A comparative study of Islamic and conventional banks’ risk management practices: empirical evidence from Pakistan

Abstract

While conventional bank risk management practices are well documented in the literature, there is limited research devoted at comparing the risk management practices of Islamic and conventional banks and how the recent financial crisis affected the approach taken in each banking model to manage the risks. In this paper, we use self-administered questionnaire to collect data from 150 bank senior managers and risk specialists from Pakistani conventional and Islamic banks to identify the main contributing factors to their risk management practices after the 2007–2008 financial crisis. The study results reveal that risk identification, risk assessment and analysis, credit risk analysis and risk governance are the most efficient and influential variables in explaining the risk management practices of Islamic banks, while understanding risk management, credit risk analysis and risk governance are the most significant and contributing variables in the risk management practices of conventional banks. Differences are also observed between Islamic and conventional banks in their liquidity risk analysis and risk governance. The results presented in this study are likely to benefit bank managers, investors, regulators and policymakers as they will serve them as guide when developing, reformulating and overseeing the bank(s) existing risk management practices.