Does One Size Fits All? - Applying Conventional Credit Risk Mitigation to Islamic Financial Institutions

Abdul Aziz, Ahmad Faizal and Mohamad, Shaifulfazlee (2012): Does One Size Fits All? - Applying Conventional Credit Risk Mitigation to Islamic Financial Institutions.

Abstract

The purpose of this paper is to examine the credit risk mitigation in Islamic Financial Institutions (IFIs). Currently, shariah compliant financing in Malaysia are still dominated by the concept of Bai’ Bithaman Ajil (BBA), Ijarah Thumma Al Bai and Murabahah. These sale-based approaches allow conventional credit risk mitigation to be utilized by IFIs. However, with the emergence of equity-based approach products like Musharakah/Mudharabah business financing and Musharakah Mutanaqisah Home Financing means IFIs need to enhance their perspective of credit risk which means the conventional method is not enough. Thus, this paper illustrates the concept of credit risk and differentiates them with capital impairment risk in line with the risk sharing responsibility of IFIs. This paper suggests some credit risk mitigation techniques to help IFIs create a niche for themselves in the financial market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic Banking, Risk Management, Credit Risk, Capital Impairment Risk, Default Risk, Musharakah, Mudharabah, Risk Sharing
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M42 - Auditing

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