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

Syed Alamdar Ali Shah (Islamic Economics Department, Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia)
Raditya Sukmana (Islamic Economics Department, Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia)
Bayu Arie Fianto (Islamic Economics Department, Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 11 January 2021

Issue publication date: 4 June 2021

578

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.

Keywords

Acknowledgements

For this manuscript the first author acknowledges his MBA students who put challenging questions while he was teaching the course of “Investment Analysis and Portfolio Management” to explain the portfolio theory in the context of Islamic banking. Using literature and student questions a basic framework was developed that has been used in this manuscript. We also acknowledge the contributions from unknown reviewers of International Journal of Islamic and Middle Eastern Finance and Management who helped a lot to fine-tune the manuscript in its present form.

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

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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