Risk Management Principles

Risk management refers to the overall process that a financial institution follows to define a business strategy, to identify the risks to which it is exposed, to quantify those risks, and to understand and control the nature of the risks it faces. From a risk management perspective, risks facing financial institutions can be classified into three types: risks that can be eliminated, risks that can be transferred to others, and risks that can be managed by the institutions themselves. Financial intermediaries avoid certain risks by simple business practices and will not take up activities that impose risks upon them. The practice of financial institutions is to take up activities in which the risks can be efficiently managed and to shift the risks that can be transferred.

Types of Risk

As most depositors and investors use IFIs due to their Islamic character, financial institutions must ensure that all their activities conform to the principles and values of Islam. This would require contracts and all necessary supporting documentations, including the legal papers, forms and processes, to be Shari’ah-compliant. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Is It Allowed to Charge a Fee on Customers Issuing Cheques in Case of Insufficient Funds or No Balance?
Is It Allowed to Provide a Debt Collection Company with a Point-of-Sale Equipment That Accepts the Credit Cards of KFH and Other Banks?

The risk that the terms or conditions of a contract or agreement will prove unenforceable due to legal defects in the contract or in related documentation and procedures. For further details see: FINANCIAL RISK MANAGEMENT: A Practitioner's Guide to Managing Market and Credit Risk.

Liquidity risk is the potential loss to IFIs arising from their inability to meet their obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses.

The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 150th Meeting
What are the Rulings for a Short Term Liquidity Management Fund?

Operational risk is the risk arising from inadequate or failed internal processes, people and systems or from external events. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Legal Constraints on Buying Shares of Limited Liability Companies

Reputation risk is the potential that negative publicity regarding a firm's practices and actions will cause a decline in the customer base, costly litigation, revenue reduction, liquidity constraints, or significant depreciation in market capitalization. Reputation is one of the most valuable assets a company can have, and one of the most difficult to protect. For further details see: RISK MANAGEMENT: A Modern Perspective.

Contractual Agreements Prevent the Intermediate Murabahah Seller from Buying the Good at the Cheapest Available Price

Longevity risk is the risk that advances in medical sciences and lifestyle changes will lead to people living longer. For further details see: Risk Management and Financial Institutions (Third Edition)

Macroeconomic risk depends on uncertainty in the environment of all firms in a country, though the impact on individual firms or their exposure is firm-specific. For further details see: CORPORATE DECISION-MAKING WITH MACROECONOMIC UNCERTAINTY: Performance and Risk Management.

Is It Allowed To Request an Extension of the Maintenance Period to Compensate for Disruption Due to Force Majeur?


Foreign exchange market is a market for transactions in foreign currencies, both on a spot and forward delivery basis. For further details see: ISRA, Islamic Financial System; Principles and Operations.

The Shari’ah Ruling On Currency Trading
A Customer Has Local Currency and Wants to Deposit It in His Account as Foreign Currency
Rectifying The Difficulties Of Currency Trading
An Islamic Bank Has an Account in Foreign Currency with a Foreign Bank and Vice Versa. Can They Treat Each Other’s Deposits as Non-Interest Loans for Investment?
Dollars Are Purchased at Different Prices on the Same Day; Which Price Should the Customers Be Charged?
Is It Allowed for an Islamic Bank to Place an Interest-Bearing Deposit in the Central Bank if the Law Requires It?
Is it allowed to fix the exchange price on the subscription day rather than the transaction day?
What is the ruling on a transaction concerning a promise to sell foreign currencies?
Forward Foreign Currency Exchange Transaction Based on Bai` Mu’ajjal
Foreign Currency Option Based on Hamish Jiddiyyah, Wa`d and Tawarruq
Foreign Currency Option Based on Wa`d and Two Independent Tawarruq Transactions
Hukum Perdagangan Pertukaran Matawang Asing oleh Individu Secara Lani (Individual Spot Forex) Melalui Platfom Elektronik
What is the Ruling on the zakat on Financial Portfolios that Represent Funds for Investment in Foreign Currency Exchange?
Is it Allowed for an Islamic Bank to Provide Qard Hasan to Another Bank on the Condition that the Latter Sells Foreign Currency to the Former Based Purchase Price Determined by the Central Bank?
Is it Allowed to Open Investment Accounts in Foreign Currencies on the Condition that these Funds Remain in the Same Currencies with the Bank?
Registration of Murabaha Transaction at the Exchange Rate Prevailing On the Day of Purchase from the Exporter.
the Difference between the Currency of the Credit and the Currency of the Murabaha

The Securities Commission of Malaysia (SC) defines structured product in its Guidelines on Structured Products under para 1.03 as: 1.03 for the purposes of these guidelines: (a) The term structured product means any investment product that falls within the definition of securities under the SCA [Securities Commission Act 1993] which provides the holder with an economic, legal or other interest in another asset (underlying asset) and derives its value by reference to the price or value of the underlying asset; (b) The term underlying asset means any security, index, currency, commodity or other assets or combination of such assets. A derivative is a financial instrument whose value depends on the value of other, more basic, variables such as grains, crude oil, palm oil, currencies, or indexes.

Forward Foreign Currency Transaction
قرار رقم: 195 (1/21) بشأن التحوط في المعاملات المالية

Issues and Challenges





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