MANAGEMENT

Detailed explanation-1: -From Shari’ah perspective financial risk can be classified as forbidden risk, essential risk and tolerable risk. Forbidden risk must be avoided in order to make a financial transaction Shari’ah complaint. Islamic hedging strategies are only applicable to ‘tolerable financial risk’.

Detailed explanation-2: -The Islamic Financial Services Board (IFSB, 2005) recognises six major types of risks: credit risk, equity investment risk, market risk, liquidity risk, rate of return risk, and operational risk.

Detailed explanation-3: -Risk is inseparable from real transactions and value creation. In the Islamic context, separating risk from real transactions would create more risk and would lead to greater instability in the economy. For example, trading debt for a specific price is forbidden (conventional securitisation).

Detailed explanation-4: -This is because the nature of specific risks facing Islamic banks raises a host of issues in risk measurement, analysis and monitoring. Previous researches claimed that credit risk, market risk and operational risk are one of the major risk impacts towards Islamic banks.