 In this module, we shall look at risk management in Musharka as an Islamic mode of finance. The risk management in the context of Mudarbha and Musharka could be quite similar. In our previous module, we deliberately made the contents general because we were going to discuss some of the risks associated with Mudarbha and Musharka in this module. As the list suggests, in case of Musharka and Mudarbha, the risks are quite similar in terms of a list, market risk, operational risk, liquidity risk, credit risk and ownership-related risk. Let us take an example of diminishing Musharka-based home finance to highlight these risks and their management. Interest in Musharka, let us, we are taking the example of diminishing Musharka-based home financing i.e. about a property. If the property market crashes, for whatever be the reason, the customer of the bank could be a property market investor. The property in question could be a buy-to-let property, if I am referring to one property, it could be quite a few properties in the portfolio with this kind of consideration. Now, because the market price has come down, there is a property market crash and the home financing, Islamic home financing based on diminishing Musharka was at a stage that the customer found it convenient and in its advantage to default. In that case, property would go into ownership or properties in this context, they would go into ownership, receivership, which means they would be auctioned. That is a possible loss and this is an example of market risk in Musharka, operational risk in Musharka or diminishing Musharka. The bank personnel responsible for the portfolio fails to check insurance the couple cover on the property. And it is quite possible by the way, I know some personal examples where this thing has happened. The personnel in the bank never highlighted it and there was no insurance slash the couple cover on the property for quite a few months. Now if we take this example, hypothetical one, the couple cover expired in August last month and the property actually gets fire in September. If there is no valid cover, possible loss, that is an example of an operational risk in Musharka. Now all these risks, they are interrelated. If there is a change in one risk, that would have implication for the other risks as well. For example, if there is an increase in market risk, it will have implications for credit risk. It may have an impact on provisions. In case there is a loss, in case we have to spend money on certain things, in case there are defaults, in case there is increase in credit risk, provisions come from the profits of the bank. So, they are undistributed profits. So this would have implications for provisions and of course, this might have implications for the liquidity requirements for the bank. Let us see with this grid. So, there is liquidity risk, there is credit risk, there is market risk, there is ownership related risk, there is operational risk. In banks or wherever there are big business, risk is a number and it is managed. Usually, risk management means that this number should be in this band, then we are fine. If it goes beyond that one, then we are in trouble. For every risk, there is a dollar value. Imagine the transaction value of this Musharka based product is 500,000, 500,000. Contracted income from this transaction is 100,000. Bank is expecting or bank has a contracted 20% return on this transaction. Now, how did the bank put this in risk? The bank says that market risk is normal. When there are normal conditions, they say that market risk is 500 rupees. In this transaction, 500 rupees is a risk for the market. It is not kept separately, it is in accounts. Risk department, people, they have all these calculations. Credit risk is 1000 rupees. Liquidity risk is 8000 rupees. Operational risk is 100 rupees. Ownership related risk is 200 rupees. Provisions are 500 rupees. In normal circumstances, this is the case. Now, market risk changes. The market, which was normal, actually the market risk becomes high. Then market risk allocation would be 1500. It has gone up. Credit risk would go up as well. There are possibilities of default as well. If property market crash, defaults will also start. That would have implications for credit risk. So, instead of a smaller amount, a higher amount is required. Now, provisions have gone up to 2000. Liquidity risk, 10,000. Ownership risk from 200 or 300 to 500. And we have operational risk. So, all these risks are actually interrelated. Those prudent risk managers, they would look at all these risks on one screen. And would like to see what is the implication of change in this risk over the whole risk grid. Now, at the end, I would like to ask you and myself this question. Do Islamic banks manage these banks uniquely? I would say that in most cases, no. Risk is a secular phenomenon. There is no faith in risk. So, you manage this according to the market. This is why even in Islamic banks, we find that the heads of risk, they are least interested in Islamic banks. They take this very brutal view. I have met so many heads of risk. They say, we don't know what is Islamic banking. We are looking into the risk of this bank. Whether this is Islamic or conventional, my job is to make sure that the risk is managed. So, I don't listen to the head of Sharia or head of retail. I take my own view. So, the risk is managed in Islamic banks almost the same way as in conventional banks. However, where Islamic banking differs, and we are referring to this Musharaka thing, it's basically the origin of this risk could be different. In case of Musharaka, this credit risk may arise from something which is uniquely Islamic. In case of Murabah, this credit risk could be very different from what the conventional banks are facing. However, when this credit risk is this number, whenever this credit risk or operational risk is this number, the risk manager would be managing that number. And that is what you should know if you want to go into Islamic banking to have a career.