Comparative Analysis of Risk Management in Conventional and Islamic Banks: The Case of Bosnia and Herzegovina

Abstract

Any banking activity involves a certain level of risk. Regardless of the fact that risk has always been present in banks, active risk management in conventional banking started only in the 1990s, specially after the collapse of Barings PLC, the bank with more than 200-year-old tradition, while such practice is still underdeveloped in Islamic (interest-free) banking whose practical implementation in the world started only in the 1970s. However, in the times of the recent sub-prime mortgage crisis and a large number of collapses and near collapses, multibillion losses and write-offs all banks, whether conventional or Islamic, saw the necessity for active risk management. Specific features of banks in Bosnia and Herzegovina and their way of managing risks are conditioned by a particular legal framework. This framework regulates primarily the conventional banks, but it indirectly affects the Islamic bank as well, since it does not allow the bank to offer all types of products and services which are generally present in Islamic banking. Since, to our knowledge, not a single specific comparative research into conventional and Islamic banks has been done in this part of the world, the aim of this paper is to provide an insight into risk management practiced by BiH banks, and to determine the dependence of their financial performance on the process of active risk management.

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