Syed Alamdar Ali Shah, - and Raditya Sukmana, - and Bayu Arie Fianto, - (2020) 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, 14 (3). pp. 561-578. ISSN 1753-8394, eISSN: 1753-8408

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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.

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