Mu`amalat risk mitigations for Islamic banking products : an analysis from Islamic perspective

Abstract

This study attempts to investigate the risks in Islamic banking and the approach in which Islamic commercial law (muamalat) can be the basis to mitigate the risks. Currently, Islamic banks operate in the conventional risk management framework. However, the application of muamalat principles as risk mitigants for Islamic banking products has not been thoroughly examined. Thus, this gives rise to the research gap i.e. no specific study was conducted on the actual application of muamalat principles as risk mitigants in the context of Islamic banking in Malaysia. Premised on that, questions may be raised concerning the meaning of risk from conventional and muamalat perspectives, the type of mitigants available in muamalat literature, the way they are applied in Islamic banking products, the effectiveness of the application, and the stakeholder’s perceptions concerning their application. In addressing these research questions, this study employed the qualitative method. Qualitative method is selected, considering the nature of the research, that is exploratory, as the concept and application of muamalat principles as risk mitigants are not well defined. In addition, this research needs interpretive method to get new insights in developing concepts. The data is collected from documents and interviews using purposive sampling. The documents were gathered based on their relevance to the research topic and interviews were conducted on nine participants who have expertise on Shari’ah, Islamic finance, legal, and risk. The document analysis is conducted to provide an overview about risks, and their mitigation approaches from conventional and Islamic perspectives as well as their application in the financing products of selected banks. The interview data is used to support the data from the documents and analyzed to develop themes. These themes represent the patterns of participant’s perception about the application of muamalat mitigants, the effectiveness of application, and other general perceptions, among others, the opportunities and challenges of their application. As a result, the findings of the study show that the concept of risk is the same between conventional and muamalat perspectives financially but not legally. In addition, the approaches to risk mitigation in muamalat were identified, namely, internal mitigants, external mitigants and aspects beyond muamalat i.e. belief and ethics. The objectives of the study are also met. This is demonstrated in the identification of certain types of muamalat principles which are applied as risk mitigants in the Islamic banking products, the discovery of the way in which muamalat mitigants are applied, the indication of their effective application, and the development of four general themes emerging from the analysis of participants’ perceptions. In sum, this study significantly contributes new insights about muamalat principles as risk mitigants to the body of knowledge of risk management.