Risk management instruments still lacking at Islamic financial institutions (By IFN)

(See IFN):Islamic finance has proven to be more resilient amid financial crises, but experts believe that more can still be done to manage risks.

Despite Islamic banks’ high liquidity, namely; in the form of cash, the industry still lacks the necessary depth to manage risks effectively, commented Jaseem Ahmad, the secretary general of the Islamic Financial Services Board.

“In that sense, there is still a shortage of Shariah compliant instruments and securities. A capital market is being developed but it is still not as liquid or as deep as we would want it to be; and it needs to be deeper,” Jaseem was quoted as saying.

Hence, there is room for substantial improvement in the equity management framework; as more instruments will afford Islamic banks more opportunity for risk management.

In addition to providing the banks access to a wider range of instruments, the banks should also be incentivized and provided with the necessary resources to strengthen their capabilities. Jaseem also noted that even high levels of loss-absorbing capital could be negated if risk management frameworks are not sufficiently strong and in spite of Islamic banks practising more conservative banking methods.

“There is a very high ratio of tier one capital and common equity among Islamic financial institutions which is loss-absorbing; and the kind of capital that Basel III has brought in now for conventional banks,” he noted. However, insufficient risk management and risky activities can still lead problems to crop up at any bank, “even if it is an Islamic bank,” added Jaseem.