This document discusses risk management in Islamic banking. It begins with an introduction to risk management, defining risk and outlining the risk management process. It then discusses the concept of risk management in Islam and provides an agenda covering introduction to risk management, risk management in Islamic banks, guiding principles of risk management, risk management governance, and risk management tools. The document focuses on the unique risks for Islamic banks, including Shariah non-compliance risk and rate of return risk. It emphasizes that Shariah compliance is paramount for Islamic banks.
Takaful is an Islamic insurance system based on mutual assistance and donation. It involves participants voluntarily contributing to a collective fund to guarantee each other against losses. If a participant suffers a loss, they receive money from the fund to help cover costs. Any surplus contributions are shared among participants according to a Mudarabah agreement. Takaful aims to help those in need without involving interest, gambling or other prohibited elements unlike conventional insurance.
Risk management is a vital process for Islamic banks that consists of several interconnected phases. It includes establishing a risk management framework based on ISO 31000:2009, identifying risks through analysis of products and activities, measuring risks using a composite risk index, developing a risk matrix to plot risks by severity and impact, reviewing risks and monitoring actual risk levels. Effective risk management also requires infrastructure like documentation of policies, an organizational structure with risk management committees, use of information technology systems and databases, and selecting appropriate risk measurement models. The goal is to properly manage both generic financial risks and unique risks to Islamic banks like Sharia non-compliance, displaced commercial, and equity investment risks.
The document provides an overview of the fundamentals of Takaful, which is an Islamic insurance system based on mutual cooperation and donation. It discusses the key principles of Takaful, including tabarru' (donation), ta'awun (mutual cooperation), and mudharabah (profit-sharing). The three elements typically found in conventional insurance that are not compliant with Islamic law - gharar (uncertainty), maisir (gambling) and riba (interest) - are also examined. The document then outlines the basic Takaful operating models used in practice and the legal/regulatory framework governing the Takaful industry in Malaysia.
This document discusses credit risk in Islamic finance. It begins by defining credit risk as the potential financial loss from a counterparty failing to meet contractual obligations. It then outlines the various types of credit risk exposures that can occur in common Islamic financing contracts such as mudarabah, musharakah, murabahah, ijarah, salam and istisna. The document also discusses IFSB guiding principles for credit risk management, including conducting due diligence reviews and having appropriate risk mitigation techniques. It emphasizes the importance of effective credit risk management for ensuring the financial stability and growth of Islamic banks.
This document discusses Shariah non-compliance risk in Islamic finance. It begins by defining Shariah non-compliance risk as the risk arising from a failure of Islamic banks to comply with Shariah rules and principles as determined by their Shariah boards. This can result in contracts being cancelled and income not being recognized. The document then outlines various measures that can be taken to manage this risk, such as ensuring contracts are structured to fulfill the pillars of a valid Islamic contract. Several examples of potential Shariah non-compliance in contracts like tawarruq, mudharabah and istisna' are also provided.
This document discusses risk management in Islamic banking. It begins with definitions of risk management and describes the risk management process. It then outlines the major risks faced by both Islamic and conventional banks, as well as unique risks faced only by Islamic banks. The document discusses the Shariah perspective on risk, as well as tools for risk mitigation and measurement. It provides guidance principles from Basel, IFSB, and other organizations and discusses challenges in capturing unique risks of Islamic banking. It concludes with ten rules of risk management and a word of caution about managing risks in life.
This document discusses Islamic investment in equities markets. It begins by outlining the types of securities, including common stock and preferred stock. Common stock represents ownership in a company and provides rights to dividends and voting. Preferred stock has limited voting rights but priority claim to dividends. The document then examines the underlying Shariah contract of stocks, which is based on principles of Musharakah profit and loss sharing. While common stock is generally permissible, preferred stock faces restrictions. The document concludes by discussing various ways shareholders can be rewarded, such as cash dividends, bonus issues, and rights issues, all of which can be compliant with Shariah perspectives.
This document provides background information on Affin Islamic Bank Berhad (AIBB), including its establishment, key milestones, and importance of Shariah governance. It discusses differences between Shariah and corporate governance as well as the roles and qualifications of a Shariah board. The document outlines AIBB's Shariah governance structure, including its Shariah committee and management team. It also notes some crucial issues in Islamic financial institutions regarding female Shariah board members and transparency.
Takaful is an Islamic insurance system based on mutual assistance and donation. It involves participants voluntarily contributing to a collective fund to guarantee each other against losses. If a participant suffers a loss, they receive money from the fund to help cover costs. Any surplus contributions are shared among participants according to a Mudarabah agreement. Takaful aims to help those in need without involving interest, gambling or other prohibited elements unlike conventional insurance.
Risk management is a vital process for Islamic banks that consists of several interconnected phases. It includes establishing a risk management framework based on ISO 31000:2009, identifying risks through analysis of products and activities, measuring risks using a composite risk index, developing a risk matrix to plot risks by severity and impact, reviewing risks and monitoring actual risk levels. Effective risk management also requires infrastructure like documentation of policies, an organizational structure with risk management committees, use of information technology systems and databases, and selecting appropriate risk measurement models. The goal is to properly manage both generic financial risks and unique risks to Islamic banks like Sharia non-compliance, displaced commercial, and equity investment risks.
The document provides an overview of the fundamentals of Takaful, which is an Islamic insurance system based on mutual cooperation and donation. It discusses the key principles of Takaful, including tabarru' (donation), ta'awun (mutual cooperation), and mudharabah (profit-sharing). The three elements typically found in conventional insurance that are not compliant with Islamic law - gharar (uncertainty), maisir (gambling) and riba (interest) - are also examined. The document then outlines the basic Takaful operating models used in practice and the legal/regulatory framework governing the Takaful industry in Malaysia.
This document discusses credit risk in Islamic finance. It begins by defining credit risk as the potential financial loss from a counterparty failing to meet contractual obligations. It then outlines the various types of credit risk exposures that can occur in common Islamic financing contracts such as mudarabah, musharakah, murabahah, ijarah, salam and istisna. The document also discusses IFSB guiding principles for credit risk management, including conducting due diligence reviews and having appropriate risk mitigation techniques. It emphasizes the importance of effective credit risk management for ensuring the financial stability and growth of Islamic banks.
This document discusses Shariah non-compliance risk in Islamic finance. It begins by defining Shariah non-compliance risk as the risk arising from a failure of Islamic banks to comply with Shariah rules and principles as determined by their Shariah boards. This can result in contracts being cancelled and income not being recognized. The document then outlines various measures that can be taken to manage this risk, such as ensuring contracts are structured to fulfill the pillars of a valid Islamic contract. Several examples of potential Shariah non-compliance in contracts like tawarruq, mudharabah and istisna' are also provided.
This document discusses risk management in Islamic banking. It begins with definitions of risk management and describes the risk management process. It then outlines the major risks faced by both Islamic and conventional banks, as well as unique risks faced only by Islamic banks. The document discusses the Shariah perspective on risk, as well as tools for risk mitigation and measurement. It provides guidance principles from Basel, IFSB, and other organizations and discusses challenges in capturing unique risks of Islamic banking. It concludes with ten rules of risk management and a word of caution about managing risks in life.
This document discusses Islamic investment in equities markets. It begins by outlining the types of securities, including common stock and preferred stock. Common stock represents ownership in a company and provides rights to dividends and voting. Preferred stock has limited voting rights but priority claim to dividends. The document then examines the underlying Shariah contract of stocks, which is based on principles of Musharakah profit and loss sharing. While common stock is generally permissible, preferred stock faces restrictions. The document concludes by discussing various ways shareholders can be rewarded, such as cash dividends, bonus issues, and rights issues, all of which can be compliant with Shariah perspectives.
This document provides background information on Affin Islamic Bank Berhad (AIBB), including its establishment, key milestones, and importance of Shariah governance. It discusses differences between Shariah and corporate governance as well as the roles and qualifications of a Shariah board. The document outlines AIBB's Shariah governance structure, including its Shariah committee and management team. It also notes some crucial issues in Islamic financial institutions regarding female Shariah board members and transparency.
This article will describe about an overview of derivatives in Islamic Finance. Derivative is a "claim on a claim" the value of the derivative will depend on the value of the asset (stocks, bonds, etc) on which it has a claim.
This document discusses various techniques for mitigating risk in Islamic banking. It begins by explaining how Islamic finance prohibits separating ownership from risk like conventional interest-based loans. It then discusses several key risks like credit risk and how Islamic banks estimate expected losses. It provides details on techniques for mitigating different types of risk, including using loan loss reserves, collateral, contracts, partnerships, murabahah structures, salam, parallel salam and sukuk structures. The goal is to encourage risk sharing over risk transferring in accordance with Islamic principles.
This document discusses the principles of Islamic investment. It begins by outlining Islamic worldviews related to investment such as accountability to God and society, justice, and public interest. It then defines Islamic investment as investments that adhere to Islamic principles through profit and loss sharing and avoiding interest, uncertainty, and gambling. The document outlines the sources of Islamic laws, criteria for permissible investments and activities, and challenges in Islamic finance. It also discusses concepts like zakat, speculation vs gambling, and the roles of Sharia supervisory boards and screening.
This document discusses various types of risks faced by Islamic banks, including market risk, interest rate risk, credit risk, liquidity risk, operational risk, legal risk, equity investment risk, rate of return risk, displaced commercial risk, fiduciary risk, Shari'ah compliance risk, reputation risk, and strategies for managing these risks. It provides details on the sources and impacts of each risk and emphasizes the importance of comprehensive risk management systems, internal controls, oversight committees, regular reporting, and adherence to Shari'ah principles for Islamic banks.
The document discusses Shariah screening methodology for classifying stocks as compliant or non-compliant. It outlines the screening process in Malaysia, which involves business activity and financial ratio benchmarks determined by the Securities Commission Shariah Advisory Council. The benchmarks have been revised, and could impact status of some mixed-business companies. The justification for the benchmarks is also discussed, drawing from Islamic legal principles around permissible levels of prohibited elements in items or businesses.
This document discusses derivatives in Islamic finance. It begins by defining derivatives and explaining their main uses, including hedging, speculation, and arbitrage. It then outlines common derivative types like forwards, futures, and options. The document notes that Islamic derivatives must be free of riba (usury), gharar (uncertainty), and maysir (gambling). It discusses how some contracts in Islamic law, like salam and istisna, can serve as the basis for sharia-compliant forward and futures contracts. However, deferring both price and asset delivery poses challenges in avoiding gharar. The salam contract is described as one permissible structure but it requires full prepayment and standardized terms.
The document provides an overview of sukuk, which are Islamic investment certificates that represent ownership in an underlying asset. It discusses various sukuk structures like murabahah, bai bithaman ajil, istisna'a, salam, ijarah, and mudharabah sukuk. Each structure utilizes different Shariah-compliant contracts and involves the securitization of assets into tradable certificates. Key differences between sukuk and conventional bonds are also outlined, such as sukuk representing asset ownership while bonds represent debt.
This document discusses Shariah supervision in Islamic financial institutions. It outlines the models of Shariah advisory services, including international Shariah boards, national Shariah boards, institutional Shariah boards, and outsourcing advisory services. It also describes the establishment of Shariah committees and their duties, which include advising the board, endorsing compliance manuals and documents, and providing written Shariah opinions. The document cautions against excessive flexibility in decisions and explores challenges in Shariah supervision, such as balancing monetary gains with Shariah objectives.
Takaful is an Islamic alternative to conventional insurance based on mutual cooperation and responsibility. It involves participants contributing to a common fund to guarantee each other against loss or hardship. Several fatwas have confirmed takaful's compliance with Sharia. In Pakistan, takaful is growing but faces challenges like lack of awareness, regulatory issues, and limited investment options. Improving products, services, and education can help takaful fulfill its potential.
This document discusses rate of return risk in Islamic finance. It defines rate of return risk as the potential impact of changes in market rates of return on an Islamic bank's net income or equity value. Rate of return risk exists for Islamic banks because they use conventional interest rates as benchmarks, exposing them mismatch risk between asset and liability rates. The document outlines various techniques Islamic banks can use to manage this risk, such as diversifying assets, securitization, and off-balance sheet hedging methods. Managing rate of return risk is important for Islamic bank profitability and competitiveness.
This document provides an overview of Sukuk, which are Islamic investment certificates that represent ownership in an underlying asset. Sukuk offer risk diversification for investors and are asset-backed, tradable, and Sharia-compliant. The document discusses various Sharia contracts that can underlie Sukuk structures, including Murabahah, Ijarah, Mudarabah, and Musharakah. It also compares key differences between Sukuk and conventional bonds, such as Sukuk representing ownership in an asset while bonds represent debt. The document outlines reasons for issuing Sukuk, including raising funds for projects in a Sharia-compliant way and tapping both Islamic and conventional investor bases.
This document provides an overview of Islamic investment funds. It begins by defining investment funds and unit trusts. It notes that investment funds can take the form of mudharabah or wakalah contracts. The document then discusses the classification of investment funds as either open-ended or close-ended. It provides examples of different types of funds categorized by investment portfolio, including equity funds, fixed income funds, money market funds, balanced funds, Islamic funds, sukuk funds, real estate investment trust funds, and exchange traded funds. The key differences between Islamic and conventional funds and how a unit trust works are also summarized.
Musharakah is an Islamic financing structure where two or more parties agree to contribute capital to a business venture with the goal of sharing profits and losses. It is a form of partnership permitted under Islamic law. The document discusses the definition of Musharakah according to Bank Negara Malaysia, how profits and losses are shared, examples of how it can be applied, its origins in the Quran and hadith, and the consensus of Muslim jurists that it is valid.
This document discusses risk management principles for Islamic finance as outlined by the Islamic Financial Services Board (IFSB). It provides an overview of the IFSB's objectives to promote prudent and transparent Islamic financial services through international standards. The key risks for Islamic financial institutions are identified as equity investment, rate of return, displaced commercial, operational, and Shariah compliance risks. The document outlines guiding principles for managing each of these risks, focusing on credit, market, liquidity, and operational risks. The principles emphasize comprehensive risk management and reporting processes, Shariah compliance, and protecting the interests of fund providers.
Islamic banking provides an interest-free alternative to conventional banking based on Shariah (Islamic law) principles. It prohibits Riba (usury or interest) and involves profit/loss sharing arrangements. While still evolving, Islamic banking has grown significantly in recent decades and shows potential to mobilize resources and support economic development in accordance with Islamic values. However, it also faces ongoing challenges in translating principles into practical products and services.
The document provides an overview of Islamic financial systems and principles. It discusses that Islamic finance prohibits riba (interest), gharar (excessive risk), and maysir (gambling). It outlines various Islamic banking contracts and instruments like mudarabah (profit-sharing), musharakah (partnership), murabahah (cost-plus financing), ijarah (leasing), and sukuk (Islamic bonds). The principles of Islamic finance are that wealth must be generated through legitimate and ethical means, risks should be shared, and harmful activities avoided.
Standards & guidelines issued by accounting, auditing, governance (aaoifi)Makhluk Hasan
The document discusses standards and guidelines issued by three organizations for Islamic banking: the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Financial Services Board (IFSB), and Bangladesh Bank. AAOIFI has issued 80 standards covering accounting, auditing, governance, Shariah, and other areas. The IFSB has set 12 standards on risk management, capital adequacy, and other issues. Bangladesh Bank's guidelines cover licensing, Shariah compliance, investment principles, financial statements, and profit distribution for mudaraba deposits.
This document provides information on the Salam contract structure and principles in Islamic finance. It defines Salam as a contract where the purchaser pays for a commodity in full at the time of the contract with deferred delivery. The key principles discussed are that the object of sale must be tangible goods, the price must be known and paid upfront, and delivery date must be specified. It provides an example mechanism of how a Salam contract works between an Islamic bank and customer to provide financing.
Fahad Zafar provides risk management consulting services. He discusses various types of risks that Islamic banks face including credit, market, liquidity, operational and Shariah non-compliance risks. Effective risk management requires identifying, measuring, monitoring and controlling exposures at the strategic, portfolio and transactional levels in accordance with the bank's risk appetite. Key risk indicators and stress testing should be used to assess risk profiles and concentrations.
1. Islamic banking is based on Islamic legal concepts like risk-sharing and prohibits interest-based financing.
2. The purpose of Islamic finance is to mobilize resources for development while conforming to Islamic principles like prohibiting Riba (interest) and Gharar (excessive uncertainty).
3. Islamic banks utilize various financing techniques based on profit-and-loss sharing like Mudarabah, Musharakah, Murabaha, and Ijara to provide financing alternatives to interest.
Professional Persona Project by Ester ConceiçaoEster Conceiçao
Ester Conceiçao was born in Sao Paulo, Brazil and had a passion for drawing from a young age. She enjoyed tennis but realized art was her true calling, inspired by Disney. She decided to study character design at Full Sail University, supported by her family and friends. Ester hopes to make her dream career in animation after graduation.
This document discusses opportunities and challenges for Islamic microfinance. It notes that Islamic economic principles around equality, fairness and risk sharing align well with microfinance goals of poverty alleviation and entrepreneurship. However, Islamic financial services have focused more on religious compliance than social goals, while conventional microfinance often ignores cultural sensitivities. The document then outlines various Islamic microfinance experiments in countries like Bangladesh, Pakistan and Malaysia. It identifies issues around sustainability, transparency and excluding the poorest clients. The document concludes with recommendations for Islamic banks to partner with microfinance institutions and expand rural outreach to better meet the demand for Sharia-compliant microfinance.
This article will describe about an overview of derivatives in Islamic Finance. Derivative is a "claim on a claim" the value of the derivative will depend on the value of the asset (stocks, bonds, etc) on which it has a claim.
This document discusses various techniques for mitigating risk in Islamic banking. It begins by explaining how Islamic finance prohibits separating ownership from risk like conventional interest-based loans. It then discusses several key risks like credit risk and how Islamic banks estimate expected losses. It provides details on techniques for mitigating different types of risk, including using loan loss reserves, collateral, contracts, partnerships, murabahah structures, salam, parallel salam and sukuk structures. The goal is to encourage risk sharing over risk transferring in accordance with Islamic principles.
This document discusses the principles of Islamic investment. It begins by outlining Islamic worldviews related to investment such as accountability to God and society, justice, and public interest. It then defines Islamic investment as investments that adhere to Islamic principles through profit and loss sharing and avoiding interest, uncertainty, and gambling. The document outlines the sources of Islamic laws, criteria for permissible investments and activities, and challenges in Islamic finance. It also discusses concepts like zakat, speculation vs gambling, and the roles of Sharia supervisory boards and screening.
This document discusses various types of risks faced by Islamic banks, including market risk, interest rate risk, credit risk, liquidity risk, operational risk, legal risk, equity investment risk, rate of return risk, displaced commercial risk, fiduciary risk, Shari'ah compliance risk, reputation risk, and strategies for managing these risks. It provides details on the sources and impacts of each risk and emphasizes the importance of comprehensive risk management systems, internal controls, oversight committees, regular reporting, and adherence to Shari'ah principles for Islamic banks.
The document discusses Shariah screening methodology for classifying stocks as compliant or non-compliant. It outlines the screening process in Malaysia, which involves business activity and financial ratio benchmarks determined by the Securities Commission Shariah Advisory Council. The benchmarks have been revised, and could impact status of some mixed-business companies. The justification for the benchmarks is also discussed, drawing from Islamic legal principles around permissible levels of prohibited elements in items or businesses.
This document discusses derivatives in Islamic finance. It begins by defining derivatives and explaining their main uses, including hedging, speculation, and arbitrage. It then outlines common derivative types like forwards, futures, and options. The document notes that Islamic derivatives must be free of riba (usury), gharar (uncertainty), and maysir (gambling). It discusses how some contracts in Islamic law, like salam and istisna, can serve as the basis for sharia-compliant forward and futures contracts. However, deferring both price and asset delivery poses challenges in avoiding gharar. The salam contract is described as one permissible structure but it requires full prepayment and standardized terms.
The document provides an overview of sukuk, which are Islamic investment certificates that represent ownership in an underlying asset. It discusses various sukuk structures like murabahah, bai bithaman ajil, istisna'a, salam, ijarah, and mudharabah sukuk. Each structure utilizes different Shariah-compliant contracts and involves the securitization of assets into tradable certificates. Key differences between sukuk and conventional bonds are also outlined, such as sukuk representing asset ownership while bonds represent debt.
This document discusses Shariah supervision in Islamic financial institutions. It outlines the models of Shariah advisory services, including international Shariah boards, national Shariah boards, institutional Shariah boards, and outsourcing advisory services. It also describes the establishment of Shariah committees and their duties, which include advising the board, endorsing compliance manuals and documents, and providing written Shariah opinions. The document cautions against excessive flexibility in decisions and explores challenges in Shariah supervision, such as balancing monetary gains with Shariah objectives.
Takaful is an Islamic alternative to conventional insurance based on mutual cooperation and responsibility. It involves participants contributing to a common fund to guarantee each other against loss or hardship. Several fatwas have confirmed takaful's compliance with Sharia. In Pakistan, takaful is growing but faces challenges like lack of awareness, regulatory issues, and limited investment options. Improving products, services, and education can help takaful fulfill its potential.
This document discusses rate of return risk in Islamic finance. It defines rate of return risk as the potential impact of changes in market rates of return on an Islamic bank's net income or equity value. Rate of return risk exists for Islamic banks because they use conventional interest rates as benchmarks, exposing them mismatch risk between asset and liability rates. The document outlines various techniques Islamic banks can use to manage this risk, such as diversifying assets, securitization, and off-balance sheet hedging methods. Managing rate of return risk is important for Islamic bank profitability and competitiveness.
This document provides an overview of Sukuk, which are Islamic investment certificates that represent ownership in an underlying asset. Sukuk offer risk diversification for investors and are asset-backed, tradable, and Sharia-compliant. The document discusses various Sharia contracts that can underlie Sukuk structures, including Murabahah, Ijarah, Mudarabah, and Musharakah. It also compares key differences between Sukuk and conventional bonds, such as Sukuk representing ownership in an asset while bonds represent debt. The document outlines reasons for issuing Sukuk, including raising funds for projects in a Sharia-compliant way and tapping both Islamic and conventional investor bases.
This document provides an overview of Islamic investment funds. It begins by defining investment funds and unit trusts. It notes that investment funds can take the form of mudharabah or wakalah contracts. The document then discusses the classification of investment funds as either open-ended or close-ended. It provides examples of different types of funds categorized by investment portfolio, including equity funds, fixed income funds, money market funds, balanced funds, Islamic funds, sukuk funds, real estate investment trust funds, and exchange traded funds. The key differences between Islamic and conventional funds and how a unit trust works are also summarized.
Musharakah is an Islamic financing structure where two or more parties agree to contribute capital to a business venture with the goal of sharing profits and losses. It is a form of partnership permitted under Islamic law. The document discusses the definition of Musharakah according to Bank Negara Malaysia, how profits and losses are shared, examples of how it can be applied, its origins in the Quran and hadith, and the consensus of Muslim jurists that it is valid.
This document discusses risk management principles for Islamic finance as outlined by the Islamic Financial Services Board (IFSB). It provides an overview of the IFSB's objectives to promote prudent and transparent Islamic financial services through international standards. The key risks for Islamic financial institutions are identified as equity investment, rate of return, displaced commercial, operational, and Shariah compliance risks. The document outlines guiding principles for managing each of these risks, focusing on credit, market, liquidity, and operational risks. The principles emphasize comprehensive risk management and reporting processes, Shariah compliance, and protecting the interests of fund providers.
Islamic banking provides an interest-free alternative to conventional banking based on Shariah (Islamic law) principles. It prohibits Riba (usury or interest) and involves profit/loss sharing arrangements. While still evolving, Islamic banking has grown significantly in recent decades and shows potential to mobilize resources and support economic development in accordance with Islamic values. However, it also faces ongoing challenges in translating principles into practical products and services.
The document provides an overview of Islamic financial systems and principles. It discusses that Islamic finance prohibits riba (interest), gharar (excessive risk), and maysir (gambling). It outlines various Islamic banking contracts and instruments like mudarabah (profit-sharing), musharakah (partnership), murabahah (cost-plus financing), ijarah (leasing), and sukuk (Islamic bonds). The principles of Islamic finance are that wealth must be generated through legitimate and ethical means, risks should be shared, and harmful activities avoided.
Standards & guidelines issued by accounting, auditing, governance (aaoifi)Makhluk Hasan
The document discusses standards and guidelines issued by three organizations for Islamic banking: the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Financial Services Board (IFSB), and Bangladesh Bank. AAOIFI has issued 80 standards covering accounting, auditing, governance, Shariah, and other areas. The IFSB has set 12 standards on risk management, capital adequacy, and other issues. Bangladesh Bank's guidelines cover licensing, Shariah compliance, investment principles, financial statements, and profit distribution for mudaraba deposits.
This document provides information on the Salam contract structure and principles in Islamic finance. It defines Salam as a contract where the purchaser pays for a commodity in full at the time of the contract with deferred delivery. The key principles discussed are that the object of sale must be tangible goods, the price must be known and paid upfront, and delivery date must be specified. It provides an example mechanism of how a Salam contract works between an Islamic bank and customer to provide financing.
Fahad Zafar provides risk management consulting services. He discusses various types of risks that Islamic banks face including credit, market, liquidity, operational and Shariah non-compliance risks. Effective risk management requires identifying, measuring, monitoring and controlling exposures at the strategic, portfolio and transactional levels in accordance with the bank's risk appetite. Key risk indicators and stress testing should be used to assess risk profiles and concentrations.
1. Islamic banking is based on Islamic legal concepts like risk-sharing and prohibits interest-based financing.
2. The purpose of Islamic finance is to mobilize resources for development while conforming to Islamic principles like prohibiting Riba (interest) and Gharar (excessive uncertainty).
3. Islamic banks utilize various financing techniques based on profit-and-loss sharing like Mudarabah, Musharakah, Murabaha, and Ijara to provide financing alternatives to interest.
Professional Persona Project by Ester ConceiçaoEster Conceiçao
Ester Conceiçao was born in Sao Paulo, Brazil and had a passion for drawing from a young age. She enjoyed tennis but realized art was her true calling, inspired by Disney. She decided to study character design at Full Sail University, supported by her family and friends. Ester hopes to make her dream career in animation after graduation.
This document discusses opportunities and challenges for Islamic microfinance. It notes that Islamic economic principles around equality, fairness and risk sharing align well with microfinance goals of poverty alleviation and entrepreneurship. However, Islamic financial services have focused more on religious compliance than social goals, while conventional microfinance often ignores cultural sensitivities. The document then outlines various Islamic microfinance experiments in countries like Bangladesh, Pakistan and Malaysia. It identifies issues around sustainability, transparency and excluding the poorest clients. The document concludes with recommendations for Islamic banks to partner with microfinance institutions and expand rural outreach to better meet the demand for Sharia-compliant microfinance.
The Punishment for Dealing with Riba (Interest and Usury) [Tafsir ibn Katheer]Zaffer Khan
The document discusses the Islamic prohibition of riba (usury or interest) according to Islamic scripture and teachings. It describes the severe punishment for dealing with riba on the Day of Judgment, with those who consume riba being resurrected insane. It provides several hadith and quotes from Islamic scholars explaining the sinfulness of riba and different types of transactions that may involve riba. The document emphasizes that riba was strictly forbidden by Muhammad and that Allah will destroy riba while rewarding charitable deeds.
The document provides an introduction to Islamic microfinance. It outlines some key differences between Islamic and conventional microfinance, including that Islamic microfinance is based on trade and partnership rather than interest/debt. Products of Islamic microfinance like murabahah, ijara, and mudaraba are discussed. The progress of Islamic banking in Pakistan and worldwide is also briefly mentioned.
The document discusses the concepts of Fairtrade and its alignment with Islamic principles of justice and equity in trade. It provides information on Fairtrade standards such as minimum pricing and premiums that ensure farmers' and workers' livelihoods are supported. The document also highlights teachings from the Quran and hadith that promote fairness, workers' rights, environmental stewardship and contractual agreements. It encourages individuals to consider ethically sourced Fairtrade products and support farmers in poorer nations through their consumer choices.
There are two types of riba (interest) prohibited in Islam:
1) Riba al-nasiyah (interest on loans) which refers to any predetermined increase on a loan based on time.
2) Riba al-fadl (interest in exchange) which occurs when exchanging amounts of the same commodity if the amounts are not equal or not simultaneous.
The key differences between the two are that riba al-nasiyah involves lenders/borrowers while riba al-fadl involves sellers/buyers, and riba al-nasiyah considers time while riba al-fadl can occur in a spot transaction. Both ultimately aim to curb unfair
This document discusses Islam's prohibition on interest (riba) and introduces Islamic alternatives to interest-based financing. It begins by defining interest as any excess paid or received on the principal of a loan. The Quran explicitly bans riba in several verses. While capitalism allows money to generate unrestricted returns, Islam requires money to be invested and shared in business profits and losses. The document suggests interest misallocates capital and causes economic imbalances. It introduces musharaka, an Islamic financing model where investment returns are shared, as an alternative to interest.
This document discusses risk management in Islamic banking and finance. It provides an overview of Islamic banking principles and history. It then examines the specific risks faced by Islamic banks, such as liquidity risk and credit risk. It also explores the development of Islamic financial contracts and instruments. The document then focuses on the Arab Finance House in Lebanon as a case study. It analyzes the bank's development, strategies, investments and financial highlights. It concludes by discussing the future prospects for the Arab Finance House, including plans for continued growth while adhering to Sharia principles.
ISSUES AND RECOMMENDATIONS IN MUSHARAKAH MUTANAQISAH HOUSE FINANCINGWan Zaleha Zainudin
BY ZALEHA ZAIN.
In our world nowadays, the contract of Al-Bay’ Bithaman Ajil (BBA) had always been used for long time duration of financing. For example, home financing. In Malaysia also, this concept is popular and it showed that at the Kuala Lumpur High Court alone, 90% of the 3,200 Muamalat cases registered between 2003 to 2009 concerns BBA . While the BBA is popular, it has proven to be quite unsatisfactory to the customers and bankers. That’s why Musharakah Mutanaqisah concept is being argued as a better contract than BBA for long time duration.
THIS PAPER DISCUSSED ON THE ISSUES AND RECOMS OF MM.
Concept of RIBA, Interest & Profit in Islamic Economics SystemYousuf Ibnul Hasan
RIBA does not justify money to be a medium of exchange and develop a love of money, greed and selfishness instead of respect for the money for socioeconomic development for the humanity.
The document summarizes several types of risks faced by Islamic banks, including credit risk, benchmark risk, liquidity risk, operational risk, legal risk, withdrawal risk, fiduciary risk, displaced commercial risk, and counterparty risks associated with Murabahah, Salam, and Istisna'a financing contracts. It notes that credit risk depends on the financing mode used, and benchmark risk arises because Islamic banks use market interest rates to price instruments even though they do not deal in interest. Liquidity risk is also high for Islamic banks due to Sharia restrictions. Operational and legal risks are increased by the newness of Islamic banking practices and lack of standardized contracts.
The document discusses interest (riba) in Islam. It provides definitions of interest from the Quran, Hadith, encyclopedia and other sources. It outlines the stages by which interest was prohibited in Islam based on verses revealed in the Quran. It discusses the types of interest prohibited and myths around the topic. The document also discusses the negative impacts of interest-based economies, including unequal distribution of wealth and debt issues.
Dokumen tersebut membahas konsep wakalah, kafalah, dan hawalah dalam hukum Islam. Wakalah adalah penyerahan suatu pekerjaan kepada orang lain untuk menggantikan, kafalah adalah jaminan atas utang orang lain, sedangkan hawalah adalah pengalihan hutang."
MUSYARAKAH MUTANAQISAH AN ALTERNATIVES TO BBA IN HOME FINANCINGmiss_hajar
1) MMP is an alternative to BBA in home financing that is based on three contracts: musharakah, ijarah, and bay'. Under MMP, the customer and bank jointly own the asset, the bank leases its share to the customer, and the customer gradually buys out the bank's share.
2) BBA is a deferred payment sale that is widely used in Asia but has been ruled as containing riba' elements and being inequitable for customers. It requires customers to pay the full price even if the developer neglects the property.
3) MMP offers advantages over BBA for both banks and customers, including risk sharing and flexible rescheduling. It allows customers to fully own
This document discusses different types of market risk that banks are exposed to, including liquidity risk, interest rate risk, foreign exchange risk, equity price risk, and commodity price risk. It provides definitions and explanations of these risks, as well as strategies that banks can employ to manage each type of market risk, such as maintaining adequate liquidity, using hedging tools and derivatives, setting prudent exposure limits, and monitoring investments. Diversification alone does not eliminate market or systematic risk for banks.
This document discusses the concept of al-kafalah (suretyship) in Islamic finance. It defines al-kafalah and provides evidence from the Quran and hadith. It outlines the pillars (elements) of al-kafalah including the guarantor, creditor, principal debtor, and guaranteed item or debt. It describes different types of al-kafalah including for a person and for property. It also discusses the advantages, effects, and conditions of al-kafalah contracts.
This document defines al-Wakalah as agency, representation or authorization, and discusses its evidence from the Quran and hadith. It outlines the pillars of al-Wakalah as the agent, principal and subject matter. It also discusses the types as limited or unlimited, and conditions related to the contracting parties and subject matter. Finally, it notes modern applications of al-Wakalah contracts in Islamic banking and finance instruments.
Risk management in banking sector project report mba financeBabasab Patil
This document discusses risk management in the banking sector. It introduces the concepts of risk management and provides definitions of key risk types including credit risk, market risk, operational risk, and regulatory risk. It also summarizes Basel II, the international banking accord that introduced a risk-based capital adequacy framework. The framework has three pillars: minimum capital requirements, supervisory review, and market discipline. Effective risk management and maintaining adequate capital are important for banking stability and soundness.
the presentation will help you in understanding diffrent terms of islamic banking. also it will help you in finding the answers of your critics about islamic banking.
This document is a self-study guide for understanding basic banking operations and risks. It begins by explaining the goals of banks are to generate profits while managing risks. It then provides overviews of the routine transaction flows in banks, how the central pool of funds is managed, and the various risks banks face, including credit, market, interest rate, liquidity, operational, legal, and reputation risks. The guide is intended to help non-banking staff gain a foundational understanding of banking.
This document discusses risk management in Islamic finance, specifically for Takaful (Islamic insurance) operations. It identifies five main types of risk for Takaful operators: underwriting risks, operational risks, credit risks, liquidity risks, and market risks. For each risk, it provides examples of how the risk can occur in a Takaful context. It then outlines several ways Takaful operators can manage each of these risks, such as establishing standard underwriting procedures, recruiting skilled IT professionals, implementing liquidity ratios, and exploring Shariah-compliant hedging instruments. The document emphasizes that effective risk management is important for Takaful operators to provide protection in accordance with Islamic principles.
Operational risk in Islamic finance can arise from a variety of sources. The document identifies six main categories of operational risk: 1) Shariah non-compliance risk, 2) people risk, 3) technology risk, 4) fiduciary risk, 5) legal risk, and 6) reputational risk. It also discusses the nature of operational risks as either internally or externally inflicted, the impacts as direct or indirect, and the degree of expectancy as expected or unexpected losses. Proper identification and management of operational risks are important for Islamic financial institutions.
The document discusses asset valuation and corporate social responsibility (CSR) from an Islamic perspective.
It outlines key principles for asset valuation in Islam based on the Quran and Hadith, including that assets are only valuable if they provide benefits to society. CSR in Islam is guided by principles of obedience to God, public interest, and environmental protection.
The document contrasts the Western view of CSR as aligned with materialism versus the Islamic view, which takes a holistic approach based on spiritual teachings of the Quran and Hadith. CSR from an Islamic perspective focuses on human dignity, free will, equality and rights as derived from divine revelations.
This document discusses operational risk management in Islamic banking and finance. It begins by introducing operational risk and noting that it is complex to quantify. It then outlines four generic risks facing all banks and provides examples of how risks transform under different Islamic contracts. The document focuses on operational risk definitions and frameworks from the Islamic Financial Services Board. It discusses causes, examples, and management of operational risks, including Sharia, legal and fiduciary risks. Quantitative approaches like the Basic Indicator Approach and Standardized Approach are described and criticized for their limitations in fully capturing operational risk. The role of effective management in mitigating operational risk is emphasized.
ISFIRE Risk Management for IFIs - Nov 2014Mujtaba Khalid
Risk management has been a major focus in Islamic banking since the establishment of the IFSB in 2002. This article summarizes the risk management guidelines issued by the State Bank of Pakistan, which are based on IFSB principles. It focuses on operational risk management and the different types of risks faced by Islamic banks, including equity investment, credit, liquidity, and market risk. The author examines how Islamic banks should implement comprehensive risk identification, measurement, monitoring, and mitigation processes to manage risks in accordance with Sharia principles and protect the interests of depositors and stakeholders.
This document discusses operational risk management in Islamic banking and finance. It defines operational risk and notes that it is more complex in Islamic finance due to additional Sharia compliance risks. The document outlines four generic risks facing all banks, and discusses specific operational risks in various Islamic finance contracts. It emphasizes the importance of identifying, measuring, monitoring, reporting, controlling and mitigating operational risks, including people, technology, sales, documentation and other risks. Failure to properly manage these risks could lead to losses, non-compliance issues, and reputational damage for Islamic banks.
Risk management has become an important part of banking operations as banks take on new risks through expanding operations. Effective risk management requires developing markets like repo markets, addressing regulatory gaps, and introducing risk hedging instruments. It also requires banks to implement strong asset-liability management and have oversight of their risk management practices. The document outlines various types of risks banks face, including financial risks, market risks, operational risks, settlement risks, and asset-liability risks. It emphasizes the importance of managing these risks through appropriate policies, procedures, and oversight.
This document proposes a Mudarabah model of microfinance for rural poor Muslims in Nigeria. It assumes that micro-entrepreneurs and loan officers will adhere to Islamic principles. Under the model, the microfinance program provides capital while the entrepreneur provides labor and expertise. Profits are shared according to a fixed ratio, while losses are absorbed solely by the program. Key challenges include monitoring loans, mitigating risk given the program's lack of control over funds, and addressing information asymmetries that could enable adverse selection or moral hazard.
This document discusses risk management in Islamic banking. It defines risk and risk management, noting they are the same concepts as in conventional banks but with some unique aspects for Islamic banks. Generic risks include operational, credit, market, and liquidity risk, while unique risks are Shariah non-compliance, rate of return, displaced commercial, and equity investment risk. The document stresses Islamic banks need formal risk management frameworks to identify, measure, and control risks. It dispels myths that Islamic banks are not exposed to risks like interest rates and can use financial instruments to transfer some risks.
This document discusses risk management in Islamic finance, specifically equity investment risk. It defines equity investment risk according to the Islamic Financial Service Board as the risk of participating in a business partnership where the provider of finance shares in business risks. Equity investments in Islamic finance are typically done through mudarabah and musharakah contracts which are profit/loss sharing in nature and can result in total loss of capital. The document outlines some of the key risks of equity investment including partner risk, lack of reliable partner information, credit risk, industry risk, and risks specific to mudarabah and musharakah contracts. It concludes by suggesting some ways to mitigate equity investment risk such as diversification, long-term investing, expert advice,
This document discusses the risk characteristics of Islamic financial products and banking. It identifies 50 different types of risks that Islamic banks may face, such as liquidity risk, interest rate risk, commodity risk, communication risk, equity risk, operational risk, religious risk, and language risk. The document emphasizes that Islamic banking involves the same types of risks as conventional banking, but in some cases the risks may manifest differently due to Islamic banking principles forbidding interest and certain types of investments. Key risks discussed include liquidity, interest rates, commodities, unclear communication, and determining what is religiously permissible.
Banks face various risks through their business activities of mobilizing and deploying funds. This document discusses the key risks faced by banks under three categories - risks to the banking book, risks to the trading book, and off-balance sheet exposures. It identifies the major risks as liquidity risk, interest rate risk, credit risk, market risk, and operational risk. Each risk is further broken down into more specific sub-risks. The risks arise from a bank's loans, deposits, investments, trading activities, and other transactions and have the potential to result in losses for the bank. Effective risk management involves identifying, measuring, controlling and monitoring these risks.
This document summarizes the risk management framework of ICICI Bank. It discusses the key risks faced by the bank including credit, market, liquidity, operational, compliance and reputation risks. The risk management strategy involves identifying, measuring, monitoring and controlling risks. Oversight of risks is provided by the Board of Directors and associated committees. Policies govern each type of risk and business activities are undertaken within this framework. Independent groups evaluate, monitor and manage risks across the bank.
This document discusses displaced commercial risk in Islamic finance. It defines displaced commercial risk as the risk resulting from volatility in returns generated by assets financed by investment accounts, which can cause Islamic banks to not pay competitive rates compared to conventional banks. The document outlines ways Islamic banks can manage this risk, including using profit equalization reserves and investment risk reserves. It also discusses the impact of displaced commercial risk mitigation on Islamic banks and their customers and the overall economy.
This document discusses credit risk management and debt servicing management. It begins with an agenda and overview of risk, credit risk, historical credit risk management practices in India, why credit risk management is important, and the tasks of a credit risk department. It then covers the risk management process/cycle and building blocks of credit risk management. Various types of risks for financial institutions are defined including market, operational, credit, and portfolio risks.
Banks face numerous risks that must be carefully managed. The document outlines several key risks faced by banks: credit risk from loan defaults, market risk from changes in market prices, operational risk from failed internal processes, liquidity risk from inability to fund operations, and reputational risk from negative publicity. It also provides examples of how specific banks like Northern Rock and Barings faced risks that ultimately led to losses or collapse without proper risk mitigation. Effective risk management requires banks to identify, assess, prioritize and control risks, as well as purchase insurance and diversify their portfolios.
Islamic Banker Asia - Shariah Compliance and Audit - February 2015Mujtaba Khalid
Against the backdrop of growth, a number of key industry stakeholders (including senior Shari’a scholars) have highlighted their concerns regarding the overly engineered nature of contemporary structures, which seem to lose the industry’s essence that believe in equity-based form of investment.
The Steadfast and Reliable Bull: Taurus Zodiac Signmy Pandit
Explore the steadfast and reliable nature of the Taurus Zodiac Sign. Discover the personality traits, key dates, and horoscope insights that define the determined and practical Taurus, and learn how their grounded nature makes them the anchor of the zodiac.
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This presentation is a curated compilation of PowerPoint diagrams and templates designed to illustrate 20 different digital transformation frameworks and models. These frameworks are based on recent industry trends and best practices, ensuring that the content remains relevant and up-to-date.
Key highlights include Microsoft's Digital Transformation Framework, which focuses on driving innovation and efficiency, and McKinsey's Ten Guiding Principles, which provide strategic insights for successful digital transformation. Additionally, Forrester's framework emphasizes enhancing customer experiences and modernizing IT infrastructure, while IDC's MaturityScape helps assess and develop organizational digital maturity. MIT's framework explores cutting-edge strategies for achieving digital success.
These materials are perfect for enhancing your business or classroom presentations, offering visual aids to supplement your insights. Please note that while comprehensive, these slides are intended as supplementary resources and may not be complete for standalone instructional purposes.
Frameworks/Models included:
Microsoft’s Digital Transformation Framework
McKinsey’s Ten Guiding Principles of Digital Transformation
Forrester’s Digital Transformation Framework
IDC’s Digital Transformation MaturityScape
MIT’s Digital Transformation Framework
Gartner’s Digital Transformation Framework
Accenture’s Digital Strategy & Enterprise Frameworks
Deloitte’s Digital Industrial Transformation Framework
Capgemini’s Digital Transformation Framework
PwC’s Digital Transformation Framework
Cisco’s Digital Transformation Framework
Cognizant’s Digital Transformation Framework
DXC Technology’s Digital Transformation Framework
The BCG Strategy Palette
McKinsey’s Digital Transformation Framework
Digital Transformation Compass
Four Levels of Digital Maturity
Design Thinking Framework
Business Model Canvas
Customer Journey Map
The Most Inspiring Entrepreneurs to Follow in 2024.pdfthesiliconleaders
In a world where the potential of youth innovation remains vastly untouched, there emerges a guiding light in the form of Norm Goldstein, the Founder and CEO of EduNetwork Partners. His dedication to this cause has earned him recognition as a Congressional Leadership Award recipient.
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In this article, we will dive into the extraordinary life of Ellen Burstyn, where the curtains rise on a story that's far more attractive than any script.
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The report *State of D2C in India: A Logistics Update* talks about the evolving dynamics of the d2C landscape with a particular focus on how brands navigate the complexities of logistics. Third Party Logistics enablers emerge indispensable partners in facilitating the growth journey of D2C brands, offering cost-effective solutions tailored to their specific needs. As D2C brands continue to expand, they encounter heightened operational complexities with logistics standing out as a significant challenge. Logistics not only represents a substantial cost component for the brands but also directly influences the customer experience. Establishing efficient logistics operations while keeping costs low is therefore a crucial objective for brands. The report highlights how 3PLs are meeting the rising demands of D2C brands, supporting their expansion both online and offline, and paving the way for sustainable, scalable growth in this fast-paced market.
1. Bank Islam reserves all propriety rights to the contents of thisBank Islam reserves all propriety rights to the contents of this Presentation. No part of this Presentation may be used or reproPresentation. No part of this Presentation may be used or reproduced in any formduced in any form
without Bank Islamwithout Bank Islam’’s prior written permission.s prior written permission.
This Presentation is provided for information purposes only. NeiThis Presentation is provided for information purposes only. Neither Bank Islam nor the Presenter makes any warranty, expressedther Bank Islam nor the Presenter makes any warranty, expressed or implied, noror implied, nor
assumes any legal liability or responsibility for the accuracy,assumes any legal liability or responsibility for the accuracy, completeness or currency of the contents of this Presentation.completeness or currency of the contents of this Presentation.
STRICTLY PRIVATE & CONFIDENTIAL
Jeroen P.M.M. ThijsJeroen P.M.M. Thijs
Chief Risk OfficerChief Risk Officer
BANK ISLAM MALAYSIA BERHADBANK ISLAM MALAYSIA BERHAD
RISK MANAGEMENT INRISK MANAGEMENT IN
ISLAMIC BANKINGISLAMIC BANKING
2. IBFIM i-Series Program on Risk ManagementPage 2
BEFORE WE STARTBEFORE WE START
Why the title “Risk Management in Islamic Banking” instead of
“Islamic Risk Management?”
Risk Management in Islamic Banking is not significantly different from
conventional banking. There are additional risks that are unique to
Islamic Banking
3. IBFIM i-Series Program on Risk ManagementPage 3
CONCEPT OF RISK MANAGEMENT IN ISLAMCONCEPT OF RISK MANAGEMENT IN ISLAM
4. IBFIM i-Series Program on Risk ManagementPage 4
o Introduction to Risk Management
o Risk Management in Islamic Banks
o Guiding Principles of Risk Management
o Risk Management Governance
o Risk Management Tools
AGENDAAGENDA
5. IBFIM i-Series Program on Risk ManagementPage 5
INTRODUCTION TO RISK MANAGEMENTINTRODUCTION TO RISK MANAGEMENT
Concept of risk management
Definition of risk
Risk management process
6. IBFIM i-Series Program on Risk ManagementPage 6
WHAT IS RISK?WHAT IS RISK?
Risks are uncertain future events that could influence the achievement
of the Bank’s objectives, including strategic, operational, financial
and compliance objectives.
Uncertain future events could be:
• Failure of a borrower to repay a financing
• Fluctuation of foreign exchange rates
• Fraud, incomplete security documentations, etc
• Non-compliance with shariah law and principles
• Other events that may result in a loss to the Bank
7. IBFIM i-Series Program on Risk ManagementPage 7
WHAT IS RISK?WHAT IS RISK?
A Bank’s business (whether Islamic or Conventional) is to take
calculated risks. As such Risk Management is not the minimization of
losses but the optimisation of the risk reward equation
The competitive advantage of a Bank is dependent on how well it
manages risk
8. IBFIM i-Series Program on Risk ManagementPage 8
WHAT IS RISK MANAGEMENT?WHAT IS RISK MANAGEMENT?
Risk management is the process by which various risk
exposures are
(1) identified,
(2) measured/assessed,
(3) mitigated and controlled,
(4) reported and monitored.
9. IBFIM i-Series Program on Risk ManagementPage 9
1. Barings / Nick Leeson (1995)
Barings Singapore reported SIMEX trade losses of GBP
850 million
Brought down the whole bank…
2. National Australia Bank (2004)
FX derivative losses of AUD 360 million…
3. Allied Irish Bank / John Rusnak (2001)
US subsidiary Allfirst reported FX Options trading losses of
USD 750 million
EXAMPLES OF RISK MANAGEMENT FAILURESEXAMPLES OF RISK MANAGEMENT FAILURES
10. IBFIM i-Series Program on Risk ManagementPage 10
4. LTCM, Hedge Fund (1998)
Bond Market losses wiping out capital of USD3.9 billion
Fed and consortium of US Banks bailout
5. Sumitomo / Yasuo Hamanaka (1996)
Commodity (copper) trading losses of USD1.8 billion…
6. Orange County, CA, USA (1994)
Equity losses of USD2 billion
Reverse repos / over-leveraged
7. Societe Generale, France (2008)
Jerome Kerviel traded Euro stock index futures and
concealed losses up to almost EUR 5.0 bio
EXAMPLES OF RISK MANAGEMENT FAILURESEXAMPLES OF RISK MANAGEMENT FAILURES
11. IBFIM i-Series Program on Risk ManagementPage 11
8. The 2008 -… Financial Crisis
Lack of Management / Board oversight
Weak risk culture
Risk Management function marginalized
Over-reliance on quantitative tools / methodologies
Poor liquidity management
Lack of relevant internal valuation models
EXAMPLES OF RISK MANAGEMENT FAILURESEXAMPLES OF RISK MANAGEMENT FAILURES
12. IBFIM i-Series Program on Risk ManagementPage 12
o Introduction to Risk Management
o Risk Management in Islamic Banks
o Guiding Principles of Risk Management
o Risk Management Governance
o Risk Management Tools
AGENDAAGENDA
13. IBFIM i-Series Program on Risk ManagementPage 13
ISLAMIC BANKING BUSINESS ACTIVITIESISLAMIC BANKING BUSINESS ACTIVITIES
14. IBFIM i-Series Program on Risk ManagementPage 14
RISK PROFILE OF ISLAMIC BANKRISK PROFILE OF ISLAMIC BANK
Islamic bank
Rate of return risk
Displaced
Commercial
risk
Equity
Investment
risk
Operational
risk
Liquidity risk
Market
risk
Credit
Risk
Shariah
non-compliance
risk
UniqueGeneric
Strategic Legal Fiduciary Reputation Transparency Regulatory compliance
15. IBFIM i-Series Program on Risk ManagementPage 15
GENERIC RISKS FOR BANKSGENERIC RISKS FOR BANKS
Types of risks Definition
Credit risk The potential that a counterparty fails to meet its
obligations in accordance with agreed terms and conditions
of a credit-related contract
Market risk The potential impact of adverse price movements such as
benchmark rates, foreign exchange rates, equity prices on
the economic value of an asset
Liquidity risk The potential loss arising from the Bank’s inability either to
meet its obligations or to fund increases in assets as they
fall due without incurring unacceptable costs or losses
Operational risk The potential loss resulting from inadequate or failed
internal processes, people and system or external events
16. IBFIM i-Series Program on Risk ManagementPage 16
RISKS TRANSFORMATION FOR FINANCING OF ASSETSRISKS TRANSFORMATION FOR FINANCING OF ASSETS
But even generic risks are not that straightforward in
Islamic banking
For financing that involves financing assets e.g. Murabahah,
Salam, Istisna and Ijarah, the risks of financing may
transform from credit to market and vice versa at different
stages of the contract
Hence capital management needs to take into account both
the credit and market risk
17. IBFIM i-Series Program on Risk ManagementPage 17
RISK TRANSFORMATION UNDER MURABAHAH & MPORISK TRANSFORMATION UNDER MURABAHAH & MPO
Type of contract Stage of contract Credit risk Market risk
Murabahah and
non-binding
Murabahah
purchase order
Asset available for sale (asset on
balance sheet)
- X
Asset is sold to and payment is due
from customer
X -
Maturity of contract or upon full
settlement
- -
Binding Murabahah
Purchase Order
Asset available for sale (asset on
balance sheet)
X -
Asset is sold to and payment is due
from customer
X -
Maturity of contract or upon full
settlement
- -
Murabahah – Bank sells assets it already owns to customer at cost +
Murabahah Purchase Orderer (MPO) – Bank sells assets it acquires to customer at
cost +, based on promise to purchase (PP) by customer
18. IBFIM i-Series Program on Risk ManagementPage 18
UNIQUE RISKS FOR ISLAMIC BANKSUNIQUE RISKS FOR ISLAMIC BANKS
Types of risks Definition
Shariah non-
compliance risk
Risk arises from the failure to comply with the Shariah rules
and principles
Rate of return risk The potential impact on the returns caused by unexpected
change in the rate of returns
Displaced Commercial
risk
The risk that the bank may confront commercial pressure to
pay returns that exceed the rate that has been earned on its
assets financed by investment account holders. The bank
foregoes part or its entire share of profit in order to retain
its fund providers and dissuade them from withdrawing their
funds.
Equity Investment risk The risk arising from entering into a partnership for the
purpose of undertaking or participating in a particular
financing or general business activity as described in the
contract, and in which the provider of finance shares in the
business risk. This risk is relevant under Mudharabah and
Musharakah contracts.
19. IBFIM i-Series Program on Risk ManagementPage 19
SHARIAH COMPLIANCE IS PARAMOUNTSHARIAH COMPLIANCE IS PARAMOUNT
Original basis for having a banking system that meet the
religious requirements of Muslims
Factor that distinguishes Islamic banking from conventional
banking.
Ensures acceptance, validity and enforceability of contracts
from Shariah point of view.
Fulfills the objectives of Islamic finance i.e. to achieve
justice and fairness in the distribution of resources.
20. IBFIM i-Series Program on Risk ManagementPage 20
IMPLICATIONS OF SHARIAH NONIMPLICATIONS OF SHARIAH NON--COMPLIANCECOMPLIANCE
Against the commands of Allah.
Impediment from Allah’s blessing
or barakah
Contravention of the provision of
Islamic Banking Act 1983 (Section
3(5)(a) & Section 4)
Jeopardize the Bank’s reputation
as an Islamic bank
Invalidation of contract (‘aqad)
Non-halal income
Capital adequacy ratio (CAR)
Impact
Non Financial Impacts Financial Impacts
21. IBFIM i-Series Program on Risk ManagementPage 21
“ Refers to the potential impact on an Islamic
Financial Institution’s (IFI) net income / net
income margin or market value of equity arising
from changes in the market rate of returns ”
Gap/Mismatch Risk or
Re-pricing Risk or
Benchmark Rate Risk
RATE OF RETURN RISKRATE OF RETURN RISK
22. IBFIM i-Series Program on Risk ManagementPage 22
RATE OF RETURN RISKRATE OF RETURN RISK
Associated with the management of assets and liabilities
Fixed rate long term assets funded by variable rate short-
term liabilities
Movement in benchmark rates may result in fund providers
having expectations of a higher rate of return
Subsequently, it may result in displaced commercial risk
where due to market pressure, an Islamic bank needs to pay a
return that exceeds the rate that has been earned on its
assets.
If Islamic bank does not yield to market pressure, they may
lose their fund providers which could consequently lead to
liquidity risk
23. IBFIM i-Series Program on Risk ManagementPage 23
Given the nature of business of an Islamic Bank: short
term variable funding and long term (mostly fixed)
financing and investing, the GAP of the Bank is
usually much larger than in a Conventional Bank
Not many liquid hedging instruments to hedge the gap
No way to sell asset through credit derivative transaction
(not Shariah compliant)
MIND THE GAPMIND THE GAP
24. IBFIM i-Series Program on Risk ManagementPage 24
MANAGING THE GAPMANAGING THE GAP
Duration matching
Securitization in form of Sukuk certificates
Islamic Profit Rate Swap
However, equity type structures might significantly complicate
accurate assessment of the mismatch Gap.
25. IBFIM i-Series Program on Risk ManagementPage 25
Investment deposits based on Mudarabah should be a
powerful risk mitigant for Islamic Banks, but….
Displaced Commercial Risk
“ Refers to the risk arising from assets managed by the IFI
on behalf of investment account holders (IAHs) which is
effectively transferred to the IFI’s own capital because the
IFI follows the practice of foregoing part or all of its
Mudarib share of profit on such fund ”…IFSB
= Smoothening to ensure competitive returns comparable
with conventional banks.
DISPLACED COMMERCIAL RISKDISPLACED COMMERCIAL RISK
26. IBFIM i-Series Program on Risk ManagementPage 26
PER & IRR
Reserves for the purpose of income smoothening
Adjust PSR
Alternative deposit instruments
Islamic Negotiable Instrument of Deposits (INIDs)
Commodity Murabahah
However, probably not in the spirit of Islamic Finance which
encourages entrepreneurship…
Best to focus on optimizing income / revenues from sources of funds
i.e. Mudharabah Depositors / investors
Efficient Management of funds…ISLAMIC BANKING IS ESSENTIALLY
ABOUT FUND AND ASSET MANAGEMENT
DISPLACED COMMERCIAL RISKDISPLACED COMMERCIAL RISK -- MitigantsMitigants
27. IBFIM i-Series Program on Risk ManagementPage 27
“ Refers to the risk of a decline in the fair value of equity positions held
by the IFI in its trading and banking books ”
BNM classifies the following as equity positions:
Ordinary shares; voting or nonvoting (common or preferred)
Convertible Securities
Commitments to buy or sell equity securities
Equity Derivatives
Off-balance sheet items i.e. swaps and options
Underwriting of equities
Equity-type Shariah Contracts:
Mudharabah
Musharakah
Musharakah Mutanaqissah (Diminishing Musharakah)
EQUITY INVESTMENT RISKEQUITY INVESTMENT RISK
28. IBFIM i-Series Program on Risk ManagementPage 28
“ risk arising from holding items in inventory either
for resale under a Murabaha’ contract, or with a
view to leasing under the ijarah contract “
Items held under Non-binding Murabaha’ for Purchase
Order (MPO)
Items purchased under Istisna’ contract (‘unbilled work-
in-progress’)
INVENTORY RISKINVENTORY RISK
29. IBFIM i-Series Program on Risk ManagementPage 29
o Introduction to Risk Management
o Risk Management in Islamic Banks
o Guiding Principles of Risk Management
o Risk Management Governance
o Risk Management Tools
AGENDAAGENDA
30. IBFIM i-Series Program on Risk ManagementPage 30
GUIDING PRINCIPLES OF RISK MANAGEMENTGUIDING PRINCIPLES OF RISK MANAGEMENT
BASEL Committee on Banking Supervision
Islamic Financial Services Board (IFSB)
Bank Negara Malaysia (BNM)
Institute of International Finance (IIF)
31. IBFIM i-Series Program on Risk ManagementPage 31
BASELBASEL
1988 Capital Accord (Basel I)
Regulatory based
Set out requirements to calculate capital charge ie the amount of capital to be
set aside to absorb potential loss across banks and across countries
One size fits all
1996 Basel I (Amendments)
Market Risk was incorporated into Basel I
2004 International Convergence of Capital Measurement and Capital
Standards (Basel II)
Aims to make capital requirements more risk sensitive
Includes Operational Risk
Bank shall be subject to 3 mutually reinforcing pillars
2010 Basel III (Response to Financial Crisis)
Enhanced capital ratios, liquidity ratios, leverage ratio
32. IBFIM i-Series Program on Risk ManagementPage 32
IFSB STANDARDSIFSB STANDARDS
IFSB-1 Guiding Principles of Risk Management
IFSB-2 Capital Adequacy Standard
IFSB-3 Corporate Governance
IFSB-4 Transparency and Market Discipline
IFSB-5 Supervisory Review Process
IFSB-6 Islamic Collective Investment Schemes
IFSB-7 Sukuk, Securitizations and Real Estate
IFSB-8 Takaful
IFSB-9 Conduct of Business
IFSB-10 Shariah Governance Systems
www.ifsb.org
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IFSB CAPITAL ADEQUACY STANDARDIFSB CAPITAL ADEQUACY STANDARD
The need for RWCR framework
To ensure that Islamic banks can absorb a reasonable level of
losses before becoming insolvent.
To provide protection to depositors and/ or PSIA – the higher
the CAR, the higher the level of protection.
To promote stability and efficiency of the financial system by
reducing the likelihood of Islamic banks becoming insolvent.
To ensure that the Islamic banks’ capital position is
commensurate with its overall risk profile and strategy.
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Eligible Capital
Total RWA (Credit + Market Risks) + Operational Risk
LessLess
RWA funded by PSIA (Credit + Market Risks)
PSIA isis
ProfitProfit
SharingSharing
InvestmentInvestment
AccountAccount
IFSB RWCR - Standard Formula
> 8.00%
IFSB CAPITAL ADEQUACY STANDARDIFSB CAPITAL ADEQUACY STANDARD
35. IBFIM i-Series Program on Risk ManagementPage 35
BANK NEGARA MALAYSIABANK NEGARA MALAYSIA
Islamic Banking Act 1983
Guidelines on Capital Adequacy (CAFIB)
Guidelines on Financial Reporting
Guidelines on Anti Money Laundering
Guidelines on Prudential Limits and Standards
www.bnm.gov.my
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INSTITUTE OF INTERNATIONAL FINANCEINSTITUTE OF INTERNATIONAL FINANCE
www.iif.com
Final Report of the IIF Committee on Market Best Practices:
Principles of Conduct and Best Practice Recommendations
Financial Services Industry Response to the Market Turmoil of
2007-2008
37. IBFIM i-Series Program on Risk ManagementPage 37
o Introduction to Risk Management
o Risk Management in Islamic Banks
o Guiding Principles of Risk Management
o Risk Management Governance
o Risk Management Tools
AGENDAAGENDA
38. IBFIM i-Series Program on Risk ManagementPage 38
RISK GOVERNANCERISK GOVERNANCE -- STRUCTURESTRUCTURE
Board Board Audit
Committee
Board Risk
Committee
Other Board sub
committees
Managing
Director
Operations /
Support
Business
Divisions
CFO, CTO, etc Human
Resources
Compliance /
Shariah
Chief Internal
Auditor
Chief Risk
Officer
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POLICIES & GUIDELINESPOLICIES & GUIDELINES
Policies for principle risk areas are in place covering areas of credit,
market, operational and Shariah compliance
Policies are supported by Guidelines and further supported by operational
manuals to ensure policies are implemented properly and effectively
Approving authority
RMF – Board
Policy – Board
Guideline – MRCC
Manual - Stakeholders
The RMF and all policies are reviewed at a minimum once in 2 years
All Guidelines and Manuals are reviewed annually (at a minimum)
40. IBFIM i-Series Program on Risk ManagementPage 40
CREDIT RISKCREDIT RISK
Policy Guidelines
Credit Risk Policy - The policy addresses the
broad credit management framework that
covers the objective, strategy, structure and
credit processes in order to establish the best
practices in the management of credit risk
that are in line with the regulatory
requirements.
1. Pricing Matrix Guidelines
2. Acceptance Letter Offer Guideline
3. Negative List Guideline
4. Collaterals Guideline
5. Valuation Guideline
6. Discretionary Power Guideline
7. Sovereign Risk Guideline
8. Consumer Grading Guideline
9. Sectoral Guideline
10.Business Relationship Etiquette
Guideline
11.Watchlist Guideline
12.Financing Process Guideline
13.Credit Recovery Guideline
14.Guidelines on Risk Adjusted Pricing for
Corporate & Commercial
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MARKET RISKMARKET RISK
Policy Guidelines
Market Risk Policy – Describes the Risk
Policy and Analytics, Asset and Liability
Management (ALM) and Middle Office
functions of the Market Risk Department
Trading Book Policy - Addresses market
risk factors which include but not limited
to profit rate or rate of return, foreign
exchange, equity and commodity risks
inherent in the Bank’s trading and
banking books
1. Market Risk Limits Guideline
2. Hedging Guideline
3. Mark-to-Market Guideline
4. Rate Reasonability Check Guideline
5. Value-at-Risk (VaR) Guideline
6. Asset and Liability Management
Guideline
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OPERATIONAL RISKOPERATIONAL RISK
Policy Guidelines
Operational Risk Policy – The policy provides the
effective and efficient operational risk
management through out the Bank through its
strategies in terms of organization structure,
process, risk tolerance, risk measurement and
analytic model management information system
1. Operational Risk Management Guideline
2. Management Awareness and Self-
3. Assessment (MASA) Reporting Guideline
4. Fraud Handling and Reporting Guideline
5. Takaful/Insurance Guideline
6. Key Risk Indicators (KRIs) Guideline
7. Outsourcing Guideline
8. Operational Risk Management Process for
Information Security Management System
9. Customer Complaint Guideline
43. IBFIM i-Series Program on Risk ManagementPage 43
SHARIAH COMPLIANCE RISKSHARIAH COMPLIANCE RISK
Policy Guidelines
Shariah Compliance Risk Management
Policy – The policy provides the Shariah
requirements applicable throughout the Bank
in its activities, products and services in
compliance with the Shariah principles,
provisions of the Islamic Banking Act 1983
and Bank Negara Malaysia’s rules and
regulations.
1. Wadiah Contract Guideline.
2. Ijarah and Ijarah Muntahiah Bit Tamlik
Guideline
3. Murabahah and MPO Contract Guideline
4. Mudharabah (financing) Contract Guideline
5. Musharakah (financing) Contract Guideline
6. Handling and Reporting of Shariah Non
Compliances Guideline
7. Mudharabah (Deposit) Contract Guideline
8. Musharakah Mutanaqisah Contract Guideline
9. Musharakah (Investment) Contract Guideline
10.Kafalah Contract Guideline
11.Wakalah Contract Guideline
12.Tawarruq Contract Guideline
44. IBFIM i-Series Program on Risk ManagementPage 44
o Introduction to Risk Management
o Risk Management in Islamic Banks
o Guiding Principles of Risk Management
o Risk Management Governance
o Risk Management Tools
AGENDAAGENDA
45. IBFIM i-Series Program on Risk ManagementPage 45
RISK MANAGEMENT ROADMAPRISK MANAGEMENT ROADMAP
Maximise
Earnings
Potential
Earnings
Stability
Protection
Against
Unforeseen
Losses
Increased Risk Management Sophistication
-Risk Identification
-Risk Management/Assessment
-Risk Reporting
-Processes & Procedures
-RMS(datamart, credit risk,basel II)
Loss Minimization/
Risk Control Framework
-Risk based product pricing
-Linking risk and return
-Measuring risk adjusted
performance
-RMS(market, operational)
-Economic capital
-RAROC
-Bank-wide VaR
-Incremental VaR
-RMS(economic capital, Raroc,
IRB)
-Full Pillar 2 Compliance
RAPM Framework
Active Portfolio Management
Framework
Reactive
Active
Proactive
Time
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RISK MANAGEMENT SYSTEMRISK MANAGEMENT SYSTEM
Treasury Trade Other (core) systemsCore
Risk Data Mart
Reporting
Source Systems
Firmwide Risk System
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Data cleansing and enrichment: wrong input,
wrong conclusions.
Not every system provider can cater to complexity
of Islamic Banking Products!
Efficient data integration between RMS and various
source systems is key. Don’t just go for risk
functionality; treat data integration very seriously
RISK MANAGEMENT SYSTEM CONSIDERATIONSRISK MANAGEMENT SYSTEM CONSIDERATIONS
48. IBFIM i-Series Program on Risk ManagementPage 48
Application Scorecards
Statistical Scorecards for Retail
Financial Ratio + judgmental scorecards for Corporate
Behavioral application scorecards for SMEs (credit bureau)
Behavioral Scorecards
Application card only valid for 6-12 months; client
circumstances can change
Enable Bank to take preventive action
CREDIT RISKCREDIT RISK
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Behavioral Triggers
Habitual delinquencies
Adverse media reports
Delay in preparation / fling financial statements
Financial Triggers
Credit rating downgrade by 2 or more notches
Deterioration in financials and or collateral value
Financing covenant breaches
Other Triggers
Project delays/cost overruns
Sector weakening
Supply / demand concentration
WATCHLISTWATCHLIST
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Value at Risk
Historical simulation
VaR/CoVaR methodology
Monte Carlo Simulation
Issues for Islamic Bank
Limited data
Illiquid Instruments
Need to use conventional price proxies
Higher Confidence Interval? Longer Time Horizon?
MARKET RISKMARKET RISK -- TRADINGTRADING
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Risk Control Self Assessment (RCSA)
Generic RCSA
Specific RCSA
Key Risk Indicators (KRI)
Reflective of Risk
Measured on regular basis
Should detect changes in risk profile before op risk events
manifest
Loss Event Database
OPERATIONAL RISKOPERATIONAL RISK
53. IBFIM i-Series Program on Risk ManagementPage 53
Actual historical events such as the 1997/1998
crisis or the 2001 bond crisis
Scenarios
Unlikely but plausible events
Regression of macro factors such as GDP to provision /
non performing levels
Reverse stress tests
STRESS TESTINGSTRESS TESTING
54. IBFIM i-Series Program on Risk ManagementPage 54
RAROC
Most Islamic Banks cannot measure economic capital: use
regulatory capital as proxy
Need to take expected loss or at least actual provisions
into account
Risk Based Pricing
Risk Appetite Framework
Risk capacity versus risk appetite
In absence of economic capital, use regulatory and other
stakeholder measures as basis
ENTERPRISE WIDE RISK MANAGEMENTENTERPRISE WIDE RISK MANAGEMENT
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ICAAP PROCESSICAAP PROCESS
Measurement of risk and required capital under BIS2 Integration of risk and capital
in strategic decisions and
planning
Pillar 1 risks Pillar 2 risks External factors
Risk governance and control
Credit risk data
issues
Market Risk
Market risk data
issues
BIS1
Credit risk
Securitization risk
Reserve risk
Interest rate risk
bank book
Liquidity risk
Business risk
Strategic risks
Country & transfer
risk
Concentration risk
Operational Risk
Stress tests / scenarios
Macro-economic risks Risk based pricing
Risk adjusted performance
management
Active credit portfolio and capital
management
Business planning and budgeting
Risk appetite / capital management
Coherence of risks and results (EL vs
LLP)
Roles and responsibilities
•Supervisory Board
•Executive Committee
•Internal audit
•Risk Department
•Finance Department
•Strategic Planning
•Investor relations
•Branches
Risk governance
•Committees
•Limit system
•Reporting
•Escalations
Minimum Standards for risk
•Independent internal control
•Sound risk assessment
•Risk disclosure
Risk Issues Finance Issues Corporate Governance
ICAAP
ICAAP = “Internal Capital Adequacy Assessment Process
56. IBFIM i-Series Program on Risk ManagementPage 56
Wassalam
َمﻼَﺴْﻟَاوَمﻼَﺴْﻟَاو
Thank You
ًاﺮْﻜُﺷًاﺮْﻜُﺷًﻼْﻳِﺰَﺟًﻼْﻳِﺰَﺟ