Enhancing Islamic Finance through Risk Benchmarking

Abstract

This article argues that the development of a new specialist "risk benchmarking framework" for public and private Islamic BFIs operating regionally (excluding central banks), is the first and necessary step towards empirically proving a claim of Islamic finance superiority right. The development of a collaborative risk benchmarking framework for Western and Islamic banks and financial institutions (BFIs) would contribute to the enhancement of Islamic finance by: (i) contributing to enhancing the legitimacy of Islamic finance; (ii) enhancing risk management systems and practices in Islamic BFIs; and (iii) affording realistic opportunities for the offering of new Shari'ah compliant Islamic finance products. The article provides a high level analysis of the theoretical Islamic finance risk benchmarking operational framework.

Keywords: Islamic finance; Shari'ah; risk benchmarking; financial risk; banks and financial institutions; murabaha; mudaraba; musharaka; sukuk; ijara