Risk Management in Murabaha

Discussing the risks associated with a murabaha contract and related risk mitigation measures.

Islamic finance is typified by products which are based around a small number of contracts. Risk in Islamic finance revolves around the nature of these financial contracts. Because of the methods stipulated for participation, however, Shari'ah-compliant financial products are quite different from their conventional counterparts. Islamic financial institutions (IFIs) are exposed to credit risk, market risk, operational risk, equity investment risk and "rate of return" risk. Mushakah, mudarabah, murabaha, ijara, salam and istisna are some of the more popular types of Shari'ah-compliant contracts. Dr Sunil Kumar, Middle East, IRIS integrated risk management ag Switzerland, discusses the risks associated with a murabaha contract and related risk mitigation measures.

Originally published in NewHorizon magazine, January-March 2008.