CREDIT RISK MANAGEMENT IN ISLAMIC BANKING: A SYSTEM THINKING APPROACH

This research article aims to develop a system dynamic mechanism for examining the Credit Risk Management (CRM) system of Islamic banking institutions (IBIs) of Pakistan. This model has facilitated to comprehend the connections among various characters of credit risk. For the development of the System Dynamic Model (SDM), this research has been carried out in three sequential stages. The system dynamic model illustrates that an upsurge in credit risk fuels IBIs to proactively form a mechanism for the management of credit risk according to the recommendations given by the State Bank of Pakistan (SBP). Therefore, the IBIs in Pakistan manage the credit risk by conducting credit risk analysis not only before providing finance to customers but also throughout the life of business relations. This analysis consists of the evaluation of a customer's financial needs along with repaying ability, analysis of the customer's credit history, assessment of the customer's business proficiency, and assessment regarding the reliability, appropriateness, and adequacy of provided guarantees and collaterals. The model also describes that it is essential for IBIs to honor their contractual commitments to avoid unnecessary counterparty risk. Moreover, for abating the credit risk, it is vital for IBIs to follow effective financial and administrative CRM procedures. (C) 2020 INT TRANS J ENG MANAG SCI TECH.