DefinePK

Abstract

Risk, broadly defined as the possibility of harm, loss, or undesirable outcome, is an inherent aspect of all financial and commercial activities. Risk management, therefore, represents a comprehensive set of principles and practices aimed at identifying, evaluating, and controlling the threat of financial loss. It ensures business continuity and financial sustainability through ongoing planning and structured foresight. Importantly, the objective of risk management transcends the mere avoidance of financial setbacks; it isinstrumental in enabling individuals, institutions, and banks to meet their financial objectives, while simultaneously fostering public confidence and trust—key ingredients for economic growth. Within the framework of Islamic finance, risk management is not only recognized but is also deemed essential, provided it is undertaken in a manner that conforms to sharī‘ah principles. The Islamic legal tradition acknowledges the permissibility of preventive financial measures, as long as they are devoid of elements such as ribā (interest), gharar (excessive uncertainty), and maysir (gambling). Banks, as primary financial intermediaries, play a pivotal role in facilitating economic activities. However, conventional banking systems rely heavily on interest-based mechanisms, which are explicitly prohibited in Islamic jurisprudence. In contrast, Islamic banking has emerged as a sharīʻah-compliant alternative, rooted in equity-based and ethical financial principles. This research aims to explore the methodologies employed by Islamic banks for risk management, assessing their practical implementation in light of sharīʻah injunctions. It seeks to critically examine whether contemporary risk management practices in Islamic banking genuinely align with the foundational objectives of the Islamic economic system and offer a holistic, legally valid model for sustainable financial risk governance.