Three-Layer Integrative Risk Mitigation: A Model of Islamic Financing Risk Management in Indonesia

Abstract

The rapid growth of the Islamic banking industry in Indonesia presents a unique risk landscape, particularly the risk of Sharia non-compliance and yield risk, which are fundamentally different from conventional banking. There is a significant gap between the theoretical frameworks Agency Theory, Risk Theory, and Sharia Compliance Theory and their integrated implementation in operational practice, thus requiring a holistic risk management model. Therefore, this study aims to analyze existing risk management practices and subsequently formulate a comprehensive and contextualized Islamic financing risk mitigation model for Indonesia. Using a qualitative approach, data were collected through in-depth interviews and document analysis from three Islamic commercial banks in Indonesia, then analyzed using an interactive model. Key findings reveal that practitioners manage the duality of commercial and sharia risks through a three-layer integrative risk mitigation model that emerged from field practice. This model consists of: (1) a Sharia Compliance Fortress foundation overseen by the Sharia Supervisory Board; (2) an Institutional Risk Management layer that adapts conventional tools; and (3) a Contract-Specific Risk Management layer to address agency issues such as information asymmetry and moral hazard. The dominance of debt-based contracts is identified as a pragmatic strategy to mitigate the more complex risks of profit-sharing schemes. This study makes a conceptual contribution by proposing a model that aligns these three theoretical pillars within a single operational architecture. Practically, this model offers a strategic framework for practitioners, regulators, and academics to strengthen the effectiveness of risk management while maintaining sharia integrity.

Keywords: sharia financing, risk management, risk mitigation.