Risk Management

This document discusses the roles and responsibilities of central banks, commercial banks, and Islamic banks in risk management and maintaining a global economic environment. It explores how central banks enforce financial policies, how commercial banks directly interact with customers, and how Islamic banks operate under Sharia law. The document also highlights the importance of financial integrity and trustworthiness in the banking sector.

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RISK MANAGEMENT
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Table of Contents
Central banks...................................................................................................................................2
Commercial banks...........................................................................................................................3
Islamic banks...................................................................................................................................4
References........................................................................................................................................6

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Central banks
Central banks are financial organizations which manage, control and regulate other banks in that
particular nation. Central banks play a crucial part in managing, handling, controlling and
optimizing financial risks. Unlike Islamic banks and commercial banks, it has the power to
enforce financial policies and fix standard bank rate. The growth of financial balance sheets of
central banks depends on managing financial risks. However, commercial banks and Islamic
banks do not have the right to control financial policies and enforce economic rules and
regulations to mitigate risk management (Ball et al., 2016). Mitigation of risk factors helps to
control the global economic environment. Steps taken by central banks to mitigate financial risk
factors and develop global economic environment are as follows:
 As an investor, central banks tend to be conservative. It defines when other banks face
trade-off risks central bank favors the low credit risk and a modest return. This policy
helps to control short term financial risks of the banks.
 As policymakers, central banks measure market situation and market prices and analyses
possible riskfactorswhich other banks may face. For example- price hike, reduction
intransaction or reduction in loan disbursement, hence, efficient monetary policies are
employed to nullify all these possible risks. The application of monetary policy is an
essential element which differentiates central banks from other banks.
 Only central banks have the authority to bring accountability and transparency in the
financial exchange. Central banks are accountable for maintaining clarity in financial
transactionaroundthe world. It records the entire transaction details which are helpful to
control inflation and deflation (Bech and Malkhozov, 2016).

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 Central banks are also different in terms of exchanging deposits. Central banks
takedeposits directly from banks which are called cash reserve ratio. On the contrary,
commercial banks collect deposits in the form of cash, cheques, and certificates directly
from their target customers.
 Only central banks have power to lend money to banks during financial crisis like high
inflation and deflation. Neither commercial banks nor Islamic banks have authority to do
this to control financial risks.
Commercial banks
Commercial banks are types of financial organizations which directly exchange financial
transactions with their target consumers. It provides cheques, accepts deposits, disburses loans
and manages savings accounts and directly connects businessorganizations and individual
customers. Commercial banks play value able role in managing financial risks and global
economic environment. Values of commercial banks in managing risks to sustain a global
economic environment are as follows:
 Commercial Banks are influential in increasing financial values by allocating an
appropriate level of capitals to target consumers, enhancing returns on capital investment
and improving earnings consistency. This consistency maintains economic equilibrium in
the world economy by controlling high inflation or deflation. Moreover, it can directly
communicate with market and target customers which the central banks cannot do (Al-
Muharrami and Murthy, 2017).

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 It has the capability to set a particular interest rate or target market keeping alignment
with the cash reserve ratio. It provides loans and deposits money based on this interest
rate. However, this interest rate defers commercial banks from Islamic banks. Moreover,
this monetary transaction requires sufficient personal legal documents of customers
which are helpfulto mitigate financial risks associated with a transaction and maintains
risk-free transaction to keep the global economy transparent.
 Commercial banks allow maintaining a necessary capital level to improve return on
capital. Improvement in return on capital ensures financial profitability which is
impactful in maintaining sustainability in global economic scenario (Tuli, 2019).
 It encourages proper capital allocation to track performance standard and provide support
to mitigate cash allocation risks.
 Unlike commercial banks have capability to ensure financial compensation directly to
enterprises in case of risks and business failure?
Islamic banks
Islamic banking is non-interest banking which provides loans and financial by maintaining the
Sharia law. Key principles of Islamic banking are sharing of profitability and prohibition of any
interest rates by lenders. It has a significant impact on maintaining sustainability in the global
economic environment. Roles and responsibilities of Islamic banks to handle riskiness and global
economic environment are as follows:
 Islamic banks provideinterest-free loans and financial services to its target consumers and
focus on maintaining profit sharing which is completely different from Central banks and
commercial banks. It ensures trustworthiness between banks and their target consumers
with developing ethical perspective (Iqbal and Molyneux, 2016).

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 Islamic banks regularly arrange internal and external audit, GAP analysis and RAROC
analysis to maintain financial integrity. A regular audit helps to reduce credit risk,
liquidity risks and withdrawal risks.
 Unlike conventional commercial banks, Islamic banks utilize band-al-jazaa or penalty
clause to secure their market debts (Al-Malkawi, and Pillai, 2018).
A comparative analysis among Central banks, commercial banks, and rural banks is impactful in
identifying roles and responsibilities of different kinds of banks to secure global economic
environment.

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References
Al-Malkawi, H.A.N. and Pillai, R., 2018. Analyzing financial performance by integrating
conventional governance mechanisms into the GCC Islamic banking framework. Managerial
Finance, 44(5), pp.604-623.
Al-Muharrami, S. and Murthy, Y.S.R., 2017. Interest banking spreads in Oman and Arab
GCC. International Journal of Emerging Markets, 12(3), pp.532-549.
Ball, L., Gagnon, J., Honohan, P. and Krogstrup, S., 2016. What else can central banks do?.
ICMB International Center for Monetary and Banking Studies.
Bech, M.L. and Malkhozov, A., 2016. How have central banks implemented negative policy
rates?. BIS Quarterly Review March.
Iqbal, M. and Molyneux, P., 2016. Thirty years of Islamic banking: History, performance and
prospects. Springer.
Tuli, K., 2019. CUSTOMER SATISFATION ON UNITED COMMERCIAL BANK LTD.