The Objectives of the Prohibition of Riba By: Elhadi Habbani

2- 2- Contemporary risk mitigation tools;

It is generally agreeable that Islamic institutions are bearing the same credit, market, operation, liquidity, and compliance risks that conventional financial institution bear beside additional special risks quite related to the nature of Islamic institutions in terms of:

1- Products structure risk within which Islamic institutions face additional risks in forms of object risk, promise fulfillment risk, delivery risk, price risk including high cost of fund as well as impermissibility to charge more in case of delinquency which can be addressed also as opportunity cost risk …etc., and also operational risks in a forms of products process risk, additional legal risks, Shariah compliance risk … etc, and also new market and liquidity risks.
2- Structure of asset and liabilities risks.
3- Capital requirement risk within which the minimum capital Islamic institutions have to keep is bigger than conventional banks.
4- Shariah screening risk which is indeed very special.

The above points are supported by many scholars and Islamic banking practitioners; "In a recent book on Risk Management in Islamic Banks, 11 Khan and Ahmad argued that Islamic banks not only face the type of risks that conventional banks face but they are also confronted with “new and unique risks as a result of their unique asset and liability structures.” According to Khan and Ahmad, this new type of risks is an immediate outcome of their compliance with the Shari’ah requirement. They added that even in regard to common or conventional risks, the nature of risks that Islamic banks face is different from those counterpart risks faced by conventional banks" . So Islamic banks, while facing such a higher risks, need different comprehensive risk framework, as well as more investment in research, information technology, and innovation in this field aiming to enhance the current risk management techniques and emerge new risk management tools and application.
Although, the risk managements techniques used in conventional banking are agreed upon to be Shariah impermissible, but the experience of Islamic banking in creating the current risk management tools reveal the capability to extract, from the conventional banks practices and Fiqh a customized and structured Shariah permissible new techniques.
The following are some of the major risk management tools used in Islamic banking industry:

1- Revenue sharing and Revenue Sharing Sukuk
2- Service and usufruct-based finance
3- Third party guarantee: deposit guarantee
4- Reverse Murabahah and Murabahah line of credit
5- Bundles/packages financing: applying the majority rule
6- Hedging through options (not trading options)

The following also are some risk management tools facing different disputes and arguments among some scholars and Islamic banking practitioners which can be potential and promising to be legalized:

1- Swapping of usufructs;
2- Variation of future profit ratios;
3- Receivables trading against assets;
4- Combination of securitization, (Hawalah and Tawaruq);
5- Converting diminishing Musharakah into shares;
6- Return protection (Waqf Fund);
7- Waiver of right to profit;

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