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
