1. Introduction

“Risk knows no religion” Ainley (2007)

The question posed by this paper is whether Michael Ainley is right when he assumes that risk management is similar across different cultures and religions, or in this case, whether it is similar for Islamic and conventional banks. Are Islamic banks akin to any other bank that simply provides financial services, and do they thus have similar risk management requirements?

The subject of risk management in Islamic banking has many facets. On the surface, the frequently repeated notion that Islamic banks are more resilient than their conventional counterparts is attractive in a world torn apart by financial crisis. Unfortunately, and at least in the current form in which Islamic banking is practised, this perception is not entirely true. The assumption that emerged at one point during the initial stages of the current crisis was that the Islamic market would be entirely unaffected and that it would easily weather the crunch.

Indeed, people thought that the financial crisis would be the pivotal incentive for Islamic banks. On the contrary, it exposed a number of areas in Islamic banking that needed to be re-evaluated.

This paper aims to examine different aspects of risk management issues and practices in Islamic banking via the perceptions of its participants. In other words, this paper is dominated by the question of whether Islamic banks are more or less at risk than their conventional counterparts, as perceived by the participants in the questionnaire survey in this study.

It should be noted that a review of the existing literature on the subject does not, however, provide a definitive answer to this question. The majority of the relevant material instead offers conflicting views that employ theoretical arguments rather than formal empirical analysis. The issues related to risks are clearly empirical in nature and require feedback from the marketplace. This paper thus attempts to fill this gap in the empirical literature on risk management in Islamic banking through a survey-based questionnaire and with the use of in-depth interviews.

The difficulties afflicting conventional financial markets since the middle of 2007 have led to more attention being paid to Islamic alternatives. Although the modern Islamic finance industry is still relatively young, it has been growing rapidly for several years, largely on the back of an oil-fuelled economic boom in the Middle East. Considerable demand came from non-Islamic investors who were simply attracted by good investment opportunities. With awareness of the industry rising, Islamic banks have expanded their operations, especially in the core markets of the Middle East and South Asia. This expansion has also occurred in newer markets with substantial Muslim populations, including Sub-Saharan Africa and parts of Europe.