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The purpose of this paper is to assess key issues in measurement and management of operational risk in Malaysian Islamic banks.

Descriptive, analytical, and comparative analyses are used to discuss the issues of operational risk in Islamic bank through the implications associated with the Islamic banks' operational risk as well as the implications on risk measurement, risk management, and capital adequacy.

Discussion on operational risk in Islamic banks is significant and becoming more complicated compared with conventional banking because of the unique contractual features and general legal environment. While basic Basel II core principles of effective banking supervision apply equally well and ideally suit the Islamic banking institutions, risk measurement, and risk management practices still need specific adaptations to Islamic banks' operational characteristics. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the applicability of the Basel II methodology for Islamic banks.

This study has important implications for the understanding of operational risk, particularly the specific issues of the Islamic banks' operational risk that arise from the different nature of the financing and investment activities of the banks. With regard to measuring operational risk capital charge, the banks have to choose the right and effective method to ensure the operational risk capital charge will be more in line with the banks' actual risk profile and thus will provide the adequate capital and an improved buffer once the losses are announced.

The paper will fill the gap to the existing literature of operational risk in banking institutions especially Islamic banks, by showing the needs of specific adaption of operational risk measurement and risk management practices due to the nature of Islamic banks.

The purpose of this paper is to provide an insight of Islamic securitization based on sukuk structures.

Descriptive, analytical, and comparative analyses are used to discuss the risk‐sharing behaviour in Islamic securitization through different structures of mudharabah and musharakah sukuk derived from asset securitization.

The paper reveals that although sukuk are structured in a similar way to conventional asset‐backed securities, they can have significantly different underlying structures, provisions and shariah‐compliant. In particular, it prohibits the receipt and payment of interest and stipulates that income must be derived from an underlying real business risk rather than as a guaranteed return from interest. With regards to sukuk securitization, an asset is one of the vital elements that should exist as an evidence to support the process and make it permissible in Islam. In terms of Islamic securitization mechanism, it can be divided into two principles, namely, debt based and partnership. This paper further emphasizes that sukuk structures based on partnership principle is regarded as risk sharing rather than risk shifting, where it works by combining risk‐exposures in such a way that they offset one another to some degree. Accordingly, overall risk will be less than total risks on individual basis.

This paper has important implication for the understanding of risk management practices particularly in structuring sukuk. Banks as originators and special purpose vehicles (SPV) as issuers, might consider more sukuk on partnership principles since it directed towards risk‐sharing concept that could lead to increase mobilization of savings and investment. As for the investors or sukuk holders, the partnership principle could generate the wealth creation, which to be shared between both investors (fund providers) and issuers (fund users), while both bear the risks involved and the resulting loss.

The paper will fill the gap in the existing literature of Islamic finance by showing that Islamic securitization via sukuk is a viable source of funds that could help stabilize the securities market, and as solution to the current subprime mortgages financial crisis.