 In this module, we shall be studying risk management in Islamic banking and finance by way of minimizing it. In the previous model, we highlighted that the risk can be managed by way of avoiding it, by making sure that it gets minimized by way of certain actions by sharing it. In this module, we shall use an example of risk management by way of minimizing it. And this example comes from banking murabaha. Risk management in banking murabaha is a topic which has been covered in various textbooks and of course in manuals on the practice of Islamic banking and finance. In banking murabaha transactions, there is an inevitable delay in buying a commodity by the bank and selling it on to the customer. This delay in the two sales may pose some risks for an Islamic bank. These risks are not important in case of ordinary trade. If a shopkeeper is involved in buying and selling, that inventory period is actually not considered as risky as in case of Islamic banks or banks in general. In order to avoid this risk or in order to minimize the risk of ownership of the commodity during this period, the banks may ask for a security deposit from the customers. So when the application of the customer for a financing based on murabaha is accepted, following that a security deposit may be required. This is called Hamish Jidia in Arabic. It is only a name for security deposit and this is considered as a risk management tool. Once someone has put some money as a deposit, the risk of that customer going away without entering into the transaction gets minimized. Alternatively, the bank may ask the customer to sign an undertaking to purchase. This is based on the concept of wad and this wad in this context is binding on the customer. Once the customer promises to buy the commodity or the asset from the bank, once the bank has bought it from the market, this becomes a binding undertaking. Let us look at the flow of the things during a banking murabaha transaction. We have looked into this structure previously, but one thing which I have highlighted in this case is the stages to ensure that you understand the nature of risk in case of a banking murabaha transaction. Stage one or step one is negotiations between the customer who would be seeking finance from the bank. Negotiations take place between the customer and the vendor. We are assuming that in this case the customer is looking for car financing from the bank. So once negotiations have been concluded successfully the customer would then approach the bank for financing. Bank scrutinizes the application and if the application is successful the bank would inform the customer that we are happy to finance you. Because this is not just money lending rather in case of murabaha the bank will have to buy the car from the market from the vendor and then it will have to sell it on to the customer. Because this is a Sharia requirement the bank would like to make sure that once it has bought the car from the car dealer the customer actually then buys it. For this a security deposit is required at this stage or alternatively as I said the customer may be required to sign a purchase undertaking. Once this has been done the bank would buy the car from the vendor and sell it on to the customer on a murabaha basis. So this part actually step four or five these are risk management measures in a banking murabaha transaction. Of course this would not eliminate the risk altogether rather it would minimize the risk. What are other risks in a murabaha transaction? Risk of fault is there as well. Remember the bank is buying the car from a vendor and there is quite possible that at that point in time there was a fault in the car. The bank enters into an arrangement with the vendor to ensure that the manufacturing faults and other warranties are transferred to the buyer. This is very important banks are banks they don't want to get involved into all this kind of conversations and negotiations that all the car was faulty this tire wasn't good or this seat wasn't as required. Hence at the point of purchasing the car the bank would like to have an agreement with the vendor saying that I am not buying this car for myself. It's for a customer if there is a fault and there is a possibility of this then you would be dealing with the customer directly. And if there is an issue of warranty you cannot say that oh we sold the car to you to the bank why this customer is coming to us. So risk of fault is another one and this risk can be minimized by way of an arrangement with the vendor. There are some operational risks related to Sharia as well as by now you have known that murabha banking murabha involves two sales. One sale is between the vendor and the bank and the other one is between the bank and the customer. It is a Sharia requirement that the bank must buy the car first from the vendor and sell it to the customer afterwards. Because there is a saying of the Prophet sallallahu alaihi wa sallam which says that you cannot sell something which you do not own. If the bank has not bought the car how can the bank then sell it on to the customer. So in certain cases in Islamic banks because all these documents are being signed and executed at the same time. Sometimes bank officers may get the signatures on the second sale first before the sale number one. This is actually a risk if that has happened and Sharia audit has identified it then there are chances that the bank may lose its income arising from that transaction and the income might be given to a charity. So this would be an income loss and this is called Sharia related risk in an Islamic financial transaction. To avoid this kind of risk Islamic banks have started automating the Sharia process. There are other risks and we would look into these risks in a few modules and however at this point in time it is useful to highlight that there is a credit risk involved in a banking Murab Haar transaction or any other financing transaction to minimize this credit risk Islamic banks may ask for a collateral. In a lot of cases the financed item is actually considered as a collateral. There are other risks like the cost of capital risk and we would go into details of this one. When we look into risk management in Murab Haar as a mode of financing in a later module. However at this point in time it is sufficient to say that building in cost of capital variations in pricing of the product based on Murab Haar should minimize this kind of risk. Thank you.