Empirical Investigation of Risk Management Framework: Islamic Banks

This report presents an empirical investigation of the risk management framework within Islamic banks in Pakistan. The study aims to analyze the risks faced by these banks, comparing them to conventional banking systems, and to empirically examine the relationship between financial performance and risk management practices. The research employs both primary and secondary data, including journals, articles, and interviews with Islamic banking professionals. Key aspects of risk management, such as identification, measurement, mitigation, and monitoring, are explored. The methodology includes the use of ROA and ROE to assess financial performance, and a regression model to determine the impact of risk management on bank performance. The report also includes a Gantt chart outlining the research timeline and references to support the findings.

Empirical Investigation of Risk Management
Framework for Pakistani Islamic Banks

Table of Contents
STUDY AIM...................................................................................................................................1
STUDY OBJECTIVES....................................................................................................................1
INTRODUCTION...........................................................................................................................1
LITERATURE REVIEW................................................................................................................2
DATA AND METHODOLOGY.....................................................................................................2
GANTT CHART.............................................................................................................................3
REFERENCES................................................................................................................................6

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 bank of Pakistan.
 To investigate the efficiency of risk management structure of Islamic
banks Pakistan.
 To discuss the challenges faced by Islamic banks m Pakistan regarding
risk management
INTRODUCTION
The modern Islamic banking system is not as conventional banking system. In the 1970s,
Egypt, the first ever current Islamic banking system was introduced. 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 (“Impact of Islamic Banking,” 2018). 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 (Al-Tamimi, Hussein, Miniaoui and Elkelish, 2015). Islamic
banks in Pakistan needs 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.
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
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investigate the risk management framework (Naceur, Barajas and Massara, 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 system is facing the major problem in identifying and analysing the risk as
compared to the conventional banking system and the main reason for such significant issue
is the specific features of financing contracts, legal requirements, liquidity infrastructure and
governance of Islamic banking system (Zopounidis and et.al., 2017). The good risk
management practices has the direct link with the performance of the banks and many
studies shows that the relationship between risk management and financial performance are
based on the conceptual nature. In the modern banking system, risk management is
described as development of different strategies and implementation of the same towards
risk and pay off associated with it. Different Islamic banks are exposed to different kind of
risk which can affect the overall performance and growth of the banks (Khan, Ali and Khan,
2015). The research studies on risk management in Islamic banking system initiated in 1997.
After this, many scholars started to study risk in Islamic finance and came up with the
argument that the Islamic banking is not only exposed to risks that conventional banking
system is having but also there are several other risks associated with it due to restrictions
on interest and other shariah principles (Iqbal and Molyneux, 2016). There are two types of
techniques that can be used in identifying and managing the risk. The first is standard type
technique, consists of risk reporting, internal and external audits, internal ratings etc
(Rammal and Zurbruegg, 2016) . The second is normally adopted by keeping in mind the
requirements for sharia principle.
DATA AND METHODOLOGY
In this study, secondary data has been used to achieve aims and objectives which
includes journals, articles, research papers, literature reviews and professional associations
reports and to get access to all these journals, e-books and research papers, university library
will be used. Other than this, various accredited websites such as google scholars, IEEE,
science direct etc. will also be used as data collection sources.
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For data collection mainly both primary and secondary data sources will be used. For the
primary data collection a questionnaire will be used while for collecting the secondary data
sources such as books, journals and articles will be used. This study will use qualitative and
quantitative data and thus inductive approach will be used. In inductive research approach
different theories are used to explore the data. If possible and appropriate, a visit to Pakistan
will be done to physically meet the managers of different Islamic banks, otherwise a Skype
or a telephonic interview could be conducted with Islamic banking professionals in Pakistan
to get the relevant information on current structure of risk management along with issues
faced by the Islamic banks in Pakistan. For providing answers to the questions an
interpretive theory will be used in which various concepts and theoretical aspects will be
used to demonstrate the understanding of collected data.
To identify and analyse the financial performance of the Islamic bank, return on asset
ratio (ROA) and return on equity ratio (ROE) will be used. Return on assets refers to ratio of
net income over the total assets which indicates the profit earned per dollar of assets and
also shows the efficiency and performance of the banks (Akhtar, Akhter and Shahbaz,
2017). To know the impact of risk management framework on the financial performance of
Islamic banks in Pakistan, a regression model will also be used to investigate the impact.
The statistical data collected from the population will assist in achieving the research
objectives.
In this case, the population used in the research study is 6 fully fledged Islamic banks
and 15 Islamic windows of conventional banks and having interview with the professionals
of Islamic banks will help in gathering necessary information on risk management practices
related to the research. It is an exploratory research that intended to carry out investigation
of risk management framework for Islamic banks (Platonova and et.al., 2018). The study has
been conducted in a natural environment with little or no interference of the researcher. It is
planned that interview will be conducted with a total of 10-15 managers who are currently
working or serving in the Islamic banking institution in Pakistan. A total of 15 to 20
questions will be asked in the interview from each participant where each participant has a
choice to share their ideas, opinion and views (Chattha and Alhabshi, 2017). These
questions mainly consist of open-ended questions and each session last for 1 to 1 and half
hour. Most of the interviewees in the research process falls in the age bracket of above 30
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years having immense exposure and knowledge within the field which includes both male
and female participants. This research also follows convenience sampling method, giving
equal opportunity to all the participants of being selected. Also, prior permission will be
taken from each participant to record their responses and maintaining confidentiality of the
personal information of each participant throughout the process. For analysing the data both
primary and secondary sources will be used. For the analysis of secondary sources a
literature review will be performed so that suitable conclusions can be drawn on the basis of
previous research studies. For analysing the primary data thematic analysis will be
conducted to interpret the data.
GANTT CHART
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5
Tasks
Year 1 Year 2 Year 3
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2 Q3
Q
4
Revision of research proposal
Identification of the real gap research
rationale
research significance
research aim and objective
Literature
Wring literature to support research gap,
significance
some literature on designed research aim
and objectives
Research methodology
Discussion of research relevant research
philosophies,
Research approach, methods, tools,
techniques
Improving under sting on research ethics
Professional Development:
Learning to use SPSS for data analysis
Improvement research skills
Improve research presentation skills
Improvement in presenting and discussing
research with colleagues and supervisor
Revision of R1
Revision and approval of R1
Extension of literature
Selection and justification of research
methodology and philosophies
Literature review
Literature on Islamic banking
Definition of Islamic banking
Model of Islamic banking
Source of finance in Islamic banking
Profit and loss in Islamic banking
Literature on conventional banking
Model of conventional Baking
Profit and loss in conventional banking
Source of fiancé in Islamic banking
Risk Management in Banking
Credit risk
Credit risk in the products of Islamic
banking
The efficiency-risk relationship
Capital adequacy requirements and credit
risk
Risk-efficiency-capital nexus
Measuring the Performance of the Bank
Profitability of Islamic versus conventional

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REFERENCES
Books and Journals
Akhtar, B., Akhter, W. and Shahbaz, M., 2017. Determinants of deposits in conventional and
Islamic banking: a case of an emerging economy. International Journal of Emerging
Markets. 12(2). pp.296-309.
Al-Tamimi, H., Hussein, A., Miniaoui, H. and Elkelish, W. W., 2015. Financial risk and Islamic
banks’ performance in the gulf cooperation council countries. The International Journal
of Business and Finance Research. 9(5). pp.103-112.
Alam, N. and Rizvi, S. A. R., 2017. Empirical Research in Islamic Banking: Past, Present, and
Future. In Islamic Banking(pp. 1-13). Palgrave Macmillan, Cham.
Chattha, J. A. and Alhabshi, S. M. S. J., 2017. Risk Management in Changing Benchmark Rates
Regime: Prudential Implications for Islamic Banks and Supervisors. Journal of Islamic
Finance. 6. pp.205-230.
Iqbal, M. and Molyneux, P., 2016. Thirty years of Islamic banking: History, performance and
prospects. Springer.
Khan, M. A., Ali, M. and Khan, M. A., 2015. Gauging Profitability and Liquidity of Islamic
Banks: Evidence from Malaysia and Pakistan. International Journal of Accounting and
Financial Reporting. 5(1). pp.75-90.
Naceur, S.B., Barajas, A. and Massara, A., 2017. Can Islamic banking increase financial
inclusion?. In Handbook of Empirical Research on Islam and Economic Life. Edward
Elgar Publishing.
Platonova, E. and et.al., 2018. The impact of corporate social responsibility disclosure on
financial performance: Evidence from the GCC Islamic banking sector. Journal of
Business Ethics. 151(2). pp.451-471.
Rammal, H.G. and Zurbruegg, R., 2016. Awareness of Islamic banking products among
Muslims: The case of Australia. In Islamic Finance (pp. 141-156). Palgrave Macmillan,
Cham.
Zopounidis, C. and et.al., 2017. Islamic banking vs Conventional banking during the crises
period: Evidence from GCC and MENA banking industries. B'-ECONOMICS,
BUSINESS, SOCIAL SCIENCES AND EDUCATION. 15(1). pp.1-13.
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