The rapid and dynamic chaqges in the global financial landscape pose various risks to banking institutions. Operating side by side with conventional banks, lslamic banks are equally vulnerable to risks. The future of lslamic financial institutions will depend to a large extent on how well they manage risks. This ability could be enhanced if the factors affecting these risks are systematically identified. This paper examines the factors affecting credit risk, being the main risk faced by banking institutions and systematically identifies the key factors influencing credit risk formation in lslamic banking operations in Malaysia. A comparison of these factors between lslamic and conventional banking operations is highlighted. Several policy implications are addressed to promote risk management culture in lslamic banking industry
