Resultado de la encuesta a los padres de familia que tienen

that the latter upholds the principle of risk sharing. It is the concept of profit and loss sharing (PLS) that distinguishes Islamic risk management from its conventional counterpart. As an extension of this principle, risk-sharing nature of Islamic financing has implications for risk management.

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Similarly, Dusuki and Dar (2005) believe that risk management represents a system of risk-sharing on stake and equity. It is clearly founded upon idealistic principles of collaboration which encourages mutual cooperation between investors and fund users. By sharing society’s burden, risk management encourages “risk-sharing, promotes entrepreneurship, discourages speculative behaviour, and emphasises the sanctity of contracts” (Iqbal, 1997). Thus, through its efficient risk-sharing facilities, risk management promotes and increases the diversification and allocation of resources (Askari et al., 2010).

In the vein, Hassan (2006) who states that sharing risk and reward is considered as an integral part of Islamic risk management, associates risk-sharing concepts with the moral economy of Islamic finance, which help build economic justice as essentialised by Islamic principles. Therefore, Hassan (2006) locates Islamic risk management as an integration of the PLS concept and socio-economic justice, further claiming that justice in Islam is an essential part of human society as a society devoid of justice can only head towards decline and destruction. Justice, according to him, is only attainable if there is a set of moral values that humans agree to adhere to. Islamic risk management, thus, helps to support the pillars of Islam whilst supporting Islamic banking while taking ethics into consideration.

Another notable difference is with respect to risk taking behaviour. Islam is not opposed to risk taking; it proscribes two extremes of risk which are risk avoidance and excessive risk-taking. Obaidullah (1998) sees Islamic risk management as a principle which leans towards creating a cornerstone of Islam. It can somewhat tolerate risk taking and uncertainties, but key elements such as riba, gharar, and

maysir should clearly and strictly be prohibited (Obaidullah, 1998). Through its criteria of freedom from gharar, riba, maysir, and freedom of trade, to name a few, Islamic risk management upholds the concepts of Islamic finance.

Ayub (2007) believes that assuming risks is necessary before any return on capital, or otherwise profiting over an investment, can be expected. This is also agreed by Kuran (1986), who argues that profit sharing solely through money is impermissible as it is impossible for money to earn a return when it does not act as capital. In this regard, Ayub (2007) does not oppose profit sharing provided the money is used as an investment via real activities, as he believes that transferring commercial risk without

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also transferring the reward is impermissible as profits must be earned through risk and reward sharing. He views that Islam promotes taking calculated risks only when gains are expected. However, the encouragement of higher returns may also lead to moral hazards, as risk can also offer opportunities. Thus, Ayub (2007) sees risk-taking as one of the conditions for a party to be entitled to any profit over the principal. On that, despite his approval on Islamic banks taking risk mitigation measures, Ayub (2007) stresses that risk that can only be mitigated but not eliminated.

As for Obaidullah (1998), besides achieving ethics, risk management helps achieve the regulator’s objective, namely to increase efficiency. As far as the regulation goal is concerned, a conflict exists between efficiency and ethics (Obaidullah, 1998). Obaidullah (1998) sees that, whilst moving towards ethics, the notion of efficiency is misplaced. He views that, more often, the regulation’s goal is to achieve efficiency over ethics. Obaidullah (1998) stresses that there is actually no real cost in terms of loss of efficiency in the market. He views that notions of efficiency are inherent within Islamic financial ethics and usually misplaced emphasis on certain dimensions of efficiency are the ones which cause the most conflict.

Advocating the ethical Islamic banking, Obaidullah (1998) sees Islamic risk management as fulfilling the goal of regulations with regards to efficiency, and therefore, he stresses that Islamic banking needs Islamic risk management for its vital contributions to the financial market as the latter helps in mobilizing funds efficiently through the allocation of funds. Thus, if market efficiency is measured correctly, Islamic banks can help to achieve efficiency. Obaidullah (1998) explains that efficiency can be increased if funds from the saving-surplus unit can be allocated to the right fund-saving deficit unit in the economy. He also views other matters as including pricing efficiency, which can be achieved if transactions can be kept at a minimal cost.

Risk management is a mechanism to reduce inherent risks to a certain level so that residual risks can satisfy the risk appetite of wider constituents of stakeholders (Ahmed, 2009). It is one of Islamic finance’s key functions that facilitate households.

From a macro perspective, risk management is in high demand stemming from competitive developments in the Islamic financial market. High demands for Islamic

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products are present in both the GCC and non-Muslim countries (Ali, 2007). Increases in market volatility, financial innovation, shifts in banking business models, increases in competition due to mergers and acquisition, and regulatory requirements are among the factors that demonstrate the importance of risk management (Iqbal and Mirakhor, 2007).

Islamic risk management helps to pool and allocate risks (Ahmed, 2009). The concept of PLS based on a fair ratio financiers and FIs may lead to more efficient resource allocation as business risks are equitably distributed and thus help improve the investment climate (Chapra, 2001:313).

Apart from upholding fairness and socio–economic justice in the IB sector, Islamic risk management has an instrumental role in prohibiting the receipt and payment of interest as the core of the risk management system. This can be achieved when it is supported by other principles of Islamic doctrine such as, advocating risk sharing, individuals’ rights and duties, property rights, and the sanctity of contracts (Ayub, 2007).

It is also important to note that risk management is part of a process to ensure a sustainable future for the next generation. It does not compromise on human well- being. For example, risk management frees people from the burden of debt and the ones in need will not be deprived. This is evidenced through when those who are in need can then have access to funds which are made possible by banks which give priorities and preserve endowment and resources to them. It is again associated with the concept of PLS as banks become more equitable in wealth and income distribution via a more viable allocation of funds and resources.

Also, instead of feeling discouraged by the prospect of seeing their ideas transformed into business entities (as financiers assess risk involved more cautiously), entrepreneurs and investors will feel more encouraged to engage in more productive economic activities through risk sharing (Ayub, 2007). This, however, depends on the onus of the entrepreneur to reveal to the investors the profit that they make. The allocation of funds is more efficient through profitability rather than looking at customers’ credit worthiness.

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In the case of the banks and their counter-parties and depositors, they are to participate in the risk-sharing of their banking business. The depositors of investment accounts in the Islamic system are required to share the bank’s profits and losses with shareholders, and hence risk losing all or part of their initial investment (Swartz, 2012). The shareholders and investors depositors should absorb any negative shock to Islamic banks’ asset returns.

An element of direct market disciplines is also inherent within this principle (El- Hawary, 2003; Iqbal, 2008). Risk management in IBs hinges on transparency. When an element of honesty exists, a disclosure of reliable and timely information to the market participants is possible. Thus lenders can monitor the use of funds by borrowers which will inculcate better lending discipline. It helps to avoid adverse selection and moral hazards by the borrowers. In addition, there will be a fair sharing of financial resources created by the IBs (Langton et al., 2011), which should become available to the poor in moderating inequalities of income and wealth.

From the business perspective, risks management is an integral part of the business of financing as it ultimately ensures a good income flow and business continuity (Obaidullah, 1998), which is predicated differently from the one from conventional banks as it is based on one of the main principles of Shari’ah which emphasises justice and equality. Shari’ah requires transactions to be just, fair, and ethical in its dealings. In addition, one party may not financially exploit another as the balance of risk (and reward) should be proportionate (Ali, 2007).

From the investment point of view, according to Mirakhor (2009), the risk sharing characteristics of Islamic risk management has better stability than its conventional counterpart as production is financed entirely by risk-return sharing or equity finance. He views that assets and liabilities both move in the same direction simultaneously when price changes thus the financial structure adjusts in tandem on both sides of the ledger. In fact this adjustment process has demonstrated that IBs has the ability to response to shock (Mirakhor, 2009).