Abstract
This research paper aims to explore the operational risk
management structure of Pakistani Islamic banking system by developing a system dynamic model through a novel methodology called
system thinking approach. This model has facilitated to understand the
interrelationships between various characters of operational risk and its
management. In order to develop the system dynamic model, this study
has been divided into three stages. In the first stage, the researchers
have developed an initial casual loop diagram on the basis of preliminary
knowledge and understanding achieved through literature review on causal
interconnections between various variables of operational risk management
system. In the second stage, semi-structured face to face interviews
have been conducted from risk managers to improve, confirm and add
risk factors in the preliminary model. In the last stage, a refined system
dynamic model has been developed based on interview data analysis.
The model indicates that an escalation in the operational risk induces
the Islamic banking institutions to proactively develop a framework to
manage the operational risk as per the prudential regulations of the central
bank. Therefore, the Islamic banking institutions take steps to manage
the operational risk by giving training to their staff, making contingency
plans, adopting advanced technology for Islamic banking, improving
internal control system, confirming disciplined workplace environment and
ensuring compliance with Shar¯ı‘ah and fiduciary responsibilities.
Muhammad Farhan, Hassan Mobeen Alam. (2018) Operational Risk Management in Islamic Banking; A System Thinking Approach, Journal of Islamic Business and Management, Volume 8, Issue 2.
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