Workshop on Risk Management: Islamic Economic and Islamic Ethico­Legal Perspectives on the Current Financial Crisis

The workshop was attended by a group of influential Islamic legal scholars, academicians, economists, bankers and industry practitioners, who were welcomed by the Directors of IFP and LSE, Dr. Nazim Ali and Sir Howard Davies, respectively. The financial crisis, which was the backdrop of the discussions, and the need to revisit risk management practices were underscored in the opening addresses. The crisis, at its core, demonstrates the dangers of “group think” and over-optimism in clouding corporate decision-making and risk reigning. Before the crisis, it was viewed as risky not to been seen participating in this market. There was an assumption that house prices would increase indefinitely and the credit risks were all mitigated. In this regard, risk managers and board members of risk committees would have better served institutions as contrarians in their assessment approach. Understanding risk is key to managing risk. However, undermining this key tenet was the over-complexity of many financial instruments, which even managers failed to understand. The resulting underassessment fed into misaligned models concerning the true risk interactions of various securities within portfolios, causing misleading accounting and enterprise risk measures and hedges. It also highlighted the importance of looking at gross numbers and not just net figures. The Islamic finance industry is an important part of the global financial fabric. As such, it too is not immune from many of the challenges faced by the global financial industry. This risk management topic takes on a greater level of importance as everyone ties to review and to reflect on the lessons learned from this crisis.