Abstract
Operational risk is closely associated with an Islamic banking institution’s daily business. This risk exists before all other risks exist
and will always be present in an Islamic banking institution’s operation. 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 approach, which
is system thinking approach, in order to understand the interrelationships between various characters of operational risk and its
management. In order to develop the system dynamic model this study is divided into three stages. In the first stage the researcher
has developed an initial casual loop diagram based on 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 in the preliminary model and in the
final 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 Shariah and
fiduciary responsibilities
Muhammad Farhan, Hassan Mobeen Alam. (2019) Operational Risk Management in Islamic Banking; a System Thinking Approach, Paradigms , Vol 13, Issue 2.
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