 From this module, we shall be looking into risk management in Islamic modes of financing. Previously, we have looked into the risks in Islamic contract like murabha, mudarbha, musharika, salam, istisna. Now, we would be studying the risk profiles of the product which use these Islamic contracts as modes of financing. So, there is a possibility that the scope of risk in these Islamic modes of financing would be more than or larger than what was the case in case of Islamic contracts. So, let us look at the major risks faced by Islamic banks. Islamic banks, not Islamic modes of financing. Although Islamic banks would face a lot of risk which come from Islamic modes of financing and their applications in the context of Islamic banking and finance. Credit risk is one major risk faced by Islamic banks. Market risk is another one. And if you remember, we have been referring to these risks in the context of risk management in Islamic contracts. Markup risk. Sometimes we call it interest rate risk as well. Some people say that how come Islamic banks face interest rate risk if they do not use interest rate? Of course, Islamic banks do not use interest rate. However, in many products, interest rate remains relevant as a benchmark. And that reference to interest rate as a benchmark would create certain risks for Islamic banks. So, markup risk is a very important risk faced by Islamic banks, especially in the context of Islamic modes of financing which have fixed return kind of profile. Commodity asset price risk. This is a major risk faced by Islamic banks and financial institutions using Islamic modes of financing. Liquidity risk is something very well known to those who are involved in banking and finance. Operational risk. This risk is actually extremely relevant to Islamic modes of financing because most of these modes of financing, they are very complicated as compared to a simple money contract which is used by conventional banks. And I must emphasize here that conventional banks, they face all these risks. However, the nature and magnitude of these risks in case of conventional banks is a lot less as compared to Islamic banks. Broadly speaking, conventional banks use only one contract and that is called loan contract or credit contract. They lend money, so they deal in money. This is why in many books you would find a reference to money management. Banks are what? Banks are money managers. In case of Islamic banks, however, they do not deal in money, just money, but they actually deal in a lot of other things as well. And because of this operational risks faced by Islamic banks, they are a lot higher as compared to their conventional counterpart. Legal risk. This is another very important risk which could be in many ways unique to Islamic banks. In many cases, a case may go to a court, a conventional court and this is a case on an Islamic banking transaction. And the judge who would not have deep understanding of Islamic jurisprudence may interpret the contract in a different way. That is called legal risk. Withdrawal risk. This is a risk which is inherent in some of the structures, especially the structures based on mudarbha. Fiduciary risk. Because Islamic banks, they have this agency kind of function in many structures and agency requires the agent to behave in certain manner. Failing to fulfill the requirements of agency gives rise to fiduciary risk. And this is a risk which is inherent in quite a number of Islamic modes of financing. Displaced commercial risk. This is a risk which is associated with profit sharing investment accounts. And because profit sharing investment accounts are actually offered by almost all the Islamic banks, hence this is a major risk faced by Islamic banks through the application of mudarbha as an Islamic mode of finance. Now, in general, I would like to spend some time to have a conversation on risks faced by Islamic banks in general. Now, some risks are faced by Islamic banks on industry level, others on institutional level and still some others on product level. In this set of modules, we would be looking into product level risks and of course, we would be giving reference to some institutional risk as well. Industry level. Sometimes what happens and incidents happens, there is a government change, there is a regime change and the new government is not entirely in favor of Islamic banking. So as a result of that, the growth and progress of Islamic banking in that market may slow down. That is a risk and that is a risk which Islamic banks face on the industry level. We won't be focusing on this risk. All of these risks have implications for viability and sustainability of Islamic banks. Islamic banks face some risks similar to conventional banks and of course, there are some other risks which are unique to Islamic banks and they are unique to the modes of financing Islamic banks use. Even where there are similarities and this point is very important. Even when we find that there is a similarity of risk between a conventional bank and an Islamic bank, actually the word credit risk for example, credit risk faced by Islamic banks, credit risk faced by conventional banks, the nature could be completely different. So even where there are similarities, it is possible that the nature of risk faced by an Islamic bank is different from what its conventional counterpart may face. In the next module, we shall define all these risks, credit risk, market risk, etc. followed by discussions on specific modes of finance and the risks they inherently have.