Risk has been implied some uncertain expected earnings and expected outcomes. it measures the investor willing to take to realize a gain from an investment. Risk has many different types and also instigate from different situations. Risk has been also influenced by the investment or some certain situations.
Also, according to Iqbal (2002: 4) 'Risk and uncertainty is at the centre of financial contracts and the way they are constructed'. Hence, the existence of risk in the banking and financial products does not mean adversity (unless it is excessive and unnecessary), but, instead projects opportunity (Schoon; 2009: 23). The risk profile of the Islamic banking and financial products substantially differs from that of its conventional counterpart. Unlike the interest-based conventional banking products, the Islamic banking instruments are supposed to be either asset/commodity based/backed or to be premised on the profit and loss sharing basis. Hence, due to being composed of some unique characteristics and features, the Islamic banking products, in several cases, face a number of unique risks (Khurshid;2009: 208).
Shariah compliance risk is in Islamic banking always need to assurance that the assets will be used in Shariah Complaint manners. Otherwise, it is uncovered the non recognition of lease income as non permissible manners of Shariah Compliance.
Fiduciary risk is the major risk of maintenance in responsibility of an Islamic Bank as lessor, which has been take direction from the Shariah standards. It is the major responsibility of lessor to get the assurance about the usufruct is intact. It is not the possible way unless the asset maintained its position and keep safe than the lessor entitles the rental in consideration for the usufruct. These kinds of deficiencies consider as the sources of FR in Ijarah contracts.
People risk is based on the lessor who is not allowed to increase the rent dues in case of any delay of payment by the lesse. This is the standards of AAOIFI and exemplified there clearly. Sometime this principle may become the reason of misunderstanding by the staff and become the source loss by PR. in fact this income from this is not acceptable in the Shariah point of view.
Every Islamic bank may expose to legal risk in some aspects of enforcement of this contractual right which is the right to responses the asset by misconduct of lessee. It is only happens when the in-house asset enjoys the protection as a tenant.
Technological risk occurs only when the incompatibility of new accounting software that may become the reason to loss the information on the leased asset due to external security breaches.
Market risk is arises in a true leasing business, the lessor acquires the lease asset prior to securing any leasing contracts. Thus the lease asset is subject to price risk, the risk that the lessor is not able to profitably lease out the asset
Operational risk creates the top down approach across the different activities of bank. The role of standardized approach is divide activities in eight major business units and lines for better understanding. Maintenance costs can sometimes exceed rental income thereby resulting in a loss to the lessor ?? Hence, from a Shari'a perspective, one critical factor in determining the permissibility of any Ijarah arrangement is whether the lessor actually bears risks expected of a true lessor.
8- Concept of Salam:
The concept of Salam based on uncertain existence which will help in future out comes and cover the aspects of Salam. it may creates and enhance the key difference between expected and actual outcome from the implication of the rule of Bay al Salam.
9- Classification of Uncertainty:
* General: ignorance of any potential outcome
* Specific: when objective/subjective probabilities can be assigned to potential outcomes this is usually referred to as risk.
Risk usually measured by the variability or volatility of outcomes variance or standard deviation. Objectives of risk management are:
' Reduce Volatility
' Eliminate Costly Lower Tail Outcomes
' Maintain a Certain Risk Profile
' Value Maximization
Reduce volatility may become the cause of extreme market condition when any investor buy good in high price and sell at the lows. it can be taken as the tool of return investment. Normally it produces by the help of bonds and reduces volatility in stock portfolios. It is generally leave the long term impact on performance. For investors reduce volatility helps to reduce the urge to sell at wrong time (Reduce Volatility in Your Portfolio, 2014).
The elimination of lower tail outcomes are becomes the reason of minimizing variance which leads to many different conclusions in relation to the optimal hedge amount. Actually the risk managers concerned the variability of cash flows and their hedge decisions in their future cash flows (Aabbo, 2014).
Every risk profile has been investigating the risks which have based on investment selection and goals of risk profile. It has been kept the stock and bond risk at an acceptable level. Gradually it inherits to investing you have no control over. These kinds of risk affect market and economy.
It is the process which may increase the worth share price for common stocks, which have been purchased by the investors. It may help the owners to increase their economical health and profitability in the competitive market.
10- Business Risks and Financial Risks:
Business risk relates to uncertainty arising from the nature of firm's business and financial risks relate to movements in the financial market: in fact business risk based on the chances just like if the cash flow is not enough to cover all operating expenses life cost, wages, sold, rent than it happens and it is independent and related with systematic and unsystematic risk factors. While the financial risk also based on cash flow but relates to the fulfillment of creditors payments and external financial responsibilities. It relates to business's operations and amount of debt (Oscar Guzman, 2014).
Association of risk with return is central in almost every business. Risk-taking in relation to banking and financial industry is instrumental in terms of having opportunities to generate profits. The nature of risks in most of the Islamic banking products is different from that of conventional in many respects. The point of divergence in risk-exposures of both institutions' products is marked by the differences in their respective laws of contracts. Islamic banking system, that ideally promotes the proposition of risk-sharing among the parties instead of risk-shifting to one of them, has developed over the years a good number of Shariah-compliant PLS-based and trade-based products. In most of them, IFIs are 'in essence' directly or indirectly exposed to a mix of financial and non-financial risks (Abdullah Irwani Nordianwati, 2008). Also one of the distinct features of Islamic financial products and the related risks is that they can neither be premised on fictitious assets nor on the transferring of risk-load on either of the parties unjustly. Instead, Shariah requires all the transacting parties to bear the related risk of the transaction proportionately according the Islamic law of transaction. To sum up, from Shariah perspective it is imperative for an IFI to bear the risk of ownership of the assets it is dealing in, as the risk of ownership justifies any underlying return from a contract. And it is this very criterion that exposes various Islamic banking products to a wide array of unique risks (Oscar Guzman, 2014).
11- Critical Evaluation of Bay Al-Salam Risks:
As per critics views Bay Al Salam is legality of derivatives trading. Bay Al Salam gives the basis of to the Islamic future market. It is not a fullest way of Islamic banking but it corporate the modern needs of buyer and seller. Their major role is to establish an exchange, an agency to regulate and monitor the future market of Islamic banking and financial, while Bay Al Salam only used to clarify the future thoughts not very useful and authentic technique for present Islamic banking system (Abdullah, Daud Vicary 2007). In fact the present system is necessary to look and tried to overcome its loop holes in the most competitive market of banking and finance. In the view of Fahim Khan the way of Bay Al Salam conclusion covers stock indices only but it needs to cover other major aspect like gambling that is the major part of future market place. This prospective of Islamic banking is only acceptable when it is relate to the real activity and helps to shift risk from vulnerable products (Abdullah, Daud Vicary 2007).
These features that are Salam based suggested as the advance payment which is necessary and consequence for genuine trading and liquidity problems. This problem can be solving by the help of finance of future trading principles. But we can say that the practicabilities of this kind of mechanism are only possible when the problem exist (Abdullah, Daud Vicary, 2007)
12- Critical Evaluation of Ijarah Risks:
Ijara is the key ownership of property which is not transferred throughout and receives the benefits of using these assets. Critical evaluations of the associated risks are the ownership of the asset that remains with the bank and asset to revert to the bank. Critics said that both products involve cash outflows for customer or cash flows for ht future period of bank definite. It is very important in the lease agreement and all facts and features that are in favour of both lesser and lessor. It is contain in Islamic banking only.
This paper covers the all facts of Bay Al Salam and Ijarah in the light of critical analysis and exposure in Islamic banking. In fact Islamic banking is one of the most appropriate and exposure in the market of finance and economy of any country. Ijarah and Bay Al Salam are the two most important aspects and principles of Islamic banking. These two aspects cover the basic principles of cash flow and lease agreement. This study drives the key instruments of derivatives contracts in Islamic finance depend on fundamental contacts of trading. Rejection or acceptances are the key levels of risk management. These tools are totally in favour of new Islamic law and the possibility of admitting the most suitable alternatives. Monitoring of Islamic models is much easier than other guidelines of risk management. in fact these aspect of risk management are very appropriate foe the profit and loss sharing principles. It may distribute the Islamic system and the consequences of over all parties of business. Debt financing is become the conventional system and may help to relief the investors.
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