TOPIC 8 : RISK MANAGEMENT FOR ISLAMIC INSTITUTION Flashcards
WHAT IS RISK ?
- GENERAL : ignorance of any potential outcome
- SPECIFIC : when objective / subjective probabilities can be assigned to potential outcomes
Financial Risk
- possibility that the outcome of an action or event could bring adverse impact
- outcomes either result direct loss of earning/ capital
what is the process to identify risk?
Identification- measurement- monitoring & control- reporting
what is the importance of risk reporting
- Risk management is integral elemant
- Investors need to observe and form opinion
- inadequate risk can influence crisis to happen
what is shariah perspective on risk
- no risk no reward principle
- profit comes with liability and considers lawful if the people who gain profit also bear the losses
major risk type in islamic bank
- credit risk : attributed of delays, deferred and default in payments
- market risk : adverse movements in IR, commodity prices and foreign exchange risk
- equity risk : adverse changes in market value (and liquidity) of equity held
- liquidity risk: adverse cash flow
- Rate of return risk : changes in the expectation of the return on investment
- operational risk : failed processes, people and system
risk mitigating tools
takaful
personal guarantee
waad promise of purchase or sell
pledge of assets as collateral : inventories, shares, sukuk, units
risk measurement
risk and control assessment : establish risk and control rating
shariah risk key indicators (KRI)
- number of incidence of shariah on compliance
- risk level may be determined once impact has been establish
- impacts can cover minor, moderate, major
IFSB principles of risk management
- IFIS shall make a timely and appropriate disclosure of information to investment account holders (IAH) so they can assess the potential risks and rewards
- IFIs ensure a quality and timeliness of risk available to the regulatory authorities
- IFIs should have a good process for executing all the elements of the risk management
IFSB 4
- It is a disclosure to promote transparency and marketing discipline
- it have a set of disclosures that are differentiated by the type of stakeholders
WHAT IS SHARIAH RISK MANAGEMENT ACCORDING TO SGPD (2019)
- it is a functions that systematically identifies, measures, monitors and reports shariah non compliance risks
- An IFI shall ensure that its risk officers have the requisite knowledge on shariah requirements
The functions :
- identify the shariah non compliance risk exposures
- establish appropriate risk mitigation measures
- monitor the shariah non compliance risk exposures and effectiveness of the risk mitigation measures
- report to the board shariah committee
Impact of shariah non compliance
-Reputation will be affected and reduce the confidence of the customers
- contract entered and made shall becomes null
- income generated might declared non halal (HARAM)
- Leading to legal costs
IFSA
DIVISION 1 : SHARIAH COMPLIANCE (SECTION 27: INTERPRETATION, SECTION 28: DUTY OF INSTITUTION)
DIVISION 2 : SHARIAH GOVERNANCE (SECTION 30: ESTABLISHMENT OF SHARIAH COMMITTEE, SECTION 21: DUTIES)
DIVISION 3: AUDIT ON SHARIAH COMPLIANCE (SECTION 37: APPOINMENT OF A PERSON BY INSTITUTION)
WHAT NEED TO DO if the institution not compliance with shariah ?
- immediately notify the bank and its shariah committee
- cease for carrying on such business. affair or activity
- within 30 days of becoming aware of it submit it to the bank a plan of rectification of the non compliance
will get penalty
a term not exceeding 8 years or fine
not exceeding 25 million (or both)
Definition of shariah non compliance risk
- failure to comply with the shariah rules and principles that have been determined by the board
- the risk of legal or regulatory sanctions, financial loss or non financial implication including reputation damage
how to identify the shariah non compliance ?
- have a dept research
- approved products based on conditions
- have a shariah quality and deliberation process
what tools to identify the shariah non compliance ?
- shariah non compliance incidents reports
- shariah audit reports on shariah governance
- shariah risk control assessments
all of this will need to be reported and the reporting shall cover both reporting of actual and potential shariah non compliance
Shariah non compliance event management
- identification : shariah non compliance events
- confirmation : have a confirmation by officer in shariah control functions
- decisions : by the SC on the potential SNC event leading to the Actual SNC events
- proposal on the rectification plan for actual SNC events
shariah non compliance risk monitoring and control
- all the identified risk with corrective action shall be reported
- review all the policies and procedures to enhance areas of operational risk areas
- enhance shariah control functions
