Risk management

The first session of the second day of the Oman Islamic Banking and Finance Conference 2012 saw experienced speakers touch upon issues of a slightly different nature, related to Islamic Banking.

Jamsheed Hamza, Senior Manager-Branch Network Expansion in the Islamic Banking Division, Bank Dhofar, spoke on the topic, ‘Customer Care and Understanding: Key to success Islamic Banking’.

He said: “How do we care for our customers? Your clients will stay with you if you can PRAISE them. PRAISE stands for Purpose, Relationship building, Appreciation, Intelligence, Service and Empathy. You need to understand the purpose of the customers coming to you.

If the customer is coming to the bank with a Halal need, the bank must genuinely take it upon itself to meet their needs. A bank is not here to sell but to develop awareness and build relationships.

By focusing on relationships you can turn a dynamic customer into a delightful customer, where one must invest in long term relationship building. You need to appreciate your customers.”

He urged Islamic bankers to “go the extra mile” in appreciating the client’s success and helping him make appreciative investment choices. “Apply your intelligence by educating your clients and developing awareness. Ask the question WHY?

Every decision based on the question WHY that we make in our lives, is attached to an emotion. You must serve your customers. Give your customers perfection, inculcate an attitude to serve and you will generate loyalty.

Empathise with your customers. Think in the shoes of your customers and you will win their trust and loyalty. Remember in short to always PRAISE your customers,” he said.

Arsalan Ahmed Qureshi, AVP - Senior. Manager, Operational Risk-Risk Management Department, Al Baraka Islamic Bank, spoke on ‘Operational Risk Management Strategies and Best practices in Islamic Banking’.

He said: “The principles of Islamic Banking are based on Prohibition of dealing with interest — Riba, Clearing of Financial Contracts from contractual uncertainty — Gharar, Exclusion of gambling (Maysir) in any financial activity, Non-Origination of profit from Haram economic and financial activities, reference of a Financial Transaction to a tangible, identifiable underlying asset and sharing of risks and rewards by all parties to a financial transaction.”

Banks, he explained, face a number of risks – Business, Financial, Event and Operational risks. “Risks specific to Islamic banks are Commodities and inventory risk, Rate of return risks, Sharia non-compliance risk, Equality position risk and Displaced commercial risk. Operational risks include Shariah compliance risk, fiduciary risk, people risk, technology risk and legal risk.

In short people, processes, systems and external events may trigger Operational risks. The reasons could be fraud, trade, input error, system failure etc.

The consequences could be Monetary Loss, and Reputation damage.”

Qureshi listed two approaches for assessing operational risks: Top-Down Approach which takes the product into consideration, and the Bottom-Down Approach which takes events into consideration.

“Nowadays banks use a combination of both these approaches. Operational Risk Management Framework compromises of a governance structure, Operational Risk Guiding Principles and Role & Responsibilities of Operational Risk Management Function and Business Units. 

To overcome operational risks we should have strong corporate governance and strong operational policies and mitigation and downsizing through each and every part of the organization.

Any operational tool kit program should consist of a Risk Register, Internal Loss Database, External Loss Database, KRI-Key Risk Indicators, RCSA-Risk Control Self Assessment and Risk Mitigation programme,” he added.

http://main.omanobserver.om/node/98111

Need for development of robust Shariah compliant risk management infrastructure

There is need for the development of a robust Shariah compliant risk management infrastructure in Pakistan’s Islamic banking industry.

It will enable both the Islamic banks and their clients to mitigate genuine business risks, said Yaseen Anwar Deputy Governor, State Bank of Pakistan (SBP).Inaugurating a workshop on ‘Hedging in Islamic Finance and Master Hedging Agreement,’ organised by International Islamic Financial Market (IIFM) in collaboration with the SBP.He said while conventional banks have access to a variety of sophisticated risk management and hedging instruments, there has been a dearth of Shariah compliant hedging products in the country for mitigating risks arising out of genuine business transactions that put Islamic Banking Institutions (IBIs) at a disadvantageous position viz a viz their conventional counterparts.

Describing the pace of growth and development of the Islamic banking industry in Pakistan as encouraging, he said at present it constitutes over 7 percent of the country’s banking system. Given the healthy growth for the past several years, the enabling regulatory and Shariah compliance framework, the growing HR capacity of IBIs and increasing awareness of the masses about Islamic banking, the share of the industry is likely to increase manifold in the future, he added.He observed despite these positive developments and trends, we need not be complacent as the industry still faces numerous challenges, including development of a robust Shariah compliant risk management infrastructure.

 ‘Moreover, the absence of standardised documentation invariably results in significantly higher transaction costs thus making the transaction unviable,’ he added.He noted notwithstanding the dire need of Shariah compliant risk management and hedging instruments for Islamic banks, it should be explicitly understood that such instruments should cover/hedge the genuine risks arising due to real business and economic transactions and should in no way allow transactions for speculative motives. ‘I presume, the same is the spirit of the Tahawwut (hedging) Master Agreement (TMA). This workshop, I believe, will enable Islamic banking industry to better understand the objectives, the underlying transactions and legal documentation etc suggested in the TMA,’ he said.

He said it would also enable market to develop and offer Shariah compliant hedging instruments. He said the IIFM has played an active role in the standardisation of documentation for liquidity management and hedging products over the past few years, which would greatly facilitate the development of Islamic Capital and Money Markets across the globe. He said TMA developed by IIFM in collaboration with International Swaps and Derivatives Association (ISDA) has been received well globally and is likely to provide a big boost to the Shariah compliant derivatives market.He said the TMA is a major initiative to standardise the hedging document and thus minimise the transaction costs. Also at the institutional level, the TMA will hopefully pave the way for players to provide Shariah compliant and financially viable products as well as broaden the range of risk management instruments available at their disposal,’ he added.While giving a presentation on TMA, Ijlal Ahmed Alvi Chief Executive Officer IIFM said although in recent years Islamic hedging market has grown, yet it was still in the development phase. TMA is a framework risk mitigating document for hedging transactions and is developed for the entire Islamic finance industry especially for Islamic financial institutions (IFIs) as well as for Islamic windows, he added.

Habib Motani, partner, Clifford Chance LLP, London gave a presentation from London through video link and highlighted the key features (legal and documentation) of TMA. Peter M Werner Senior Director ISDA gave a presentation on ‘Islamic Jurisdictions-the Need for Law Reform.’

dailytimes.com.pk

Islamic Finance: Lower Risk, But at What Cost?

Financial products based on 8th-century religious laws may seem an unlikely haven during a global crisis. But Islamic banking and financial services, based on traditional Muslim laws known as Sharia, are enjoying a major resurgence.

A survey released on Nov. 5 by The Banker magazine found that assets held by Sharia-compliant banks rose 28.6% in 2009 to $822 billion, while assets held by conventional banks grew only 6.8%.

True, Islamic finance still accounts for only about 1% of the global financial-services market, according to the Organization for Economic Cooperation and Development. But Sharia’s strict rules against speculation, hedging, and off-balance-sheet holdings are attracting investors worldwide. Already, some 50% of clients of Islamic financial institutions are non-Muslim, Anthony O’Sullivan, head of private-sector development at the OECD, said at a Nov. 4 conference in Paris on Islamic financing.

Rather than targeting Muslim clients, “We try just to be a good bank,” Lilian Le Falher, executive manager of the Bahrain operations of Kuwait Finance House, one of several Islamic banks represented at the Paris conference. The gathering was hosted by French Finance Minister Christine Lagarde, as part of a push by French officials to promote Paris as a global center for Islamic financial services.

Under Sharia, money can only be lent if fully backed by collateral, and debt cannot be repackaged – restrictions that helped cushion Islamic financial institutions against the worst of the global turmoil last year. Some, though, have been hurt more recently because they have extensive real estate holdings in the Persian Gulf, where property values have plummeted.

Despite its attractiveness as a haven from risk, Islamic finance still has a major drawback: It’s generally more-expensive than traditional forms of financing. Renault Nissan boss Carlos Ghosn, another speaker at the Paris conference, said that if it weren’t for the higher costs, his company would gladly use Islamic financing in countries such as Morocco where it is making major investments.

Because Sharia forbids charging or paying interest, Islamic institutions often set up elaborate arrangements in which borrower and lender form nominal partnerships. For example, a bank making a Sharia-compliant home loan could form a partnership with the buyer to purchase a property, then rent it to the buyer. Such arrangements aren’t always the most efficient.

Still another problem is that authorities in different Muslim countries don’t always use the same interpretations of Sharia, making it difficult to develop financial products that can be sold across borders.

Islamic finance could one day become a major global force. But, as Ghosn put it, before that happens it will have to become “less expensive, simpler, and better understood.”

Link: http://www.businessweek.com/globalbiz/blog/europeinsight/archives/2009/11/islamic_finance.html

Islamic Finance Can Also Face Systemic Failure & Reputation Risks, Says Economist

Islamic finance could also face a systemic failure and reputation risk unless there is a unified and dynamic regulatory framework applied not only domestically but also globally, warned an economist and former International Monetary Fund (IMF) executive director Dr Abbas Mirakhor.

He brushed aside claims that Islamic Finance was the most regulated financial sector as compared to the others.

"It's not true. We may have more regulatory standards but there is no implementation of the standards in a unified manner and there is no organisation that supervises the instruments," he said in his public lecture entitled: " Strengthening The Islamic Finance System: Lessons From The Crisis," at the Securities Commission here Tuesday.

Present at the lecture was the Raja Muda of Perak, Raja Dr Nazrin Shah, and Securities Commission chairman Tan Sri Zarinah Anwar.

Mirakhor said currently every jurisdiction have their own Islamic regulations while in some cases none, which gives the opportunity for regulatory arbitrage and that people issue Islamic instruments which may be sub-par in jurisdiction which are very weak or no regulations and therefore create risk for the system.

Therefore, the regulatory challenge is far more serious within the framework of Islamic Finance than in the conventional system.

"And because Islamic Finance is at a very infancy stage of development, (when it fails) the reputation risk is very huge," he said.

He said some of the Syariah scholars now know very little about finance.

"And it seems it is becoming performable to put a stamp of approval so that an instrument can be issued. You may or may not know there has been instruments that has been in trouble but they all had their approval from Syariah scholars," he said.

Therefore, Mirakhor said that to ensure a decent chance of growth and development, one has to make sure the regulations are unified and accepted by all jurisdictions.

"So, we need to create a uniformed standardisation for Syariah products and at the same time you need a uniformed, comprehensive and universal regulatory system in place, which can have the authority of early warning when it comes to weak instruments," he said.

However, the question is whether it should be done via an association of Islamic banks or central banks that have Islamic Finance operating in its jurisdiction.

Such arrangements are not difficult but it depends very much on the "will" of the participants, said Mirakhor.

He said Malaysia has the most advanced regulatory system todate for Islamic products and therefore it should take the lead towards the establishment of a unified framework.

But whether Malaysia will be the "agency" or via some other new organisation, it depends on the will of the authorities in Islamic or non-Islamic countries where there are Islamic products being transacted.

-- BERNAMA

Sustainability, Islamic Finance and Managing Risk While Seizing Opportunities

Wed, 04/01/2009 - 07:11 — Gassner
I just published an article with the Dow Jones Islamic Market Indexes Newsletter, giving an overview about the lines of arguments regarding performance and ethical screens, be it Islamic or Sustainability and what empiricial findings have been published.

It is claimed by critics that the reduction of the universe through ethical screens shall reduce the performance, likewise corporate social responsiblity comes against a cost. Similar counterarguments have been raised regarding Islamic screening criteria.

Bank Sarasin published a study doing own research with partners and reviewing published empirical analyses in the literature. It shows that there is no negative impact on performance. My review of empirical analyses in regard to Islamic finance concluded the same and all publications let conclude that ethical screens add value by way of risk management. An example is the debt limitation of the Sharia tolerance criteria.

Ethical screens may therefore improve the investment decision process and more research shall determine, which factors add value to the portfolio and therefore form part of a professional process.

For More info;
http://www.islamicfinance.de/?q=node/429