Risk Management in Islamic vs Conventional Banking

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For distinct features of Islamic management in Islamic banking, they are provides financing which is backed by assets. Islamic banks cannot deal in documents and it is due to the asset backed nature results in productive economic activities. Additionally, Islamic banks need to comply with conventional regulatory standards as well as Shariah standards. Islamic banks do not conduct business with tobacco, alcohol and other harmful toxic producing companies. Islamic banks are not merely interest-free. Islamic banking transactions need to avoid other elements of fraud, deceit and uncertainty. It is implied from the Gharar-free nature of Islamic banking transantions that such complex conventional instruments like options, swaptions are not allowed in Islamic banking. Moreover, clean borrowing is not allowed in Islamic banking. Islamic banks provide financing to create assets. Therefore, Islamic banks do not offer credits cards, personal loans and running finance/overdraft. Islamic banking also does not permit transactions in most derivatives. However, Salam (advance sale/purchase) and Istina (project financing) are close alternatives for Forward contracts in conventional banking. Based on the above discussion, an effort will be made to decline a conceptual framework among the different concepts discussed thus far. There are two dependent variables and both are equally important. Although, adequate risk management procedures will get reflected in commercial success in the long-run, but the commercial success is not only criterion of risk management procedures. It is due to the fact that commercial success depends upon the quality of product, its USPs, its effective marketing, its simplicity and besides the cultural, political and macroeconomic context in which the product is launched and marketed. Therefore, an effort is made to separate both concepts to avoid suggesting the overhaul of an effective risk management system when it does not get reflected in profitability...
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