COMPARATIVE EXAMINATION OF RISK IN ISLAMIC AND CONVENTIONAL BANKS: AN EXTENSIVE REVIEW OF THE LITERATURE

Abstract

Islamic and conventional banks perform similar functions throughout the financial intermediation process. However, the products offered by Islamic banks differ significantly from those of the conventional banks. Due to the differences that exist in its products and contracts, it may be exposed to different levels and types of risks. Therefore, the primary goal of this paper is set to evaluate the risk difference across Islamic and conventional banks (CBs). Islamic Banks (IBs) have a special contractual and operational structure that complies with Shari'ah, the nature and degree of risks differ between the two types of banks. Furthermore, as a result of this distinction between IBs and CBs, IBs are anticipated to bear risks beyond those encountered by conventional banks, such as equity investment risk, rate of return risk, displacement commercial risk, and Shari'ah compliance risk. This study provides a clear understanding of the risk profile of both types of banks to academicians, policymakers, and investors.