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<p>Preface xv</p> <p>Acknowledgments xxi</p> <p>About the Authors xxiii</p> <p>List of Acronyms xxv</p> <p><b>PART ONE Introduction</b></p> <p><b>CHAPTER 1 Principles of the Islamic Financial System 3</b></p> <p>Islamic Financial Contracts: The li-tabarru’ Contract versus li-tijari Contract 3</p> <p>Principles of Islamic Finance 5</p> <p>Interest-Based Return versus Profit–Loss Sharing 6</p> <p><b>CHAPTER 2 The Islamic Bank and Risk Management 9</b></p> <p>Differences between an Islamic Bank and a Conventional Bank 10</p> <p>History of the Islamic Bank 11</p> <p>Global Islamic Banking Entities 12</p> <p>Risk as an Integral Part of Islamic Bank 16</p> <p>Stages in Risk Management 20</p> <p>Risk and Return Trade-Off 27</p> <p>Various Approaches on Risk Identification 28</p> <p>The Importance of Risk Management for an Islamic Bank 28</p> <p><b>PART TWO Risk Management Framework in Islamic Banking</b></p> <p><b>CHAPTER 3 History of Risk Management in Islamic Banking 33</b></p> <p>Basel I and Its History 34</p> <p>Basel II and Its History 36</p> <p>Basel III and Its History 40</p> <p>The AAOIFI and Its Role 43</p> <p>The IFSB and Its Role 44</p> <p><b>CHAPTER 4 The Risk Management Process in Islamic Banking 47</b></p> <p>Risk Management Model in Islamic Banks 47</p> <p>Risk Identification Process in Islamic Banking 56</p> <p>Risk Matrix 57</p> <p>Risk Mitigation Process 61</p> <p>Risk Review Process 62</p> <p>Infrastructure and Facilities 62</p> <p>Calculation of Minimum Capital Requirements 66</p> <p><b>CHAPTER 5 Financial Reporting and Analysis in Islamic Banking 72</b></p> <p>The Importance of Financial Statements in Risk Analysis 72</p> <p>Scope of Financial Statement in Islamic Banks 74</p> <p>Basic Contracts and Instruments in the Islamic Bank 78</p> <p>Structure of the Balance Sheet 80</p> <p>Analysis of Income Statement 87</p> <p>Persistence Analysis 88</p> <p>Tools of Financial Statement Analysis 89</p> <p>Core Business Activity in Islamic Banks 92</p> <p>Off-Balance Sheet Activity in Islamic Banks 101</p> <p><b>PART THREE Risk Management in Islamic Banking</b></p> <p><b>CHAPTER 6 Financing Risk in Islamic Banking 107</b></p> <p>Urgency of Financing Risk Management in Islamic Banking 107</p> <p>Characteristics of Islamic Financing Contracts 108</p> <p>Financing Risk: Definitions and Its Scope 110</p> <p>Role of Rahn and Kafalah 112</p> <p>Defining Determinant Factors of Financing Risk 114</p> <p>Urgency of the Independent Rating Agency 128</p> <p>Rating and Financing Risk Provisions 130</p> <p>Risk-Based Financing Limit 133</p> <p>Concentration Risk in Financing Portfolio 133</p> <p>Financing Portfolio Management 135</p> <p>Measuring Financing Risk in the Islamic Bank 139</p> <p><b>CHAPTER 7 Operational Risk in Islamic Banking 144</b></p> <p>Urgency of Risk Awareness 144</p> <p>Operational Risk Coverage in Islamic Banks 145</p> <p>Identification of Operational Risk Factors 149</p> <p>Operational Risk in Islamic Financial Contracts 155</p> <p>Measurement of Islamic Operational Risk 160</p> <p>Developing an Operational Risk Management System 166</p> <p><b>CHAPTER 8 Syari’ah Compliance Risk 168</b></p> <p>Basic Principles of Islamic Economics and Financial System 169</p> <p>Syari’ah as Principle and Spirit in Business 170</p> <p>Various Prohibitions in Mu’amalah 172</p> <p>Why Should Islamic Banking Comply with Islamic Principles? 175</p> <p>Integrating Syari’ah Compliance in the Islamic Bank 176</p> <p>Evolution of Syari’ah Governance in Islamic Financial System 177</p> <p>Syari’ah Advisory Board and Syari’ah Compliance Audit as a Framework 179</p> <p>Identification Process of Syari’ah Compliance Risk 183</p> <p>Risk Management and Mitigation of Syari’ah Compliance Risk 187</p> <p>Models of Syari’ah Governance in Several Countries 188</p> <p><b>CHAPTER 9 Strategic Risk 194</b></p> <p>Definition and Scope of Strategic Risk in Islamic Banking 195</p> <p>Determinants of Strategic Risk and Its Mitigation 196</p> <p>Issues Related to Strategic Risk 204</p> <p><b>CHAPTER 10 Investment Risk in Islamic Banking 209</b></p> <p>Syirkah as a Distinct Trait of Islamic Banks 209</p> <p>Basic Concept of Investment Risk 210</p> <p>Forms of Risk and Their Mitigation 216</p> <p>Regulations on Profit Distribution Management 230</p> <p><b>CHAPTER 11 Market Risk in Islamic Banking 232</b></p> <p>Urgency of Market Risk 233</p> <p>Scope of Market Risk in Islamic Banks 234</p> <p>Identification of Market Risk Profile 239</p> <p>Market Risk Measurement in Islamic Banks 244</p> <p>Market Risk Mitigations in Islamic Banking 253</p> <p>Implementation of Market Risk Mitigation 256</p> <p><b>CHAPTER 12 Liquidity Risk in Islamic Banking 264</b></p> <p>Urgency of Liquidity Risk 264</p> <p>Credit Multiplier, Financial Stability and Liquidity Crises 265</p> <p>Definition and Coverage of Liquidity Risk 267</p> <p>Islamic Bank’s Assets and Liabilities 271</p> <p>Liquidity Risk Management in Islamic Banks 272</p> <p><b>PART FOUR Future Prospects and Challenges in Islamic Banking</b></p> <p><b>CHAPTER 13 Development of the Islamic Financial Market 285</b></p> <p>Islamic Capital Market 286</p> <p>Derivative Islamic Market 292</p> <p>Regulation and Supervisory in Islamic Financial Market 294</p> <p>Institutional-Based Development Framework 295</p> <p>Stability in Islamic Financial System: Lesson from Global Financial Risk 296</p> <p><b>CHAPTER 14 Development of a Pricing Model in Islamic Banking 299</b></p> <p>Fundamentals in Islamic Pricing Model 299</p> <p>Time Value of Money in Pricing Model 302</p> <p>Current Islamic Pricing Model 305</p> <p>Urgency of Pricing Mechanism in Islamic Banks 314</p> <p><b>CHAPTER 15 Pathways of Risk Management in Islamic Banks 315</b></p> <p>Islamic Banks as Real Implementation of Risk Management 315</p> <p>Challenges of Islamic Banking in the World 317</p> <p>Blueprint for Islamic Banking Regulation 319</p> <p>Prospects and Challenges of Islamic Banking Development 323</p> <p>Strategic Issues in the Implementation of Islamic Risk Management 324</p> <p><b>CHAPTER 16 Future Agenda 328</b></p> <p>Landscape of Integrated Islamic Risk Management 329</p> <p>Synergy and Integration among Islamic Financial Institutions 330</p> <p>Competency and Competitiveness of Islamic Banking 331</p> <p>Regulatory Agenda in the Future 333</p> <p>Anticipating the Potential Systemic Risks 335</p> <p><b>PART FIVE Conclusion</b></p> <p><b>CHAPTER 17 Summary and Conclusion 345</b></p> <p>Glossary 350</p> <p>Bibliography 359</p> <p>Index 383</p>

<p><b>IMAM WAHYUDI</b> is a lecturer in the Faculty of Economics and Business at University of Indonesia (FEB-UI) and a senior researcher at the Centre of Islamic Economics and Business. <p><b>FENNY ROSMANITA</b> is a lecturer at FEB-UI and a researcher at its Centre of Islamic Economics and Business. <p><b>MUHAMMAD BUDI PRASETYO</b> is a lecturer and junior researcher in the Department of Management at FEB-UI. <p><b>NIKEN IWANI SURYA PUTRI</b> is a lecturer at FEB-UI and a junior researcher at its Centre of Islamic Economics and Business.

<p><b>Praise for<br/> Risk Management for Islamic Banks</b> <p>"I must congratulate the authors on this important piece of work which fills a critical gap in the literature. There are not that many books on the topic of risk management of Islamic banks and this volume is certainly one of the best ones on the topic. Risk management is not an easy topic to handle but this volume presents complex concepts and issues in a clear manner to enhance the understanding of the reader. This volume should be looked at seriously by every student and researcher of the topic. The authors should be commended for this service."<br/> —Zamir Iqbal, Lead Financial Sector Specialist, World Bank Global Islamic Finance Development Center, Istanbul <p>"With the increase in size of Islamic financial institutions and complexity of Islamic financial products and transactions, a greater need for comprehensive regulation and effective risk management is felt in the countries where Islamic banking and finance exist. This book is an excellent contribution to Islamic financial risk management, and will help teachers and trainers in the field to expose learners to a wide range of topics on the subject. While treatment of generic risk is consistent with the mainstream literature on risk management, it is the exposition of the unique risks facing Islamic banking and finance which makes the book a valuable resource for those who are looking to understand the regulatory and risk considerations of Islamic financial institutions. I expect this book to become an integral component in the curricula of undergraduate studies in Islamic banking and finance. The teaching staff at the universities offering postgraduate modules on Islamic banking and finance may also find the book of great relevance to the needs of their students."<br/> —Humayon Dar, (Cantab), Globally Renowned Expert of Islamic Banking and Finance; Founder, Islamic Bankers Association <p>"Although modern Islamic banking started 40 years ago, publications on risk management for Islamic banks are relatively limited. The efforts by four budding scholars to write on this topic are indeed laudable. This book discusses risk management for Islamic banks in a comprehensive manner and yet makes it easy for readers to understand. Practitioners, researchers, academics, and students will find it useful as it provides conceptual understanding as well as examines contemporary risk management practice in Islamic banks."<br/> —Azmi Omar, Director General, Islamic Research and Training Institute - Islamic Development Bank Group

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