UNIKL - EBB20603 - Chapter 1 : An Introduction

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EBB20603 Risk Management in

Islamic Financial Institutions

Semester September 2014

Course Leader:

Mdm Rodziah Bt Ahmad


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Chapter 1: An overview

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1. Risk Management: Basic concepts and

Techniques

2. Risk Management Process

3. Financial Balance-Sheet and Income-

Statement Structure

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Contents

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Identify and explain the basic concepts and

theories related to risk management

process

Comprehend resources for financial risk

identification

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Learning Objective

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Definition : Risk is defined as a condition of the real world in which there is a

possibility of positive or negative outcome from what is expected.

In Financial Institutions (FI), risks areuncertain future events

that could

influence the achievement of the Banks objectives, including strategic,operational, financial and compliance objectives

ncertain 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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Risk Management is not the minimization

of losses but the optimisation of the risk

reward equation.

The competitive advantage of a financial

institution is dependent on how well it

manages risk.

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Risk Management

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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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Risk Management

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1.Creates and protects value

Good risk management contributes to the achievement of an agencys

objectives through the continuous review of its processes and systems.

2. Be an integral part of organisational processes

Risk management needs to be integrated with an agencys governanceframework and become a part of its planning processes, at both the

operational and strategic level.

3. Be part of decision making

The process of risk management assists decision makers to make

informed choices, identify priorities and select the most appropriateaction.

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11 Principles of Risk Management

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4.Explicitly address uncertainty

By identifying potential risks, agencies can implement controls and

treatments to maximise the chance of gain while minimising the chance

of loss.

5. Be systematic structured and timelyThe process of risk management should be consistent across an agency

to ensure efficiency, consistency and the reliability of results.

6. Based on the best available information

To effectively manage risk it is important to understand and consider all

available information relevant to an activity and to be aware that theremay be limitations on that information. It is then important to

understand how all this information informs the risk management

process.

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7.Be tailored

An agencys risk management framework needs to include its risk

profile, as well as take into consideration its internal and external

operating environment.

8. Take into account human and cultural factorsRisk management needs to recognise the contribution that people and

culture have on achieving an agencys objectives.

9. Be transparent and inclusive

Engaging stakeholders, both internal and external, throughout the risk

management process recognises that communication and consultation iskey to identifying, analysing and monitoring risk.

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10.Be dynamic iterative and responsive to change

The process of managing risk needs to be flexible. The challenging

environment we operate in requires agencies to consider the context for

managing risk as well as continuing to identify new risks that emerge,

and make allowances for those risks that no longer exist.

11. Facilitate the continual improvement of organisations

Agencies with a mature risk management culture are those that have

invested resources over time and are able to demonstrate the continualachievement of their objectives.

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Establishing the context

Risk Assessment

Risk Identification

Risk Analysis

Risk Evaluation

Risk Treatment

Monitor & Review

Communication and consultation

http://www.praxiom.com/iso-31000-terms.htm

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Risk Management Process*

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External Parameters

External stakeholders

Local environment

International environment

Etc

Internal Parameters

Internal stakeholders

Approach to governance

Contractual relationship

Capabilities

Cultures

Standards

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Establishing the Context

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Risk

identification

To find, recognize, and describe the risks that could affect theachievement of objectives.

Risk Analysis

To understand the nature, sources, and causes of the risks that you haveidentified and to estimate the level of risk. It is also used to studyimpacts and consequences and to examine the controls that currentlyexist.

Risk

Evaluations

to compare risk analysis results with risk criteria in order to determinewhether or not a specified level of risk is acceptable or tolerable.

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Risk Assessment

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Risk

Treatment

RiskAvoidance

RiskReduction

RiskTransfer

RiskControl

RiskRetention

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Monitor:

To supervise and to

continually check and

critically observe.

Review:

To determine whether

something is a suitable,

adequate, and effectiveway of achieving

established objectives.

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Monitor & Review

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Dialogue between an organization and its

stakeholders.

Once communication and consultation is

finished decisions

are established by

stakeholders.

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Communication & Consultation

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Resources of

FinancialRisk

Management

Counter-

parts

Marketscontracts

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Documents

UNIKL - EBB20603 - Chapter 1 : An Introduction