Banking and Risk Management in Afghanistan banking system.

1. Saturday, July 22, 2017 1

2. By:
Mohammad Naweed Yosofi
Deputy Chief Risk Officer
Afghan United Bank
BANKING
and
RISK MANAGEMENT
2Saturday, July 22, 2017

3. BANKING
• The concept
• Development
• Importance in economy
• Da Afghanistan Bank
3Saturday, July 22, 2017

4. BANKING
• The concept
• Development
• Importance in economy
• Da Afghanistan Bank
4Saturday, July 22, 2017

5. BANKING
• The concept
• Development
• Importance in economy
• Da Afghanistan Bank
5Saturday, July 22, 2017

6. BANKING
• The concept
• Development
• Importance in economy
• Da Afghanistan Bank
6Saturday, July 22, 2017

7. BANKING
• The concept
• Development
• Importance in economy
• Da Afghanistan Bank
7Saturday, July 22, 2017

8. AFGHAN UNITED BANK
• Incorporated on October 4, 2007 as Full-fledged privately owned
commercial bank
• First bank in Afghanistan to introduce Islamic Banking
• 27 branches across the country
• Financial Services and products (Conventional and IB)
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9. AUB-STRUCTURE
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10. DEPARTMENTS and SECTIONS
• Operations
• Branches
• Cash Management
• Money Transfer
• PSD
• Account Administration
• Credit
• Risk
• Finance
• HR
• Compliance
• IT and CBS
• Audit
• IBW
• Marketing
• General Services
• Security
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11. DEPARTMENTS and SECTIONS
• Operations
• Branches
• Cash Management
• Money Transfer
• PSD
• Account Administration
• Credit
• Risk
• Finance
• HR
• Compliance
• IT and CBS
• Audit
• IBW
• Marketing
• General Services
• Security
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17. RISK
• Risk implies future uncertainty
about deviation from expected
earnings or expected outcome.
• Risk measures the uncertainty
that an investor is willing to take
to realize a gain from an
investment.
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18. Cont..
Or in simple terms;
• The possibility of incurring
misfortune or loss.
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19. TYPES OF RISK
• Uncontrollable by an organization
• Macro in nature
Systematic Risk
• Controllable by an organization
• Micro in nature
Unsystematic
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20. TYPES OF RISK
• Uncontrollable by an organization
• Macro in nature
Systematic Risk
• Controllable by an organization
• Micro in nature
Unsystematic
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Market Risk
Interest Rate Risk
Inflationary Risk
Systematic
Risk

21. TYPES OF RISK
• Uncontrollable by an organization
• Macro in nature
Systematic Risk
• Controllable by an organization
• Micro in nature
Unsystematic
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Business/Liquidity Risk
Credit Risk
Operational Risk
Unsystematic
Risk

22. TYPES OF RISK
• Uncontrollable by an organization
• Macro in nature
Systematic Risk
• Controllable by an organization
• Micro in nature
Unsystematic
22Saturday, July 22, 2017
Business/Liquidity Risk
Credit Risk
Operational Risk
Unsystematic
Risk

23. TYPES OF RISK
• Uncontrollable by an organization
• Macro in nature
Systematic Risk
• Controllable by an organization
• Micro in nature
Unsystematic
23Saturday, July 22, 2017
Business/Liquidity Risk
Credit Risk
Operational Risk
Unsystematic
Risk

24. TYPES OF RISK
• Uncontrollable by an organization
• Macro in nature
Systematic Risk
• Controllable by an organization
• Micro in nature
Unsystematic
24Saturday, July 22, 2017
Business/Liquidity Risk
Credit Risk
Operational Risk
Unsystematic
Risk

25. TYPES OF RISK IN AUB
• Operational Risk
• Credit Risk
• Liquidity Risk
• Market Risk
• Strategic Risk
• Security/Collateral Risk
• Exchange Risk
• Country Risk
• IT and Cyber Risk
• Legal/Compliance Risk
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• Operational Risk
• Credit Risk
• Liquidity Risk
• Market Risk
• Strategic Risk

26. RISK MANAGEMENT
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As per the ISO 31000:2009 the risk management is defined as below;
Risk Management is the systematic application of policies, procedures,
manuals and practices to the tasks of establishing the context,
• Identifying
• Analyzing
• Assessing
• Treating
• Monitoring
• Communicating

27. Saturday, July 22, 2017 27
STEPS IN RISK MANAGEMENT

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STEPS IN RISK MANAGEMENT
Risk Identification
Determining risks that could potentially prevent the
bank from achieving its strategic objectives.

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STEPS IN RISK MANAGEMENT
Risk Analysis
The process of defining and analyzing the potential
danger/loss to the bank.

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STEPS IN RISK MANAGEMENT
Risk Assessment
Determining the quantitative or qualitative
estimate of risks that are defined.

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STEPS IN RISK MANAGEMENT
Risk Treatment
Determining the quantitative or qualitative
estimate of risks that are defined.

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STEPS IN RISK MANAGEMENT
Risk Monitoring
• Tracking identified risks
• Monitoring residual risks
• Executing risk response plan
• Evaluating their effectiveness

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STEPS IN RISK MANAGEMENT
Communicating
Exchange of information about risks with the
Board of Supervisors/Directors and Management

34. BASEL I, II, III
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35. BASEL
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• City in Switzerland
• The Basel Committee founded 1974
• Membership of G10
• Headquartered at the BIS (Bank for International Settlements)
• Standards for banking regulations and banking supervision

36. BASEL I
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• The 1988 Accord called for a minimum ratio of capital to risk-
weighted assets of 8% to be implemented by the end of 1992
• Focused majorly on credit risk
• Under Basel I, banks that operate internationally are required to have
a risk weight of 8% or less
The Committee then refined the framework to address risks other than
credit risk, which was the focus of the 1988 Accord.

37. BASEL II
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• In June 1999, proposal for a new capital adequacy framework to
replace the 1988 Accord. This led to the release of a revised capital
framework in June 2004
• Three pillars;
1. Minimum Capital Requirements
2. Supervisory Review
3. Market Discipline

38. BASEL II
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• In June 1999, proposal for a new capital adequacy framework to
replace the 1988 Accord. This led to the release of a revised capital
framework in June 2004
• Three pillars;
1. Minimum Capital Requirements
2. Supervisory Review
3. Market Discipline

39. BASEL II
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• In June 1999, proposal for a new capital adequacy framework to
replace the 1988 Accord. This led to the release of a revised capital
framework in June 2004
• Three pillars;
1. Minimum Capital Requirements
2. Supervisory Review
3. Market Discipline

40. BASEL II
Saturday, July 22, 2017 40
• In June 1999, proposal for a new capital adequacy framework to
replace the 1988 Accord. This led to the release of a revised capital
framework in June 2004
• Three pillars;
1. Minimum Capital Requirements
2. Supervisory Review
3. Market Discipline

41. BASEL III
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• Even before Lehman Brothers collapsed in September 2008, the need
for a fundamental strengthening of the Basel II framework had
become apparent.
• In July 2009, the Committee issued a further package of documents
to strengthen the Basel II
• Revised in December 2010 as per the proposed standards of G20

42. BASEL III
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• Even before Lehman Brothers collapsed in September 2008, the need
for a fundamental strengthening of the Basel II framework had
become apparent.
• In July 2009, the Committee issued a further package of documents
to strengthen the Basel II
• Revised in December 2010 as per the proposed standards of G20

43. ERM (ENTERPRISE RISK MANAGEMENT)
• Enterprise Risk is the
aggregation of the complete set
of risks faced by a firm.
• Bank wide risk management
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44. ERM VS. TRADITIONAL RISK MANAGEMENT
• Strategic Application
• The enterprise/bank wide business decisions
• All departments are involved in value-based objectives
• Risks Considered
• Any risk facing by the enterprise/bank that prevent them from achieving
the goals regardless of the risk types
• Performance Metrics
• Result based performance
• Maximizing possible opportunities for growth
• Business enablers
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45. Saturday, July 22, 2017 45

46. RISK MANAGEMENT IN AUB
• CREDIT RISK
• Credit Risk Assessment
• Monitoring
• Portfolio Management and Reporting
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47. RISK MANAGEMENT IN AUB
• CREDIT RISK
• Credit Risk Assessment
• Monitoring
• Portfolio Management and Reporting
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Credit Risk Grading Score Sheet
1. Financial Risk = 50%Weight
• Leverage (Debt to Equity Ratio)
• Liquidity (Current and Quick Ratios)
• Profitability (Operating Profit Ratio)
• Coverage (Interest Coverage Ratio)
2. Business/Industry Risk = 18%Weight
3. Management Risk = 7%Weight
4. Security Risk = 15%Weight
5. Relationship Risk = 10% Weight

48. RISK MANAGEMENT IN AUB
• CREDIT RISK
• Credit Risk Assessment
• Monitoring
• Portfolio Management and Reporting
• OPERATIONAL RISK
• RCSAs (Risk and Control Self Assessment)
• KRIs (Key Risk Indicators)
• SLAs (Service Level Agreements)
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49. Cont.…
• LIQUIDITY and MARKET RISK
• VAR (Value at Risk)
• Statistical Analysis
• Exchange Rate Sensitivity Analysis
• SHARIA RISK – IBW (Islamic Banking Window)
• Unique Risk
• Sharia Non-compliance risk
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50. RISK TREATMENT STRATEGIES
Majorly there are below strategies however, it depends on nature
and type of risks;
1. Avoid Risk
2. Reduce Risk
3. Share or Transfer Risk
4. Accept Risk
Saturday, July 22, 2017 50

51. RISK TREATMENT STRATEGIES
Majorly there are below strategies however, it depends on nature
and type of risks;
1. Avoid Risk
2. Reduce Risk
3. Share or Transfer Risk
4. Accept Risk
Saturday, July 22, 2017 51

52. RISK TREATMENT STRATEGIES
Majorly there are below strategies however, it depends on nature
and type of risks;
1. Avoid Risk
2. Reduce Risk
3. Share or Transfer Risk
4. Accept Risk
Saturday, July 22, 2017 52

53. RISK TREATMENT STRATEGIES
Majorly there are below strategies however, it depends on nature
and type of risks;
1. Avoid Risk
2. Reduce Risk
3. Share or Transfer Risk
4. Accept Risk
Saturday, July 22, 2017 53

54. RISK TREATMENT STRATEGIES
Majorly there are below strategies however, it depends on nature
and type of risks;
1. Avoid Risk
2. Reduce Risk
3. Share or Transfer Risk
4. Accept Risk
Saturday, July 22, 2017 54

55. RISK APPETITE
The amount and type of risk that
an enterprise/bank is willing to
take in order to meet their
strategic objectives.
Defined by the Board of
Directors/Supervisors.
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56. GENERAL CONCEPT IN ERM
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57. GENERAL CONCEPT IN ERM
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58. GENERAL CONCEPT IN ERM
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59. CREDIT
FUNDED FACILITIES
• Overdraft
• Term Loan (Short, Medium and
Long term)
• Investments in IBW (Murabaha,
Ijara and Mushareka)
NON-FUNDED FACILITIES
• Bank Guarantees
• Letter of Credits
• Line of Credit (conditional)
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60. CREDIT
FUNDED FACILITIES
• Overdraft
• Term Loan (Short, Medium and
Long term)
• Investments in IBW (Murabaha,
Ijara and Mushareka)
NON-FUNDED FACILITIES
• Bank Guarantees
• Letter of Credits
• Line of Credit (conditional)
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61. CREDIT ANALYSIS
1. Character
2. Capital
3. Capacity
4. Collateral
5. Condition
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62. ••••••••••••••••••••••••••••••••••
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Thank you for your attention!
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