A comparative study of risk management practices between Islamic and conventional banks in Pakistan

 

The purpose of this research study is to investigate the extent to which banks are

using risk management practices in dealing with various risks and to compare risk

management practices between Islamic and Conventional banks operating in Pakistan.

Methodology: This is an empirical research study which has employed quantitative

research methods. This study has used two sources of data, i.e. primary and secondary data.

Secondary data is collected by using content analysis through annual reports of five Islamic

and conventional banks for the six year time period from 2008 to 2013. The content

analysis was performed by using frequency analysis and un-weighted index scoring. And

primary data was collected through questionnaire from the senior managers, risk managers

and CRO of Islamic and conventional banks. The sample size was consisting of 150

respondents from banks. The data was analysed by using descriptive statistics, regression

analysis and Mann-Whitney U test.

Findings: Islamic banks are found to be significantly different from their conventional

counterparts in risk identification, risk management practices, liquidity risk analysis and

risk governance. Moreover, risk identification, risk assessment and analysis, credit risk

analysis and risk governance are most influencing and contributing variables in risk

management practices of banks operating in Pakistan. Also, credit, liquidity, market and

operational risk are found to be the most important risks faced by both conventional and

Islamic banks.

Practical Implication: Considering the importance of risk management practices in

Islamic and conventional banks; Bankers, investors, regulators, and policymakers are likely

to benefit from the results of the study as a guide, when developing and reforming the

existing risk management practices.

Originality: This study has extended the risk management practices model of banks by

incorporating two more variables, i.e. liquidity risk analysis and risk governance into the

model. Also, it is adding value methodologically, as data triangulation is used to draw a

valid inference. So, this study will add value to literature and will be useful for Islamic

banks, conventional banks, practitioners as well as for academic point of view.