Risk Management in Mudharabah and Musharakah Financing of Islamic Banks

Abstract:     
The low level participation of the Islamic banks in mudharabah and musharakah financing models has become one of the problems in the development of the industry. This arrangements are unique to Islamic banking and account for its superiority over conventional banking on grounds of ethics and efficiency, but the majority of Islamic banks have limited themselves to less risky trade-financing assets, which tend to be a shorter maturity. This paper tries to analyzes why Islamic banks are reluctant to indulge in mudharabah and musharakah financing. It introduces the theoretical model of balance sheet to compare them to the practices of Islamic banking. Then this paper analyze the reasons why Islamic banks tend to avoid such financing models. In the end it explore the risk management concept that might solve the problem.

Number of Pages in PDF File: 30

Keywords: Islamic Banks, Profit and Loss Sharing Arrangements, Risk Management

JEL Classification: G00, G20, G21

working papers series