Risk Management in Islamic Banking

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  • Topic: Risk, Islamic banking, Basel II
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RISK MANAGEMENT IN ISLAMIC BANKING
Chief Risk Officer BANK ISLAM MALAYSIA BERHAD

Jeroen P.M.M. Thijs

Bank Islam reserves all propriety rights to the contents of this Presentation. No part of this Presentation may be used or reproduced in any form reproduced without Bank Islam’s prior written permission. Islam’ This Presentation is provided for information purposes only. Neither Bank Islam nor the Presenter makes any warranty, expressed or implied, nor Neither assumes any legal liability or responsibility for the accuracy, completeness or currency of the contents of this Presentation.

STRICTLY PRIVATE & CONFIDENTIAL

BEFORE 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

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IBFIM i-Series Program on Risk Management

CONCEPT OF RISK MANAGEMENT IN ISLAM

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IBFIM i-Series Program on Risk Management

AGENDA
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

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IBFIM i-Series Program on Risk Management

INTRODUCTION TO RISK MANAGEMENT
Concept of risk management Definition of risk Risk management process

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IBFIM i-Series Program on Risk Management

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

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IBFIM i-Series Program on Risk Management

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

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IBFIM i-Series Program on 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.

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IBFIM i-Series Program on Risk Management

EXAMPLES OF RISK MANAGEMENT FAILURES 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

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IBFIM i-Series Program on Risk Management

EXAMPLES OF RISK MANAGEMENT FAILURES 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

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IBFIM i-Series Program on Risk Management

EXAMPLES OF RISK MANAGEMENT FAILURES 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

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IBFIM i-Series Program on Risk Management

AGENDA
o Introduction to Risk Management o Risk Management in Islamic Banks o Guiding Principles of Risk Management o Risk Management...
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