to increase its assets value in the coming years(Salman Skeikh,2017).
Risk management plays a crucial role in the survival, growth and progress of Islamic banking sector. But this study will
focus on the different risks that are faced by the Islamic banks and to identify the different methods of risk management to
empirically analyse and investigate the risk management framework (Naceuret.al., 2017). Commonly used risk management
process which includes identifying the risk, measuring and analysing the risk, mitigating the risk and monitoring and reporting
the risk will also be the part of the investigation.
Literature Review
Islamic banking system is facing a greater challenge in identifying and analyzing the risk as compared to the conventional banking
system. One of the main reasons for such a significant challenge is because of the specific features of financing contracts, liquidity
infrastructure, legal requirements and governance of Islamic banking system (Cihak and Hesse, 2008). The performance of banks
linked with the good risk management practices and many studies on the relationship between risk management and financial
performance are based on conceptual nature (Al-Tamimi et.al., 2015). In modem banking system, risk management is described
as different strategies like board and management oversight, portfolio management, market analysis and more, that are
implemented towards risk and pay off associated with it(Iqbal and Molyneux, 2016).Different Islamic banks are exposed to
different kinds of risks like credit, liquidity, moral hazard, operational risk and more, which can badly affect their performance.

Unlike the conventional banking, the research studies on risk management in Islamic banking system accelerated in 1997(Khan,
1997). And after that various scholars had started to study risk analyses in Islamic finance. All these researchers like Rahman
(2018) andMirr (2011),brought the argument that the Islamic banking is not only exposed to the risk that conventional banking
sector is having, instead there were many other risks due to their restrictions on interest and other shariah principles (Mirr, 2011).
Two types of techniques can be used to identify and manage the risk in Islamic banks. The first technique is a standard type and
consist on risk reporting, external and internal audits, internal rating and so on. The second technique normally adopted by
keeping in mind the requirements for sharia principles such as prohibition of interests or usury, ethical standards, liability and
business risk etc (Rammal and Zurbruegg, 2016).
Theoretical Framework
Decision Theory
For the current research paper, decision theory will be taken into consideration. By making use of appropriate knowledge about
decision theory and the field of risk management, a common basis was formed. This common basis had laid increased emphasis
on dealing with the uncertainties and giving them the priority (Coopchik, 2015). Decision theory can play the role of the counsel in
the response to these uncertainties by examining that preference should be given to which course of action (Al Suwailem, 2000). It
does not eliminate the roles of a risk manager within a company because decision theory only act as a tool through which certain
suggestion is being provided.
In the case of Islamic banking in Pakistan, there are a lot of uncertainties with respect to operations being performed by Islamic