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RISK MANAGEMENT IN ISLAMIC BANKING

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Title: RISK MANAGEMENT IN ISLAMIC BANKING


1
(No Transcript)
2
RISK MANAGEMENT IN ISLAMIC BANKING
  • Presentation by
  • MAHMOOD SHAFQAT
  • Senior Joint Director
  • Islamic Banking Department
  • September 01, 2008
  • The views expressed in this presentation are
    those of the author and do not necessarily
    represent State Bank of Pakistan.

3
Outline
  • Definition and Introduction to Risk Management
  • Is Risk Management allowed under Shariah
  • Risks faced by Banks
  • Unique Risks faced by Islamic Banks
  • Risk mitigation tools
  • Regulatory Framework for Risk Management in
    Pakistan
  • SBP Guidelines on Risk Management in IBIs
  • IFSB Standard on Capital Adequacy

4
RisksBasic Concept
  • Risk
  • existence of uncertainty about future outcomes
  • difference between expected and actual result
  • Uncertainty classified as general and specific
  • General ignorance of any potential outcome
  • Specific when objective/subjective probabilities
    can be assigned to potential outcomesthis is
    usually referred to as risk.

5
Definition of Financial Risk
  • Financial risk in a banking organization is
    possibility that the outcome of an action or
    event could bring up adverse impacts.
  • Such outcomes could either result in a direct
    loss of earnings / capital or may result in
    imposition of constraints on banks ability to
    meet its business objectives.

6
RISK MANAGEMENT
  • Risk Management involves identification,
    measurement, monitoring, reporting and
    controlling risks to ensure that
  • The individuals who take or manage risks clearly
    understand it.
  • The organizations Risk exposure is within the
    limits established by Board of Directors.
  • Risk taking Decisions are in line with the
    business strategy and objectives set by BOD.
  • The expected payoffs compensate for the risks
    taken
  • Risk taking decisions are explicit and clear.
  • Sufficient capital as a buffer is available to
    take risk

7
Risk Management activities
  • Risk management activities take place at
  • Strategic level by senior management and BOD
  • Definition of risks, institutions risk appetite,
    formulating strategy and policies for managing
    risks and establish adequate systems and controls
    to ensure that overall risk remain within
    acceptable level and the reward compensate for
    the risk taken.
  • Macro Level within a business area or across
    business lines
  • Risk reviews by middle management
  • Micro Level where risks are actually created
  • Activities performed by individuals who take risk
    on organizations behalf such as front office and
    loan origination functions. Confined to following
    operational procedures and guidelines set by
    management.

8
Risk management process
  • Identification
  • Measurement
  • Monitoring
  • Reporting
  • Mitigation and control

9
  • To put it simply and directly,
  • if the bosses do not or cannot understand both
    the risks and rewards in their products,
  • their firm should not be in the business. -
  • William J. McDonough, President, Federal Reserve
    Bank of New York

10
Shariah Perspective
  • No Risk No Reward principle (Al Ribh Bi Daman)
  • So No Risk Management?
  • Measures taken by Hazrat Yousuf (AS) for drought
    (Ahsan ul Qasas)
  • Do not give your Amwal to Sufahaa
  • Writing of contracts whether spot or deferred
    (Legal risk, Documentation risk, etc)
  • Maqasid-e-Shariah
  • Protection of Izat, Jaan, Aql, Maal, Nasl

11
RISKS FACED BY BANKS AND THEIR APPLICATION ON
ISLAMIC BANKING
12
Risk Dimensions
Credit
13
ISLAMIC BANKING LESS RISKY?
  • Islamic Banking is safer as it is not based on
    INTEREST?
  • Depositors are liable to share losses, therefore
    solvency risk is mitigated?

14
Major Types of Risks in IB
  • Credit Risk
  • Attributed to delayed, deferred, and default in
    payments by counterparties. Covers profit sharing
    contracts (Mudaraba and Musharaka), receivables
    and lease (Murabaha, DM and Ijara, Salam,
    Istisna), and covers different stages of a
    contract
  • Market Risk
  • Adverse movements in interest rates, commodity
    prices and FX rates. Commodity risk in Murabaha,
    Ijara, Salam
  • Equity Risk
  • Adverse changes in market value (and liquidity)
    of equity held for investment purposes. Covers
    all equity instruments including Mudaraba and
    Musharaka

15
Major Types of Risks in IB
  • Liquidity Risk
  • Adverse cash flows in situations arising mainly
    out of changing market risk exposures, credit
    risk exposures and operational risk exposures.
  • Rate of Return Risk
  • Changes in account holders expectations of the
    return on investment. Also related to
    fluctuations in returns due to changes in
    underlying factors of the contract.
  • Operational Risk
  • Inadequacy of failed processes, people and
    systems. Also includes Shariah non-compliance
    Risk
  • Legal Risk
  • Inadequate legal framework, conflict of
    conventional and Islamic laws and conflict
    between Shariah rulings and legal decisions

16
Credit Risk Mitigating Tools
  • Pledge of assets as collateral
  • Inventories, Shares, Sukuk, Units, etc.
  • Third party Guarantee
  • Personal Guarantee
  • Promise
  • Charge on deposits and assets
  • Takaful
  • Hamish Jiddiya
  • Urbun
  • Khiyar / Option
  • Parallel contract, if permissible

17
Regulatory Framework
  • Risk Management
  • Guidelines on Risk Management - BSD Circular No.
    7 dt. Aug. 15, 2003 
  • Guidelines on Internal Credit Risk Rating Systems
    BSD Circular No. 8 dt. Oct. 29, 2007
  • Risk Management Guidelines for IBIs IBD
    Circular No. 1 dt. Jan. 2, 2008.
  • ICAAP Guidelines - BSD Circular 17 of 2008
  • Stress Testing
  • Guidelines on Stress Testing - BSD Circular No. 5
    dt. Oct. 27, 2005 
  • Internal Controls
  • Guidelines on Internal Controls - BSD  Circular
    No . 7 dt. May 27, 2004 and BSD Circular No. 1
    dt. Jan.14, 2006
  • Policy Framework in Banks/DFIs - BSD Circular 3
    of 2007  

18
SBP RM Guidelines for IBIs
  • 15 Guiding Principles
  • Divided into
  • General (1 Principle)
  • Credit risk (4 Principles)
  • Equity investment risk( 3 Principles)
  • Market risk (1 Principle)
  • Liquidity risk (2 Principles)
  • Rate of return risk ( 2 Principles)
  • Operational risk (2 Principles)
  • IBIs are also exposed to reputational risk
    arising from failures in governance, business
    strategy and process. Negative publicity about
    their business practices, particularly relating
    to Shariah non-compliance in their products and
    services, could have an impact upon their market
    position, profitability and liquidity.

19
Guiding Principles on RM
  • These principles are not radically different from
    those applicable to conventional banks
  • However, these are some fundamental differences
  • Emphasis on Shariah compliance
  • 6 out of 15 principles make explicit reference to
    Shariah rules

20
1. General Requirement
  • Principle 1.0 IBIs shall have in place a
    comprehensive risk management and reporting
    process, including appropriate board and senior
    management oversight, to identify, measure,
    monitor, report and control relevant categories
    of risks. The process shall take into account
    appropriate steps to comply with Shariah rules
    and principles and to ensure the adequacy of
    relevant risk reporting to the supervisory
    authority.

21
1. General Requirement
  • Board of directors (BOD) and senior management
    oversight
  • approve the risk management objectives,
    strategies, policies and procedures
  • approvals shall be communicated to all levels
  • ensure the existence of an effective risk
    management structure
  • Shariah Advisor to oversee that the IBIs
    products and activities are Shariah compliant

22
1. General Requirement
  • Board of directors (BOD) and senior management
    oversight
  • approve limits on aggregate financing and
    investment exposures
  • review the effectiveness of the risk management
    activities
  • Senior management shall execute the strategic
    direction and set clear lines of authority and
    responsibility
  • Independence of risk management function from
    risk taking activities

23
1. General Requirement
  • Risk management process
  • sound process for executing all elements of risk
    management, including risk identification,
    measurement, mitigation, monitoring, reporting
    and control
  • adequate system of controls with appropriate
    checks and balances
  • (a) comply with the Shariah rules and
    principles,
  • (b) comply with applicable regulatory and
    internal policies and procedures and
  • (c) take into account the integrity of risk
    management processes
  • quality and timeliness of risk reporting
    available to regulatory authorities
  • appropriate and timely disclosure of information
    to depositors

24
1. General Requirement
  • Application of Emergency and Contingency Plan
  • Integration of Risk Management
  • Risk Measurement and use of models
  • Utilization of funds
  • Role of Finance Administration Department
  • Management Information System for board or senior
    management committee
  • Human Resource Training and development

25
2. Credit Risk
  • Principle 2.1 IBIs shall have in place a
    strategy for financing, using various instruments
    in compliance with Shariah, whereby they
    recognize the potential credit exposures that may
    arise at different stages of the various
    financing agreements.

26
2. Credit Risk
  • Principle 2.2 IBIs shall carry out a due
    diligence review in respect of counterparties
    prior to deciding on the choice of an appropriate
    Islamic financing instrument.
  • Principle 2.3 IBIs shall have in place
    appropriate methodologies for measuring and
    reporting the credit risk exposures arising under
    each Islamic financing instrument.

27
2. Credit Risk
  • Principle 2.4 IBIs shall have in place
    Shariah-compliant credit risk mitigating
    techniques appropriate for each Islamic financing
    instrument.

28
2. Credit risk
  • These principles apply to
  • Murabaha, Salam, ijara and Istisna contracts
  • Mudaraba and Musharaka
  • Sukuk
  • For example, for working capital financing,
    Salam and Mudaraba contracts could be used
  • In case of Salam, the bank enters into a parallel
    Salam contract with a third party
  • What factors may effect the counterpartys
    ability to repay

29
2. Credit risk
  • The commodity price
  • Dont use commodities with high price volatility
  • A list of all types of applicable and approved
    transaction and financing
  • The Islamic banks should ensure that adequate
    systems and resources are available to implement
    this strategy
  • In case of using Mudaraba contract as a working
    capital tool
  • The choices of Mudarib company should be made
    with care

30
2. Credit risk
  • The bank must have close links with the company -
    Shariah implications
  • Choose an appropriate trading activity for
    financing
  • Guidelines on a realistic review of expected
    future cash flow

31
2. Credit risk
  • Transformation of risk should be taken into
    account while devising a sound risk management
    strategy
  • For example, in Murabaha contracts, the risk gets
    transformed from market risk to credit risk
  • In Mudaraba and Musharaka contracts, equity
    investment gets transformed to debt in case of
    proven negligence for misconduct on part of the
    Mudarib or Musharaka partners
  • The role of promises must be scrutinized and
    recognized in the complex structures

32
2. Credit risk
  • Clearly define risk mitigating techniques
    including but not limited to
  • Methodology for setting Mark-up rates according
    to the risk-rating of the counterparties
  • Permissible and enforceable collaterals and
    guarantees
  • Clear documentation as to whether or not purchase
    orders are cancelable
  • Clear procedure for taking a/c of governing laws
  • Always try to buy the asset-to-be- financed on
    sale-or-return basis

33
2. Credit risk
  • IBIs shall assess credit risk in a holistic
    manner and ensure that credit risk management
    forms a part of an integrated
  • For example, in a Salam contract, changes in
    market risk factors such as commodity prices, as
    well as the external environment (for example,
    bad weather) become key determinants affecting
    the likelihood of default.

34
2. Credit Risk
  • The IBIs must have
  • an appropriate credit strategy, including pricing
    and tolerance for undertaking various credit
    risks
  • a risk management structure with effective
    oversight of credit risk management
  • credit policies and operational procedures
    including credit criteria and credit review
    processes, acceptable forms of risk mitigation,
    and limit setting

35
2. Credit Risk
  • an appropriate measurement and careful analysis
    of exposures, including market- and
    liquidity-sensitive exposures and
  • a system to
  • monitor the condition of ongoing individual
    credits to ensure the financings are made in
    accordance with the IBIs policies and procedures,
  • manage problem credit situations according to an
    established remedial process and to determine
    adequate provisions to be made for such losses.

36
3. Equity investment risk
  • Equity investment risk may be defined as the risk
    arising from entering into a partnership for the
    purpose of undertaking or participating in a
    particular financing or general purpose activity
    as described in the contract, and in which the
    bank shares in the business risk
  • Market risk
  • Liquidity risk
  • Credit risk
  • Other risks
  • Capital impairment risk

37
3. Equity Investment Risk
  • Principle 3.1 IBIs shall have in place
    appropriate strategies, risk management and
    reporting processes in respect of the risk
    characteristics of equity investments, including
    Mudarabah and Musharakah investments.

38
3. Equity Investment Risk
  • Principle 3.2 IBIs shall ensure that their
    valuation methodologies are appropriate and
    consistent, and shall assess the potential
    impacts of their methods on profit calculations
    and allocations. The methods shall be mutually
    agreed between the IBIs and the Mudarib and/or
    Musharakah partners.

39
3. Equity Investment Risk
  • Principle 3.3 IBIs shall define and establish
    the exit strategies in respect of their equity
    investment activities, including extension and
    redemption conditions for Mudarabah and
    Musharakah investments, subject to the approval
    of the institutions Shariah Advisor.

40
3. Equity Investment Risk
  • Risk mitigation
  • Define and set the objectives of, and criteria
    for, investment using profit sharing instruments
  • Monitoring
  • Evaluation of Sharia compliance, holding of
    periodical meeting with partners and proper
    recordkeeping of these meetings
  • Monitoring of transformation of risks at various
    stages of investment lifecycle
  • Monitoring of factors affecting the expected
    volume and timing of cash flows

41
3. Equity Investment Risk
  • Valuation
  • Appropriate valuation methods profit calculation
    and allocation
  • Assessment and measurement of potential
    manipulation of reported results leading to
    overstatements or understatements of partnership
    earnings
  • Independent audit and valuations
  • Appropriate methods for the treatment of retained
    profits
  • Criteria for Exit strategies

42
4. Market Risk
  • Principle 4.1 IBIs shall have in place an
    appropriate framework for market risk management
    (including reporting) in respect of all assets
    held, including those that do not have a ready
    market and/or are exposed to high price
    volatility.

43
4. Market Risk
  • The risk that arises from fluctuations in values
    of tradable, marketable or leaseable assets
    (including Sukuk) and in off- balance sheet
    individual portfolios
  • The risks relate to the current and future
    volatility of market values of
  • Salam based assets (due to commodity prices)
  • Sukuk
  • Murabaha assets( purchased to be delivered)
  • Market risk exposures may occur at certain times
    or throughout the contract

44
4. Market Risk
  • In operating Ijarah, a lessor is exposed to
    market risk on the residual value of the leased
    asset at the term of the lease or if the lessee
    terminates the lease earlier (by defaulting),
    during the contract.
  • In Ijarah Muntahia Bittamleek, a lessor is
    exposed to market risk on the carrying value of
    the leased asset (as collateral) in the event
    that the lessee defaults on the lease
    obligations.
  • In Salam, IBIs are exposed to commodity price
    fluctuations on a long position after entering
    into a contract and while holding the subject
    matter until it is disposed of.
  • In the case of parallel Salam, there is also the
    risk that a failure of delivery of the subject
    matter would leave the IBIs exposed to commodity
    price risk as a result of the need to purchase a
    similar asset in the spot market in order to
    honour the parallel Salam contract.

45
4. Market Risk
  • IBIs shall establish a sound and comprehensive
    market risk management process and information
    system, which (among others) comprise
  • a conceptual framework to assist in identifying
    underlying market risks
  • guidelines governing risk taking activities in
    different portfolios of depositors and their
    market risk limits
  • appropriate frameworks for pricing, valuation and
    income recognition and
  • a strong MIS for controlling, monitoring and
    reporting market risk exposure and performance
    to appropriate levels of senior management.

46
4. Market Risk
  • Market risk is closely related to other forms of
    risks, and an overall measure of it can be
    calculated with the help of an appropriate VAR
    model
  • Islamic banks then should ensure that adequate
    capital is held against the market risk

47
5. Liquidity Risk
  • Principle 5.1 IBIs shall have in place a
    liquidity management framework (including
    reporting) taking into account separately and on
    an overall basis their liquidity exposures in
    respect of each category of current accounts,
    unrestricted and restricted investment accounts.
  • Principle 5.2 IBIs shall undertake liquidity
    risk commensurate with their ability to have
    sufficient recourse to Shariah-compliant funds
    to mitigate such risk.

48
5. Liquidity Risk
  • Two major types of fund providers
  • current account holders and
  • PLS Deposit holders
  • PLS Deposit holders do not share in the risks on
    assets financed by current accounts, which are
    borne by shareholders alone
  • As fiduciary agents, the IBIs are concerned with
    matching their investment policies with PLS
    Deposit holders and shareholders risk appetites

49
5. Liquidity Risk
  • Linked with displaced commercial and Shariah
    compliance risks
  • Islamic banks must maintain adequate liquidity to
    meet their obligations at all times
  • Strategy for managing liquidity involving
    effective BOD and senior management oversight
  • A framework for developing and implementing sound
    processes for measuring and monitoring liquidity
  • Adequate systems in place for monitoring and
    reporting liquidity exposures on a periodic basis

50
5. Liquidity Risk
  • Adequate funding capacity, with particular
    reference to the willingness and ability of
    shareholders to provide additional capital when
    necessary
  • Liquidity crisis management, fixed asset
    realization and sale and leaseback arrangements
    etc.

51
5. Liquidity Risk
  • Risk mitigation
  • - Diversity sources of funds
  • - Reduce concentration of funding base
  • - Rely on marketable assets
  • Identity any future shortfalls in liquidity by
    constructing maturity ladders
  • Known cash flows
  • Murabaha, Ijara, IMB and diminishing Musharaka
    receivables

52
5. Liquidity Risk
  • Conditional but predictable cash flows
  • Salam and Istisna receivables
  • Conditional and unpredictable cash flows
  • Musharaka investments
  • Periodic cash flow analysis under different
    scenarios
  • A normal operating environment (e.g., a steady
    state condition)
  • Adverse circumstances (e.g., non-linear events
    and chaotic conditions)

53
5. Liquidity Risk
  • establish the maximum amounts of cumulative
    liquidity mismatches they consider acceptable
  • Liquidation procedures must be incorporated in
    the investment contracts
  • Liquidity contingency plans addressing various
    stages of liquidity crisis

54
6. Rate of Return Risk
  • Principle 6.1 IBIs shall establish a
    comprehensive risk management and reporting
    process to assess the potential impacts of market
    factors affecting rates of return on assets in
    comparison with the expected rates of return for
    PLS Deposit holders.
  • Principle 6.2 IBIs shall have in place an
    appropriate framework for managing displaced
    commercial risk, where applicable.

55
6. Rate of Return Risk
  • An increase in benchmark rates may result in PLS
    depositors having expectations of a higher rate
    of return
  • The actual return on assets may be under
    performing as compared to the competitors rate
    of returns
  • Displace commercial risk
  • Profit Equalization Reserve
  • Investment Risk Reserve

56
7. Operational Risk
  • Principle 7.1 IBIs shall have in place adequate
    systems and controls, including Shariah Advisor,
    to ensure compliance with Shariah rules and
    principles.

57
7. Operational Risk
  • Principle 7.2 IBIs shall have in place
    appropriate mechanisms to safeguard the interests
    of all fund providers. Where PLS deposit holders
    funds are commingled with the IBIs own funds, the
    IBIs shall ensure that the bases for asset,
    revenue, expense and profit allocations are
    established, applied and reported in a manner
    consistent with the IBIs fiduciary
    responsibilities.

58
7. Operational Risk
  • Shariah compliance risk
  • - The risk that arises form Islamic banks
    failure to comply with the Shariah rules
    principles determined by the Shariah Advisor or
    the relevant body in the jurisdiction in which
    Islamic banks operate
  • Fiduciary risks
  • - The risk that arises from the Islamic banks
    failure to perform in accordance with explicit
    and implicit standards applicable to their
    fiduciary responsibilities

59
7. Operational Risk
  • IBIs shall establish and implement a clear and
    formal policy for undertaking their different and
    potentially conflicting roles in respect of
    managing different types of investment accounts.
  • IBIs shall adequately disclose information on a
    timely basis to their PLS deposit holders and the
    markets in order to provide a reliable basis for
    assessing their risk profiles and investment
    performance.

60
ROLE OF SUPERVISORY AUTHORITY
  • adequate understanding on the wide array of risks
    and satisfy itself that the IBIs have in place an
    adequate risk management and reporting process
  • Develop and utilise prudential regulations and
    requirements to control these risks

61
ROLE OF SUPERVISORY AUTHORITY
  • Credit Risk
  • maintain a detailed description of each financing
    instrument used by the IBIs in their jurisdiction
    and the risk exposures to which each instrument
    gives rise
  • may decide to develop Shariah guidelines or
    minimum documentations in respect of agreements
  • adequacy of the policies and procedures to be
    implemented by the IBIs to mitigate risks are
    subject to review by the supervisory authority in
    compliance with Shariah

62
ROLE OF SUPERVISORY AUTHORITY
  • Equity Investment Risk
  • satisfy itself that adequate policies and
    procedures are in place for equity investment
    risk management
  • ensure that the IBIs have sufficient capital when
    engaging in equity investment activities
  • may develop regulatory guidelines for measuring,
    managing and reporting the risk exposures when
    dealing with non-performance financing and
    providing provisions

63
ROLE OF SUPERVISORY AUTHORITY
  • Market Risk
  • satisfy itself on the adequacy of IBIs internal
    systems and controls and internal limits set by
    the IBIs on their market risk management in
    relation to the activities undertaken.
  • Supervisory authorities should require IBIs in
    their jurisdictions to develop guidelines for
    acceptable valuation techniques where direct
    market prices are not available, and should
    approve such guidelines. Alternatively, the
    supervisory authorities may themselves develop
    such guidelines.

64
ROLE OF SUPERVISORY AUTHORITY
  • Liquidity Risk
  • satisfy itself that the IBIs have adequate
    liquidity policies, systems and controls in place
    to manage their liquidity
  • may establish appropriate minimum levels of
    liquidity for each category
  • central bank in its capacity as lender of last
    resort may provide Shariah compatible mechanisms
    for liquidity arrangements to IBIs as per
    stipulated regulations before the IBIs can resort
    to seeking funds

65
ROLE OF SUPERVISORY AUTHORITY
  • Rate of Return Risk
  • assess the capacity of the IBIs to manage the
    rate of return risk may establish appropriate
    minimum levels of liquidity for each category
  • Where the supervisory authority may have a
    policy of stating an expected rate of return for
    unrestricted IAH, the supervisory authority shall
    establish a framework within which this is to be
    undertaken by the IBIs operating in its
    jurisdiction

66
ROLE OF SUPERVISORY AUTHORITY Rate of Return Risk
  • The ROR framework may include amongst others,
    methods, applicable periods and recognisable
    income and expenses, and other calculation bases
    relating to the use of funds. This framework
    shall assist the supervisory authority to assess
    the efficiency of IBIs in terms of their
    profitability and prudent management.

67
ROLE OF SUPERVISORY AUTHORITY
  • Operational Risk
  • satisfy itself that IBIs have in place a
    comprehensive and sound framework for developing
    and implementing a prudent control environment
    for the management of operational risks
  • IBIs have adequate Shariah compliance mechanisms
    in place
  • well-defined and adequately qualified and staffed
    organisational structure
  • clear lines of authority and accountability
  • policies and procedures for approval of products
    and activities

68
ROLE OF SUPERVISORY AUTHORITY
  • Operational Risk
  • prescribe formal guidance for the IBIs to ensure
    they fulfil their fiduciary duties towards their
    IAH
  • applicable auditing standards relevant to IBIs
    are being implemented correctly in respect of the
    assessment of the appropriateness of allocations,
    distributions and reporting of profits to IAH
  • The supervisory authority may require IBIs to
    have an independent and regular review of
    Shariah compliance in this regard.

69
Risk Measurement
  • Risk measurement methods
  • - Traditional
  • GAP analysis
  • Duration analysis
  • Statistical analysis
  • Scenario analysis
  • Modern portfolio theory
  • Variation from the mean
  • VAR

70
TEN RULES TO RISK MANAGEMENT
  • There is no return without risks
  • Rewards go to those who take risks
  • Be transparent
  • Risk should be fully understood
  • Seek experience
  • Risk is measured and managed by people, not by
    mathematical models
  • Know what you dont know
  • Question the assumptions made
  • Communicate
  • Risk should be discussed openly

71
TEN RULES TO RISK MANAGEMENT
  • Diversify-avoid concentration
  • Multiple risks will produce more consistent
    rewards
  • Show discipline
  • A consistent and rigorous approach will beat a
    constantly changing strategy
  • Use common sense
  • It is better to be approximately right, than to
    be precisely wrong
  • Return is only half of the equation
  • Decisions should be made only after considering
    the risks and returns of the possibilities
  • Oversight must be enterprise-wide
  • Risks cannot be managed in isolation

72
IFSB Capital Adequacy Standard
  • Overview
  • Largely based on the Basel approach, with
    necessary modification and adaptation to cater
    for specific nature and characteristics of
    Shariah compliant products and services
  • Uses Risk weights derived from those proposed in
    Basel II because of lack of historical data to
    modify risk weights
  • For Credit Risk - Standardized approach
  • Market Risk - 1996 Market Ris Amendment
  • Operational Risk - Basic Indicator approach
  • CAS is structured in a Matrix format to cater for
    transformation of risk at different stages of
    contract
  • Treatment of PSIA and assets financed by PSIA in
    CAR
  • Adoption after Impact Study by SBP

73
A Word of Caution
  • Risk Management of your life is important than
    everything.
  • Would you ever think about it.
  • Various risks are related with our body and Soul.
    Some of them could harm a lot and some less.
  • Kindly Think about it .

74
For Comments and Suggestions please
contact Mahmood Shafqat Senior Joint
Director Islamic Banking Department State
Bank of Pakistan I.I. Chundrigar Road,
KarachiPh 92-21-9212509, 2453741Fax
92-21-9212472E-mail mahmood.shafqat_at_sbp.org.pk
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THANK YOU
  • MAY ALLAH THE ALMIGHTY SHOW US THE RIGHT PATH,
  • THE PATH OF HIS LOVED ONES (AAMEEN)
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