Adapting Risk Management for Profit and Loss Sharing Financing of Islamic Banks

The low level of participation of the Islamic banks in profit and loss sharing (mudharabah and musharakah) financing models has become one of the problems in the development of the industry. These arrangements are unique to Islamic banking and account for its superiority over conventional banking on grounds of ethics and efficiency, but the majority of Islamic banks have limited themselves to less risky trade-financing assets, that tend to be a shorter maturity. This paper intends to analyzes why Islamic banks are reluctant to indulge in mudharabah and musharakah financing. Finally, it explores the risk management concept that might solve the problems.