Risk management and challenges in İslamic banks a case study of Libya

Islamic banking is one of the new growing financial streams that emerged in the Islamic world in the seventh decade of last century. Emerging from pioneering counties such as Malaysia, the Islamic financial concept had to adjust many of the strategies in order to comply with the Islamic law. The heart of the Islamic law's financial instructions is the prohibition of interest and the sharing of profit and losses between the capital provider and the borrower. However, such a concept imposes many implications on the risk management of the financial institute adopting the Islamic banking concept. While traditional risk types, including credit, market, liquidity and operational risks, apply in Islamic banking, the sources of risk and mitigation strategies differ in comparison with conventional banking. Furthermore, there are unique risk types that accompany Islamic banking such as rate of return risk, equity investment risk, Sharia non-compliance risk, and displaced commercial risk. On the practical side, a case study of risk management in Libyan banks adopting Islamic banking principles is evaluated as a diagnostic research. The outcomes of the study show immaturity in the concept of risk management in the country affected by many non-financial factors. Therefore, the researcher provides his recommendation in order to empower development of the risk management concept in Libyan Banks.