Operational risk in Islamic banks: examination of issues

Marliana Abdullah, Shahida Shahimi, Abd. Ghafar Ismail

Research output: Contribution to journalArticle

19 Citations (Scopus)

Abstract

Purpose – The purpose of this paper is to assess key issues in measurement and management of operational risk in Malaysian Islamic banks. Design/methodology/approach – Descriptive, analytical, and comparative analyses are used to discuss the issues of operational risk in Islamic bank through the implications associated with the Islamic banks' operational risk as well as the implications on risk measurement, risk management, and capital adequacy. Findings – Discussion on operational risk in Islamic banks is significant and becoming more complicated compared with conventional banking because of the unique contractual features and general legal environment. While basic Basel II core principles of effective banking supervision apply equally well and ideally suit the Islamic banking institutions, risk measurement, and risk management practices still need specific adaptations to Islamic banks' operational characteristics. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the applicability of the Basel II methodology for Islamic banks. Research limitations/implications – This study has important implications for the understanding of operational risk, particularly the specific issues of the Islamic banks' operational risk that arise from the different nature of the financing and investment activities of the banks. With regard to measuring operational risk capital charge, the banks have to choose the right and effective method to ensure the operational risk capital charge will be more in line with the banks' actual risk profile and thus will provide the adequate capital and an improved buffer once the losses are announced. Originality/value – The paper will fill the gap to the existing literature of operational risk in banking institutions especially Islamic banks, by showing the needs of specific adaption of operational risk measurement and risk management practices due to the nature of Islamic banks.

Original languageEnglish
Pages (from-to)131-151
Number of pages21
JournalQualitative Research in Financial Markets
Volume3
Issue number2
DOIs
Publication statusPublished - 7 Jun 2011

Fingerprint

Islamic financial institutions
Operational risk
Risk measurement
Risk management
Risk capital
Charge
Basel II
Banking
Management practices
Islamic banking
Legal environment
Investment activity
Methodology
Banking supervision
Financing
Bank risk
Design methodology
Buffer
Capital adequacy

Keywords

  • Capital adequacy standard
  • Islamic banking
  • Malaysia
  • Operational risk
  • Risk management

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Operational risk in Islamic banks : examination of issues. / Abdullah, Marliana; Shahimi, Shahida; Ismail, Abd. Ghafar.

In: Qualitative Research in Financial Markets, Vol. 3, No. 2, 07.06.2011, p. 131-151.

Research output: Contribution to journalArticle

Abdullah, Marliana ; Shahimi, Shahida ; Ismail, Abd. Ghafar. / Operational risk in Islamic banks : examination of issues. In: Qualitative Research in Financial Markets. 2011 ; Vol. 3, No. 2. pp. 131-151.
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