Effect of Risk Management Practices on the Performance of Islamic Banks and Islamic Window in Sri Lanka

This study was aimed to analyze the relationship between risk management practices and financial performance in the Islamic banks in Sri Lanka. For achieving this objective, the study assessed the current risk management practices of the Islamic banks, Islamic windows and links them with the banks’ financial performance. The study used both the primary data from survey questionnaires and secondary data from annual reports. For this purpose the present study selected Risk environment, risk measurement, risk mitigation, risk monitoring and internal control as independent variables while return on assets (ROA) is utilized as dependent variables for the period from year 2010 to year 2015. For the statistical analyze purpose, the study used descriptive, correlation, and multiple regression model. The results revealed that independent variable factors impact on ROA of 85.4%. The further revealed that risk environment, risk measurement, risk monitoring and internal control system have positive significant level with financial performance and risk mitigation factor has no significant with financial performance. The results of the study shed some lights on the risk management practices of the Islamic banks in Sri Lanka. By assessing their risk management practices and linking them with financial performance, the study contribute in terms of recommending strategies to strengthen the risk management practices of the Islamic banks so as to increase the overall competitiveness in the Islamic banking industry. Keywords: Risk environment, Risk measurement, Risk monitoring, Risk mitigation, Internal control.