Challenges Facing Bank in Financing International Trade: From an Islamic Perspective

Abstract

Risk has always existed in business and it is even predominant when business transactions are done across borders. With the intensification of industrialization, it has resulted in risks that are unknown before. In the competitive business environment today, for business firms to compete, they must not only be able to minimize their risks in doing business, but also be able to take advantage of the growth opportunities presented by doing business in other countries. Hence understanding what risk is and what the perception of business firm towards risk is very important to any bank especially Islamic bank. This study investigates the risks that Islamic banks face in particular when dealing with the Islamic bank mode of financing. There are some inherent risks involved when Islamic bank uses the Islamic principle of financing. Managing risk management is a complex discipline even in a very simple commercial transaction. Nevertheless, risk is a core element of business (particularly international business) which is closely related to return. Financing international trade inevitably is complex and involves risks, irrespective of the markets in which business firms chose to conduct their business transactions. Hence, it is pertinent that an analysis on issues of risk management in the Islamic Financial system is undertaken as well. A Sharia' compliant risk management is analysed and some alternatives to risk management is proposed for Islamic banks in mitigating their risks in financing international trade. JEL Classification Codes: F190, F300, F390, G320.