Strategic Risks and Mitigation in Islamic Finance Sector

This report examines the strategic risks faced by Islamic financial institutions and proposes mitigation measures. It identifies three key strategic risks: a changing business landscape, improper strategy formulation, and innovation challenges. The report suggests that Islamic banks should view new entrants as potential partners, communicate the advantages of new product substitutes, monitor the mission and vision of the bank, formulate special divisions for strategy, enhance communication and coordination between strategic levels, develop technological facilities, and form research and development divisions. These strategies aim to ensure the long-term health and profitability of Islamic financial institutions in a competitive environment, aligning with Islamic principles while addressing modern business challenges. Desklib offers a wealth of resources, including solved assignments and past papers, to support students in understanding complex topics like risk management in Islamic finance.

Running Head: RISK MANAGEMENT BY ISLAMIC FINANCIAL INSTITUTIONS
Risk Management by Islamic Financial Institutions
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Author Note

Strategic Risks Faced by Islamic Financial Institutions and Risk Mitigation
Measures
1. Strategic Risk of a Changing Business Landscape
Strategic risk in an Islamic financial institution can arise as a result of changes that occur in
the business landscape. Changes in the business landscape are those that take place as a result of
two importance factors, namely, the entrance of a new business and the birth of new product
substitutes. 1The entrance of new businesses is always a welcome thing in the Islamic financial
world, but it can serve as a threat for individual and well established Islamic banks. The
emergence of an array of new substitute products such as an Islamic credit card in the place of a
debit card can also be a problem.2
1.1. Risk Mitigation Methods
1.1.1. To view New Entrants as Potential Partners
When it comes to mitigating the risk of new entrants, efforts need to be made on the part
of Islamic banks not to view the new entrants as a threat or competition but rather to look to
them for cooperation and collaboration. Instead of viewing the new entrants as rivals and as
1 Waemustafa WS Sukri, 'Bank Specific And Macroeconomics Dynamic Determinants Of Credit Risk In Islamic
Banks And Conventional Banks.' (2015) 5 International Journal of Economics and Financial Issues
2 A Elamer, A Nitim and HA Abdou, 'Islamic Governance, National Governance, And Bank Risk Management And
Disclosure In MENA Countries' [2017] Business and Society.

competition, energies can be directed towards collaboration, by perceiving the new entrants as
potential partners.
1.1.2. To Communicate about the Advantages of New Product Substitutes
As far as mitigating the risk of new product substitutes is concerned, Islamic banks need
to always act in compliance with Islamic principles when introducing the new product. The
communication team of an Islamic bank should focus on explaining the various advantages that
are associated with the new product, to make it acceptable in the market.
2. The Strategic Risk of Improper Strategy Formulation
Strategic risk in an Islamic financial institution can arise when strategies are not in
keeping with the mission and vision of the bank. Strategic risks can also arise if strategic
environmental analysis is not carried out in a comprehensive manner and if a discrepancy
exists between strategic plans and at different strategic levels. 3
2.1. Risk Mitigation Methods
2.1.1. Monitoring of Mission and Vision of the Bank
The manner in which the vision and mission of the bank is being implemented needs to
be periodically monitored to ensure consistency. Values from the bank’s mission and vision
statements need to be internalized.
3 M Saeed and M Izzeldin, 'Examining The Relationship Between Default Risk And Efficiency In Islamic And
Conventional Banks. J' (2016) 136 Journal of Economic Behavior and Organization.

2.1.2. Formulation of Special Divisions
Special divisions need to be formed for the formulation of strategy of the firm. Plans need to
be formulated after analyzing different types of scenarios that could emerge in the current
business environment.
2.1.3. Enhance of Communication and Coordination
Coordination and communication needs to be enhanced between the various strategic levels
of the Islamic enterprise. Mutual goals need to be internalized, that the bank can aim for.
3. The Strategic Risk of Innovation Challenges
Innovation challenges can arise as a result of inadequate research as well as development
and also because of continuous improvements being made in the process of a business.
Innovation challenges can arise too if Islamic financial institutions are not adaptive enough to
different technological processes.4
3.1. Risk Mitigation Methods
3.1.1. Development of Technological Facilities
Various technological facilities need to be developed. Banks must cooperate with each other
to manage technological facilities jointly. There must be collaboration with IT professionals for
this purpose.
4 Weber, A Hoque and M Ayub Islam, 'Incorporating Environmental Criteria Into Credit Risk Management In
Bangladeshi Banks' (2015) 5 Journal of Sustainable Finance & Investment.

3.1.2. Formation of Research and Development Divisions
Several divisions need to be formed for research and development. Information used must
always be up to date.

References
A Elamer, A Nitim and HA Abdou, 'Islamic Governance, National Governance, And Bank Risk
Management And Disclosure In MENA Countries' [2017] Business and Society.
M Saeed and M Izzeldin, 'Examining The Relationship Between Default Risk And Efficiency In
Islamic And Conventional Banks. J' (2016) 136 Journal of Economic Behavior and Organization.
Weber, A Hoque and M Ayub Islam, 'Incorporating Environmental Criteria Into Credit Risk
Management In Bangladeshi Banks' (2015) 5 Journal of Sustainable Finance & Investment.
Waemustafa WS Sukri, 'Bank Specific And Macroeconomics Dynamic Determinants Of Credit
Risk In Islamic Banks And Conventional Banks.' (2015) 5 International Journal of Economics
and Financial Issues