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07 November 2018
ISLAMIC BANKING

The Islamic finance industry needs to take risks in order to innovate

Islamic banking has always been more secure, more risk-averse, by its very nature. This may be holding it back.

CREDIT: YAROSLAV/SHUTTERSTOCK


At the World Islamic Banking Conference, held last December in Manama, Bahrain, there were, as always, many important issues facing the industry that need to be addressed. In his keynote speech, HE Rasheed Mohammed Al Maraj, the Governor of the Central Bank of Bahrain focused on a few of these issues. But it was risk-sensitivity that he brought up first:

“First, we need to be more risk-sensitive in uncertain economic conditions. This means that our risk management practices must be up to date, risk-awareness levels high and risk mitigation in place. It also means that banks should increase stress-testing frequency in order to fully understand the weak links and be prepared for the worst-case scenario in the current uncertain economic environment. Please note that being risk sensitive does not necessarily mean being risk averse. It only means that we need to be more vigilant on what type of risk we should and should not take,” said Al Maraj.

Properly managing risk is indeed important, especially in these times, but it is conventional banking that has always had more trouble assessing risk. After all, the last financial crisis was a result of exactly this. Islamic banking has always been more secure, more risk-averse, by its very nature.

In my conversations with Islamic bankers at the WIBC and beyond, it wasn’t risk that seemed to be their main concern—it was innovation. Though there were new products that were on offer and there are new standards being set all the time, there is a general feeling that the industry isn’t moving fast enough. Innovation is inherently risky—there is an inevitable trial-and-error that will result. But the industry needs that innovation now more than ever—it’s time to take the right kinds of risks.

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