Download - risk management in islamic banking
12 November 2013 |
RISK MANAGEMENT IN ISLAMIC BANKING
Anita Menon
Chief Risk Officer
Prudential BSN Takaful Berhad
IBBM Risk Management Conference 2013
11-12 November 2013
Kuala Lumpur, Malaysia
Agenda
• Introduction
• How To Ensure Risk Management Is Embedded At The Heart Of The Business?
• What Are The New Drivers Shaping The Role Of the CRO In Islamic Finance?
• Summary
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The Changing Regulatory Landscape Challenges for IFIs
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BASEL III "Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.
Islamic Financial Services Board The risk management standard sets out 15 principles of risk management for institutions (other than insurance institutions) offering only Islamic financial services (IIFS). Requirement to comply with Shariah rules and principles especially the prohibitions of generating profits without bearing any risks. However, IIFSs’ fiduciary duty requires it to apply Shariah compliant risk mitigation techniques wherever appropriate.
BNM Risk Governance The policy document on Risk Governance describes the supervisory expectations on risk governance practices in financial institutions :- • Roles of the board and senior
management oversight. • Independence of risk management
and control functions. • Importance of having a holistic view
of all relevant risks • Ensuring that reporting of risks
provides an integrated view which points to an ERM type approach
Islamic Financial Services Act 2013 (IFSA) The new Act came into force in July 2013 and will be a landmark law, perhaps the only omnibus Islamic finance legislation in the world. It could easily be called the Islamic Financial Stability Act for it lays the foundation for a comprehensive regime to promote a robust and resilient Islamic financial system in Malaysia.
BNM Shariah Governance Framework The Framework is designed to meet the objectives of outlining BNM's expectations on an IFI's Shariah governance structures, processes and arrangements, and providing comprehensive guidance to the key functions in discharging its duties relating to Shariah, in order to ensure that all its operations and business activities are in accordance with Shariah principles.
Considerations For IFIs The Unique Risk Faced by IFIs
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Financial Risk Operational Risk
Shariah Compliance Risk
Potential losses due to non-compliance with
Shariah rules e.g. penalty and reputation
Investment Risk
Rate of Return Risk
Exposed in the context of their overall balance sheet exposures. An increase in
benchmark rates may result in profit-loss sharing deposit holders’ having expectations
of a higher rate of return
Fiduciary Risk
Arises from IFIs’ failure to perform in accordance to
explicit and implicit standards applicable to
their fiduciary responsibilities
UNIQUE RISKS SPECIFIC TO IFIs OTHER THAN THOSE FACED BY ALL IFIs
What is Risk Management
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An “effective” risk management system is one where there is an
appropriate risk culture, decisions (at all levels) are based on an
understanding and consideration of risks, and risks that are either above
or below risk targets are managed towards that target.
Enterprise Risk Management (ERM)
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Broadens risk awareness
Aligns risk profile
and strategy
Minimises surprises
and losses
Rationalises capital
requirements
Assures regulatory
compliance
Improves ROE and
shareholder value
Business Risk
Financial Risk
Strategic Risk
Operational Risk
CRO
Risk Management
Risks
Business
Unit &
Process
Risk
Management
/Compliance
/Shariah
Board
Executive
Benefit
Enterprise Risk Management (ERM)
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The ERM foundation is built on 5 factors
ERM
Risk Management
Culture
Risk Models
Risk Controls Strategic Risk Management
Emerging Risk
Management
System of Governance Risk Management Needs to Cover All Aspects
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Board
Reporting Measurement and
Control Operations
Risk assessment/
Response
Business objectives
and strategy Risk strategy Value proposition Risk appetite
Risk awareness/
Identification
Organisation and
people
Limits and
controls Methodologies Systems Data Policies Reporting
Culture Training Communication Performance measures Reward
Strategy
Process
Infrastructure
Environment
Validation/
re-assessment
Supervise Framework of
objectives Safeguard Oversight
Risk Governance 3 Lines of Defence
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Senior Management
Board of Directors
1st Layer of Defence
Business Units
2nd Layer of Defence
Risk Management
Compliance
Shariah
3rd Layer of Defence
Internal Audit
Risk Acceptance,
day to day
dealings
Risk control unit,
oversight, policies
& framework
Independent
assurance
Audit Committee Board Risk
Management Committee
Shariah Committee
Investment Committee
Developments In Local Regulation
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BNM Risk Governance
The Principle 6 in Risk Governance describes the role of the CRO in financial institutions
• Financial institutions must establish an independent senior risk executive role (chief risk officer or its equivalent).
• The role of the chief risk officer (CRO) must be distinct from other executive functions and business line responsibilities.
• The CRO must be positioned at a sufficiently senior level in the organisation to enable risk considerations to be raised directly to the board and senior management.
• The CRO must report and have direct and unimpeded access to the board and its risk committee.
External Factors
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• Stock and bond markets remain volatile...
• Europe continues to face recession…
• US political chaos and debt ceiling row…
• Food and energy prices continue to rise...
• GDP slowdown in BRIC countries...
• Protests continuing in many countries...
Role of the CRO in IFIs
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Development of an ERM type
approach
Risk Measurement and
Reporting
Risk Assessment of business
strategy
Capital Management
Regulatory Compliance
Management and influence of other key stakeholders
Oversight of Shariah Risk
Management
Oversight of investment
management
In Summary ERM is an end to end process
Planning and Designing the Approach and
Concept
Implementing an Integrated approach to
Risk Management
Embedding Risk Management within
the Business
Continuously Improving the Integrated Risk
Management Framework
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