Risk management practices of
conventional and Islamic banks
in Bahrain
Hameeda Abu Hussain and Jasim Al-Ajmi
Department of Economics and Finance, University of Bahrain,
Sekheer, Bahrain
Abstract
Purpose – The purpose of this paper is to report empirical evidence regarding the risk management
practices of banks operating in Bahrain.
Design/methodology/approach – A sample of bankers was surveyed through a questionnaire and
the results used to examine if the risk management practices are significantly associated with the type
of bank (conventional or Islamic) and if those practices are positively affected by understanding risk,
risk management, risk identification, risk assessment analysis, risk monitoring and credit risk
analysis. Several statistical and econometric methods were used to the test the hypotheses.
Findings – Banks in Bahrain are found to have a clear understanding of risk and risk management,
and have efficient risk identification, risk assessment analysis, risk monitoring, credit risk analysis
and risk management practices. In addition, credit, liquidity and operational risk are found to be the
most important risks facing both conventional and Islamic banks. Furthermore, the risk management
practices are determined by the extent to which managers understand risk and risk management,
efficient risk identification, risk assessment analysis, risk monitoring and credit risk analysis. Islamic
banks are found to be significantly different from their conventional counterparts in understanding
risk and risk management. The levels of risks faced by Islamic banks are found to be significantly
higher than those faced by conventional banks. Similarly, country, liquidity, and operational, residual,
and settlement risks are found to be higher in Islamic banks than in conventional banks.
Research limitations/implications – The results may have been influenced by the current
economic global crisis. Although the response rate is very high, there is no evidence of non-response
bias, and there is high internal consistency within the responses. The reliance on survey methodology
introduces the possibility that respondents expressed their beliefs and did not necessarily describe
their actions.
Practical implications – Bankers, depositors, investors and regulators are likely to benefit from the
results of the study when taking decisions related to the banking industry.
Originality/value – This is the first published attempt to investigate empirically the risk
management practices of banks operating in Bahrain and to compare the practices of conventional and
Islamic banks.
Keywords Bahrain, Banks, Risk management, Conventional banks, Islamic banks, Perceptions,
Risk management practices
Paper type Research paper
1. Introduction
Effective risk management is accepted as a major cornerstone of bank management by
academics, practitioners and regulators. Acknowledging this reality and the need for a
comprehensive approach to deal with bank risk management, the Basel Committee
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JEL classification – G20, G21, G28
Risk
management
practices
215
Received September 2011
Revised November 2011
Accepted February 2012
The Journal of Risk Finance
Vol. 13 No. 3, 2012
pp. 215-239
q Emerald Group Publishing Limited
1526-5943
DOI 10.1108/15265941211229244