Integration of Islamic bank specific risks and their impact on the portfolios of Islamic Banks

Abstract

Purpose

This study aims to propose a risk management framework for Islamic banks to address specific risks that are unique to Islamic bank settings.

Design/methodology/approach

A unique methodology has been developed first by exploring the dynamics and behaviors of various risks unique to Islamic banks. Second, it integrates them through a series of diagrams that show how they behave, integrate and impact risk, returns and portfolios.

Findings

This study proposes a unique risk-return relationship framework encompassing specific risks faced by Islamic banks under the ambit of portfolio theory showing how Islamic banks establish a steeper risk-return path under Shariah compliance. By doing so, this study identifies a unique “Islamic risk-return” nexus in Islamic settings as an explanation for the concern of contemporary researchers that Islamic banks are more risky than conventional banks.

Originality/value

The originality of this study is that it extends the scope of risk management in Islamic banks from individual contract-based to an integrated whole, identifying a unique transmission path of how risks affect portfolio diversification in Islamic banks.

Citation

Shah, S.A.A., Sukmana, R. and Fianto, B.A. (2021), "Integration of Islamic bank specific risks and their impact on the portfolios of Islamic Banks", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 3, pp. 561-578. https://doi.org/10.1108/IMEFM-01-2020-0021