Fiduciary risk
The risk that an institution fails to meet the standards that apply to its duties as trustee or manager of others' funds.
Fiduciary risk is the risk arising from an institution's failure to perform in accordance with explicit and implicit standards applicable to its fiduciary responsibilities, as IFSB-29 defines it. It is significant in Islamic finance because banks and takaful operators often act as mudarib, agent or trustee for investment account holders and participants. Negligence or misconduct in that role can make the institution liable for losses it would otherwise not bear.
Sources
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.
Related terms
MudaribThe manager in a mudarabah, who runs the venture and earns a share of profit rather than a guaranteed fee.WakalahAgency: one party appoints another to act on its behalf, with or without a fee.Takaful operatorThe entity that manages a takaful business on behalf of participants, usually for a fee, a profit share or both.Operational riskThe risk of loss from failed processes, systems, people or external events; for Islamic institutions it includes Shariah non-compliance risk.