Professional Documents
Culture Documents
Banks
2) What are some of the main specific risk issues Islamic Banks face?
5) Your Questions
Page 2
Risk Management Approach in Islamic Banks
- Governance
- Framework (COSO)
- Risk Culture
- Systemic Risk in
Islamic Banking?
Page 3
Generic Risks In Islamic Banking
Credit Risk
-Loss
oss given
g e Default
e au t higher
g e
-Contract Risk
-Limited
Limited Data for effective application scoring
Page 4
Generic Risks In Islamic Banking
Market Risk
-Liquidity
qu d ty issues
ssues
-Valuation
Page 5
Generic Risks In Islamic Banking
Operational Risk
-Complexity higher
-Limited
ted knowledge
o edge oof staff
sta
-Processes
-Systems
Page 6
Specific Risks in Islamic Banking
-Displaced
sp aced Commercial
Co e c a Risk
s
Page 7
Typical Balance Sheet
ASSETS LIABILITIES
RetailFinancing Restricted InvestmentAccountHolders
CorporateCommercial Financing UnrestrictedInvestmentAccountHolders
EquityBased
q y Financings/Partnerships
g / p ProfitSharingInvestmentAccounts
g
Investments (Sukuk) DemandDeposits
Shareholders
EquityInvestment
Displaced
Risk
CommercialRisk
RateofReturnRisk
8
Specific Risks in Islamic Banking
9
Specific Risks in Islamic Banking
Due to GIA/SIA
DuetoGIA/SIA Return not guaranteed
OperationalRisk Fid i
Fiduciary risk
i k absorbed
b b db by B
Bank
k
Page 10
Profit Equalization Reserve & Investment Risk Reserve
Investment
SourcesofFunds ShareholdersFunds
Accounts
Fund Allocation
FundAllocation Assets
PER
IRR
Profit&Loss
Bank Bank IAH
Distribution
11
Specific Risks In Islamic Banking
Page 12
Specific Risks In Islamic Banking
Page 13
Risk/Return within Set Risk Appetite
Risk Appetite
-Linked
ed to st
strategy
ategy a
and
d Macro
ac o Economic
co o c Environment
o e t
-Effective Communication
Economic
MaterialRisk InitialCapital
Capital
Assessment Assessment
In
nternal Capita
Definition
Capital Supply
CapitalSupply
al Planning
InternalTarget
Internal Target CapitalStress
Capital Stress
CapitalDemand
RWCR Test
Page 15
Risk Assessment
Develop comprehensive risk library
Credit Risk
CreditRisk Market Risk
MarketRisk
Migration Risk
16
Risk Assessment
OperationalRisk
Legal Risk
Systemic
y Risk
Shariah Non
Compliance Risk
Fiduciary Risk
17
Materiality Assessment
For instance:
Quantitative:Netexposurerepresentsmorethan5%ofBank
Quantitative: Net exposure represents more than 5% of Banksscapitalfor
capital for
respectiveRisktype
Qualitative:Banksexpertjudgmentthatsuchriskcouldthreatensurvival
ofBank
JeroenThijs2012
18
Risk/Return within Set Risk Appetite
-Determine
ete e minimum
u cap
capital
ta needed
eeded to suppo
supportt bus
business
ess
jeroen@bankislam.com.my www.bankislam.com.my
Page 21