Risk Management in Islamic Trade Finance

Islamic trade finance, though still not fully developed, has in practice reached the stage in which it calls for a careful review of a wide range of products in export and import financing. The purpose of this paper is to categorize, from a risk management point of view, Islamic trade finance products for asset based&backed and sub-categories of exports and imports. Each cluster of products would necessitate specific risk measures to be taken for a healthy management of lending and borrowing processes. Asset based Murabaha requires transfer of ownership simultaneously from supplier to financier and from financier to the beneficiary of loan. Hence, risk management practices would be similar to conventional lending. Asset backed Murabaha, on the other hand, necessitates holding ownership of the goods financed and gives rise to certain risk to be managed. This paper highlights the risk areas for asset based&backed Murabaha and suggests methods to handle the risk associated with processes shaped by the underlying Islamic trade finance contract.