Balancing the outcomes: risk exposure in Islamic banking

While Western commercial bankers are concerned mostly with credit risk--the risk that loans may default--Western investment bankers are concerned mostly with business risk. Business risk is the risk that business ventures may fail. Islamic bankers must assume both types of risk. To cope with this dilemma, Islamic banks should not guarantee all the funds of its depositors. The various types of financing utilized by Islamic banks should be categorized according to the type of risk involved. Musharaka and mudaraba, for example, are full-risk financing modes. Other available forms of financing are often less risky. The source of funds available to Islamic banks should also be categorized according to the level of risk that depositors are comfortable with. While some care only to have their deposits grow at the rate of inflation, others will be willing to endure the necessary risk involved with business transactions. Banks must provide a myriad of services that involve different l