Impact of Financial Risk Management Practices on Islamic Banks Performance in Pakistan

Abstract

In current era, an effective risk management process is the basic requirement to perform better financial performances. Once the risk has been recognized, then organizing the risk is one of the main objectives to be done. The relationship between risk and return is associated with each other. In Islamic finance, reward cannot be obtained without risks i.e., more risks more rewards and vice versa. The key objective of the current study is to investigate the impact of the financial risk management practices (RMPs) on the Islamic banks (IBs) financial performance in Pakistan. To achieve the main objectives, this research measures the existing RMPs of the IBs and associate these RMPs with the IBs financial performance. This is a dynamic study that has researched both primary and secondary data. To proxy the IBs financial performance, return on assets (ROA) stood average for six years (2014-2019). An adapted questionnaire is distributing among the IBs risk managers for measuring the financial risk management practices of IBs. The methodology of this study comprises on the analysis of data using the analysis of multiple regression and correlation analysis. The results are display in tabulated form and mathematical regression equations. The current study identifies that practices of IBs in Pakistan indicates better financial risk management, resultantly these RMPs discloses the optimistic relationship with IBs financial performance. The study on financial performance recommends that IBs should plan and attempt the advanced techniques and process of risk measurement in IBs. To mitigate the financial risk, the current study proposes to trained the IBs managers with modern techniques which will be very useful and valuable for the IBs financial performance.

Keywords: Risk Management, Islamic Banks, Financial Risk, Financial Performance

DOI: 10.7176/RJFA/12-14-02

Publication date:July 31^st 2021