The author describes operational risk management as one of the financial management strategies that have unique elements and definite and clear goals. As such, it very clear that operational risk management, must develop a mechanism for implementing operational risk policies and strategies as well comprehensive data capturing for assessing risk exposure. At this point, the author points out that every organization has unique environments that requires unique set of solutions. This means that there is no single framework that can be equivocally used in all situations.
However, the author maintains that there are fundamental elements that are generally prevalent in effective frameworks. This includes policies and procedures that give clear direction of actions to be taken in the management of operational risks and the use of appropriate tool for identifying risks and measuring risk exposures. The researcher examines the evaluation of operational risk management as practiced in Japanese and Islamic financial institutions. Japanese financial institutions recognize the need to identify and quantify operational and prevalent risks.
The writer reveals that Japanese banks and financial institutions recognize the need to introduce time –series analysis as one of the strategies for enhancing the effective management of operational policies. The author reinforces this argument by examine a study case done by a Japanese group (Study Group 2006) which came up with various technical caveats using the Loss Distribution Method (LDM) a method that is also commonly used in operational risk quantification techniques.
The writer argues that by focusing on narrow spectra of technical shortcoming, the method presents other challenges that must be stressed. The self assessment and control method is also used in Japanese banking institutions and other financial institutions by identification of inherent risks and establishment of appropriate controls to safeguard the financial institutions from risk exposures. This method also makes use of key risk indicators to give forecasts on prevalent risk dynamics. This method is more effective since it gives institutions the time to take preemptive actions and mitigation measures.
In Islamic banks, the concept of operational risk management is designed to ensure that financial products are compliant to Sharia rules and regulations and to enhance the capacity and ability of financial institutions to carry out their fiduciary roles effectively. In addition, the author points out that under Islamic banking and financial systems other elements useful in assessing operational risk is the observation of people risk, technology related risk and risks born from legal processes.
A critical analysis reveals that under Islamic banking peoples risk has a greater and deeper meaning compared to the convectional banking principles. As such, the general understanding is that this could lead to increased exposure to operational risks. The author points out that Islamic banking and other financial system focus on sources of operational losses. The author notes that in advanced financial industry, Islamic banking leverages on technology just like the conventional banking systems.
However, the success of the effective use of technology depends largely on the ability to assemble and manage data bases that help in timely decision making processes to meet client expectations and keep abreast with industry changes and general trends. The use of advanced technologies has shaped the competitive dynamics leading to increased use of information technology solutions in enhancing competitive advantage and market leadership based on market share and positioning strategy.