Risk Management Practiced Tools in the MENA Region: A Comparative Study between Islamic and Conventional Banks

Abstract

ABSTRACT The purpose of the study is to investigate the current risk management practices of Islamic and conventional banks in the MENA region. The study is based on a survey of 47 banks, including 24 conventional and 23 Islamic banks. The collected data were analysed using descriptive statistics and t-tests. The findings indicate that banks in MENA region have effective risk strategies and effective risk management frameworks in place. Furthermore, the findings reveal that credit risk is considered the most important for both conventional and Islamic banks followed by liquidity risk. Finally, both conventional and Islamic banks continue to rely on traditional credit risk mitigation tools. These findings have significant contributions to the literature by comprehensively clarifying and critically analysing the current state of risk management among the Islamic banks and conventional banks located in the MENA region. JEL Classifications: G20, G21, G28, Keywords: risk management; MENA; Islamic banking; Islamic finance; VaR I. INTRODUCTION Risk management in the financial sector is very important since the ultimate goal of the institution is to maximize revenues and shareholders value. Moreover, the recent financial crisis was marked by market volatility, lack of liquidity in many financial markets and increased systemic risk (Delloitte, 2011). This crisis has forced banks to take a critical look at how they manage risk and has exhibited some significant weaknesses in risk management in financial industry (KPMG, 2009). This difficulty has highlighted the importance of risk management; as a result many institutions have reviewed their risk management models. An active role was undertaken in re-examining their approaches of risk management, the establishment of risk management policy and approval of risk appetite. Solid practices risk management in the banking sector is important for financial stability and economic development. A robust framework of risk management can help banks to reduce their exposure to risks, and enhancing their ability to compete in the market (Mirakhor and Iqbal, 2007). Reducing the exposure will reduce systemic risk. Thus, it is necessary for banks to put in place a comprehensive risk management to identify, measure, monitor, manage, and report the various categories of risk. Risk management is a key element of the strategic management of the organization. This is the process whereby organizations methodically address the risks their activities with the goal of achieving sustained benefit. In this regard, CBSB (2011) forces authorities to ensure that banks have in place a comprehensive risk management. The process of risk management is a structured and consistent approach to identify and understand the potential risk factors and evaluation of consequences and uncertainties associated with these risk factors identified. Based on this information, the best plan of action is evaluated and selected to address identified risks and achieve the desired objectives. This study extends the work of Tafri et al. (2011) but differ in some aspects. Firstly, the questionnaire is similar but not identical; in fact it investigates the liquidity risk, which has not been examined by Tafri et al. (2011). Secondly, this study explores the risk management tools practiced in Islamic and conventional banks in a different environment (MENA-Middle Eastern and North Africa region). The main purpose is to examine the current practices in risk management methodologies of Islamic and conventional banks in the MENA region. It discusses and analyses the tools and methods used in managing credit risk, market risk, liquidity risk and operational risk among Islamic and conventional banks in the aim to identify the convergence in the practices of risk management and risk mitigation between Islamic and conventional banks. The remainder of the paper is divided into four sections: Section II provides a brief review of the literature, Section III describes the methodology along with research hypotheses, Section IV discusses the main empirical results and Section V presents the main conclusions, limitations of the research. …

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