Presentation on theme: "Pre-Examination Session Class Review IB2002 Risk Management for IFIs"— Presentation transcript:
1Pre-Examination Session Class Review IB2002 Risk Management for IFIs Prof. Saiful Azhar Rosly, Banking DepartmentINCEIF
2Risk ManagementRisk management is a continuing process of corporate risk reductionRisk management is about how firm actively select the type and level of risk that is appropriate for them to assume.Risk management and risk taking are two sides of the same coin.
3Business riskPotential loss in the world of business due to uncertainty about:Demand for productsThe price that can be charged for those productsThe cost of producing and delivery the products
4Risk is potential loss Risk itself is not an evil thing Avoiding risk with zero profit is allowed – Wadiah Yad Dhamanah depositAvoiding risk with positive profit is not allowed – interest from loans.Avoiding risk is an evil action if it injures the counterparty – interest from loans
5Risk Management in Islamic Banking Fundamental principle in Islamic business :no reward without risk – al-ghorm bil ghonmWith profit comes liability – al-kharaj bil daman.Risk taking behaviour – as the above –risk > 0, profit > permissibleRisk avoiding behaviour – risk =0, profit > not permissible
62 dimensions of Islamic bank risk management Profitability(Making profit with risk)Banking bookCredit riskMarket risk, operational riskLiquidity riskRoR, DCR,Shariah riskTrading bookMarket riskOperational riskLegal riskFinancial stabilityBasel IIIFSB1. Capital Adequacy2. Supervision3. Market discipline
7Profitability vs Financial Stability Banks as profit-maximizing firms cannot be left alone without proper regulations by authorities.Banks may take excessive risks and overlooked safety of depositors’ fund, eroding capital and thus jeopardizing public confidence.Thus in making profit, banks may introduce financial instabilities.The purpose of regulation is to instill financial stability by controlling bank’s behaviour.
8Loss due Risk exposures Reduce Earnings Reduce Capital Bank Failure Financial Instability
105 Basic Shariah Principles in Financial Transactions #2 Application of Al-Bay#3 Avoidance of Gharar#4 Prohibition of Gambling(Maisir)#5 Prohibition of Impure Commodities#1 Prohibition of Riba
11Islamic Bank Risk Management Process & Due DiligenceAppraisalCredit ScoringPD, LGPDBusiness PlansCash FlowsTake PositionPricingRisk premiumSecurityMonitoringEffects of Exposure due to Systematic and Unsystematic risksRisk Mitigation
12Risk Management Impact on Firm OPTIONS OF RISK MANAGEMENT Risk Take Position: Risk-TakingImpact on FirmOPTIONS OF RISK MANAGEMENTRiskAvoidanceRiskPrevention/Reduction/MitigationRisk TransferInsuranceDerivatives
14Failures of Risk Management Long-Term Capital Management (LTCM)EnronWorldComGlobal CrossingParmalatLehmanMorgan StanleyAIGBears & StearnNorthernrockWashington MutualMore coming soon… subprime world crisis
15Islamic Bank’s Average Balance Sheet AssetLiabilityCashWadiah Dhamanah Current AccountBBA Home FinancingWadiah Dhamanah Savings AccountAITAB Car FinancingRestricted Mudarabah AccountBay al-Inah Personal FinancingEnterprise FinancingUnrestricted Mudarabah AccountGovernment Islamic SecuritiesCommodity MurabahahNegotiable Islamic Certificate of DepositsSukukFixed AssetsShareholders’ Capital
16Income Statement ‘Reward comes with Risk” Islamic BankingProfit and LossRevenuesCost of Funds$500m$200mGross Profit$300mOverheadsProvisions for NPFProfit Equalization Reserve$80m$10mProfit Before Tax and ZakatTax and Zakat$60mNet Profit$140m
23Risks in BBA Financing Operational Shariah Risk Credit Risk Low credit scoring for Islamic customers, higher probability of default(PD)Market RiskNegative Gap can mean losses asInterest rate increasesShariah RiskRecent Court Judgementon murabaha/BBA as non bona fide saleOperationalRiskConventionalsolution/system not able to accomodate Islamic accounting principles leading toovercharging and undercharging customers.High NPF and Write-OffsCapital DepletionEarning at risk (EAR)Capital at risk (EAR)Litigation CostsErosion of earningsIncreaseOverheadsLitigation costs
24Risk-taking Once the bank accepts the risk, it must manage it. What are the risks faced by an Islamic bank?The Islamic bank’s shareholders face the following risks:Credit riskMarket riskLiquidity riskOperational riskCommercial displacement riskRate of return riskShariah riskLosses arising from risky financing facilities will adversely affect deposits and shareholders’ capital.The objective of banking regulation (Basel II) is to protect deposits.When losses wiped out bank’s capital, the bank becomes insolvent.
25Risk Management in Islamic Banking Concept of risk in IslamRisk in trading and commercial transactions (al-bay)Risk in loansTypes of riskSystematic , pure and speculative riskUnsystematicIslamic Banking businessOperates under Basel IIBasel II – to protect depositors’ fundCapital adequacy requirementRisk management –Before bank approves financing facilities, it:Identify riskMeasure riskPricingRisk mitigationcollateralrisk transfers via derivatives
26Islamic Banking Balance Sheet Asset Risk WeightLiabilityMurabahah $6000mWadiah dhamanah $2000mIjarah $2000mMudarabah $1000mMudarabah investment deposits $8000mMusharakah $1000mOthers $500mCapital ? CAR = 10%Capital ratio = Eligible Capital / Risk-Weights Assets (RWA)= $?m/RWAEligible Capital = Capital ratio x RWA= 0.1 / (6000 x 1) + (2000 x 1.5) + (1000 x 2.0) + ($1000 x 2.5) + ($500 x 0.5) =______?Highly risky assets carry high conversion factor (Risk Weight)Islamic bank must carry more capital in order to conduct risky business.
27Risk / Potential losses Murabaha : sale with installment paymentsCredit riskShariah riskIjarah: financial leasing – leasing ending with saleMarket riskPartnership: profit-sharingOperational risk
28Islamic BankingProfit and LossRevenuesCost of Funds$500m$200mGross Profit$300mOverheadsProvisions for NPFProfit Equalization Reserve$80m$10m$5mProfit Before Tax and ZakatTax and Zakat$60mNet Profit$140m
30Credit riskCredit risk is the risk that a change in the credit quality of a counterparty will affect the value of a security or portfolio.When counterparty defaults, the bank loses either all of the market value of the position or, the part of the value that it cannot recover.Expected loss (LGD loss given default) – covered by provisionsUnexpected loss – covered by capital
31Islamic Banks that thrived on Credit Financing Loss due to Credit risk is inevitable
32Basel II and Credit Risk Expected Loss(Covered by bank’s provisions)Unexpected Loss(Covered by capital)Total Loss
33Rising Non-Performing Financing Reduce Earnings Capital Depletion Loss due Credit RiskRising Non-Performing FinancingReduce EarningsCapital DepletionBank FailureFinancial Instability
34Credit Risk Management Adverse selection and moral hazardMoral hazard exists because borrowers may have incentive to engage in activities that are undesirable from lender’s point of viewIn such situations, it is more likely that the lender will be subject to the hazard of defaultBanks have to overcome the adverse selection and moral hazard problem that make loan defaults more likely.
35Credit Risk Management This is done byScreeningMonitoring & enforcing restrictive covenantsEstablishment of long term customer relationshipsLoan commitmentSpecialized lendingCollateral and compensating balance requirementsCredit rationing
36Largely due to unsystematic risk Unexpected Loss Total LossExpected LossLargely due to unsystematic riskUnexpected LossLargely due to systematic risk
37Credit Risk in BBA The risk of the facility is characterized by: The external and /or internal rating attributed to each obligor, usually mapped to probability of default (PD).The loss rate given default (LRGD) and EAGD of the facilities. LRGD is the loss rate when the borrower defaults.Exposure at given default (EAGD) : notional value of a loan, or exposure for loan commitment. Amount of credit outstanding at the time of default.The expected loss (EL) for each credit facility:EL = PD x EAGD x LRGD
38Example: Expected Loss Zahidi Bank hold a $500 million BBA portfolio with 15 years tenor.PD of the portfolio = 10%BBA defaulted after 5 yearsExposure at given default (EAGD) = $400Collateral $300mLoss rate given default = (EAGD – collateral)/$500m = ($400m - $300m)/$500m = ($100/$500) x 100% = 20%EL= PD x EAGD x LRGDEL = 0.1 x $400m x 0.2 = $8 millionBank will put aside $8 million for NPF provisioning.
39EXPECTED LOSS = PD x EAGD x LRGD EAGD = $400mMaturityOriginationPD = 10%DefaultBBA PORTFOLIO = $500m
40Expected Loss is covered by Bank’s Provisioning General and Specific ProvisionsExpected Loss (EL)Probability of Default (PD)Loss Rate Given Default (LRGD)Exposure at Given Default (EAGD)
41Credit risk inn BBAExpected loss (EL) is the basis for the calculation of the bank’s allowance for BBA losses, which should be sufficient to absorb both specific and general credit related losses.EL can be viewed as cost of doing business. That is, on average, the bank will incur a credit loss amounting to EL.However ACTUAL credit losses may be higher or lower than EL.The variation for credit losses beyond EL is called unexpected loss (UL).UL is the basis for the calculation of economic and regulatory capital.
42Assessing credit exposure Compute ELCompute ULDetermine the volatility of expected loss of a BBA to the whole portfolio.Calculate the probability distribution of credit loss for the portfolio and asses the capital required to absorb the unexpected losses.
43Pricing, Credit risk and Expected Loss How does an Islamic bank pass on the cost of non- performing financing provisions to the customers?
44Pricing of Debt instrument Pricing of Debt instrument. Profit rate = Cost of deposits + cost of overheads + risk premiumBanking ProductsCost of DepositsOverheadsStatutorymarginsRisk-Premiums
45Bank’s contractual loan rate is equal to the: cost of deposits (rd),operating costs (c),Statutory profit margin (p) anda risk premium.If we take away the risk premium, we get the targeted interest- rate (rt), which is also known as the prime or base-lending rate (BLR).The BLR is the interest rate charged to bank’s best customers consisting of the interest rate on deposits (rd) operating cost (c) and a profit margin (p).
46Based on the above rt = rd + c + p. Let’s say that bank pays depositors 7% and incurred 1% in operating cost and a 2% profit margin.The targeted interest rate is therefore 10%.
47Now the bank receives a $180,000 BBA application from Salim Now the bank receives a $180,000 BBA application from Salim. After full assessment of his credit ratings, the bank felt that Salim has a 20% default risk (pd = 0.2).This also implies that the probability of Salim making full payment is 80% (pf).Given this information, the question now is how much should the bank charge Salim for the $180,000 BBA?Or what is the contractual profit rate (rc)?
48The contractual profit interest rate is the rate set in the BBA contract in arriving at the selling price (SP).Given that Salim is a risky customer, the bank may not want to charge him the prime rate. The prime rate is the rate the bank charges to its best customer. Certainly now, the contractual profit rate is expected to be higher than the prime rate or BFR.
49To obtain the contractual profit rate, the bank must first determine how much profits it desires to make from the BBA. Meaning that the expected rate of return (re) must be computed to find (rc).Since the bank’s targeted rate of return (rt) is equal to the BFR, it also means that expected rate of return (re) must be equal to the targeted rate of return (rt).rt = re
50Now given Salim’s 20% probability of default, which is assumed to cause the bank a 10% loss (rd), [also known as loss rate given default LRGD in a BBA portfolio] the expected rate of return (rc) and contractual profit rate are given below:
51 Computing the Contractual profit rate (rc) on a Risky BBA re = (pf x rc) + (pd x rd)re = (0.8 x rc) + (0.2 x -0.1)rt = rd + c + pSince rt = 10% or 0.1= 0.8rcrc = ( )/0.8 = 0.15 or 15%; rc rt
52We can see in the above illustration that the pricing of BBA has included the credit risk factor. It has also added earlier the time- value of money factor.Profit rate = cost of GIA deposit (TVM) + OVH + credit riskthe contractual profit rate (rc = 15%) is higher that the targeted rate of return (rt = 10%). This is simply because Salim is a risky customer thus was charged 5% higher than the bank’s best customer(s) who by definition have no credit or default risk at all.In other words, for risky borrowers, the contractual profit rate is set above the targeted rate.Likewise, the lower the default risk, the lower is the contractual profit rate relative to the targeted rate.Why is this allowed BBA and disallowed in loans?
53Credit Risk Premium and EL Based on the calculated contracted rate of return (Rc), it is found that the bank charges an extra 5% based on the credit worthiness of customer.This 5% risk premium is used by the bank to cover the Expected Loss or the expenses on BBA loss provisioning.
54Islamic BankingProfit and LossRevenuesCost of Funds$500m (Rc x F)$200m (Rd x D)Gross Profit$300mOverheadsProvisions for NPFProfit Equalization Reserve$80m$10mProfit Before Tax and Zakat$200mTax and Zakat$60mNet Profit$140mRisk premium isused to pay forunexpected loss (UL)or NPF provisioning.Rc = cost of deposit + overhead + risk premium
61GAP = $50m - $1000m = -$950m FRA 1. BBA $700m 2.AITAB $400m 3. Tawaruq $100mTotal $1200mRSAMudarabah $50mGAP = -$950If profit rate decreases by 1%, then net income will increase by (-$950m x 0.01) = $9.5mRSLWAD $200mPSIA $800mTotal $1000mWAD & PSIA $1000GAP = -$950If profit rate increases by 1%, then net income will fall by (- $950m x 0.01) = $9.5m.
62To make GAP = 0 Increase RSA Decrease RSL But to decrease RSL will mean adding more fixed rate deposits (FRD).FRD = CMD, NICD.When GAP = 0, any changes in profit rate/interest rate will not affect income.
63How to mitigate interest-rate risk in Islamic banking? Offering Floating-Rate BBA productsBBA securitizationProfit-rate Swap (PRS)
64Floating Rate BBA/Murabaha Islamic Bank expects interest rate to increase.Set up the maximum rateMarket rate = 5%Maximum rate = 10% (based on bank’s forecast)Cost of asset = $200,000Tenure = 10 yearsAqad price = $200,000 + ($200,000 x 0.1 x 10) = $400,000Monthly payment = $400,000/120 = $3333.Selling price based on current rate = $200,000 + ($200,000 x 0.05 x 10) = $200,000 + $100,000 = $300,000Monthly payment = $2500 = Actual paymentRebate = $ $2500 = $833
65Floating rate BBA/Murabaha If rate increases to 6%, SP = $200,000 + ($200,000 x x 10) = $200,000 + $120,000 = $320,000Monthly payment = $2666Rebate = $ $2666 = $667Islamic bank able to adjust the rate since the aqad price remains the same based on the capping rate of 10%.As interest rate increases, rebate decreases.
66Interest Rate Swap (IRS) FixedLoanBank ABank BFloatingBLRBank A expects interest rate to increaseBank B expects interest rate to fallActual thing: interest rate increasesLoan = $100mFixed Interest payment = 0.1 x $100m = $10Floating interest payment = 0.12 x $100 = $12 millionBank B pays Bank A $2 million.No exchange of notional loan amount between Bank A and Bank B.
67Profit Rate Swap (PRS) Fixed rate@BBA 10% @ BBA Bank A Bank B FloatingBLR BBABank A expects interest rate to increaseBank B expects interest rate to fallActual thing: interest rate increasesLoan = $100mFixed profit-rate payment = 0.1 x $100m = $10Floating profit rate payment = 0.12 x $100 = $12 millionBank B pays Bank A $2 million.No exchange of notional BBA amount between Bank A and Bank B.
68Profit Rate Swap (PRS) Stage 1 Sells asset in cash ie. notional Bank A Bank Bresell notional + fixed ratePay fixed rateBank ABank B
70Relationship between Market Risk and Displaced Commercial Risk -ve Gap – Market risk RoRRoR DCRDCR risk mitigation PER
71Profit Equalization Reserve Displaced Commercial RiskRate of Return RiskMarket Risk(Negative Income gap)
72Commercial displacement risk (DCR) DepositsExpected rate of return < realized rate of returnCustomers may switch from Islamic deposits to conventional depositsTo prevent deposit migration, Islamic bank uses its own reserves to top up the deficit.Total earning/profit declines.
73Gap Analysis Gap = RSA – RSL Positive Gap: RSA > RSL Negative Gap: RSA < RSLNegative Gap: (RSA/RSL) < 1Credit based (Murabaha) Islamic bank:Most assets are fixed rate asset (FRA) or RISAsMost liabilities (Wadiah&Mudarabah) are RSLs.Islamic bank faces Negative Gap ; RSA < RSL
78BBA Intensive Islamic Banks Most assets are fixed rate asset (FRA) or RISAsMost liabilities (Wadiah&Mudarabah) are RSLs.Islamic bank faces Negative Gap ; RSA < RSL
79Potential loss arising from loss of deposits Rate of Return RiskPotential loss arising from loss of depositsGap/Asset-Liability MismatchesRate of Islamic deposits < deposit interest rateRd < idActual rate of return < indicated/expected rate of returnDisplacement Commercial RiskPotential loss that occurs when Shareholders’ Funds are utilized to “smoothen” rate of return on Islamic deposits.Profit Equalization ReserveAmount appropriated out of total income to main an acceptable level of return on Islamic deposits.Serve to smoothen return on Islamic deposits (RoID).Increase PER provisions when RoID not competitive.
80Implication of Negative Gap: Example: Profit = ($100m x 0.07) – ($100 x 0.03)= $7m - $3m = $4mWhen market interest rates go up, what can happen to the bank?The bank cannot raise then profit rate to accommodate prevailing cost of fund. If it does, the murabaha contract turns invalid.The bank will lose deposits when Islamic deposit rate (IDR)< conventional interest rates (CII).When it losses deposits and forced to acquire money market funds at a higher cost, the bank earning drops. This is known as the Displaced Commercial Risk (DCR).To mitigate DCR, the Profit Equalization Reserve (PER) was instituted.PER serves to fill the gap between IDR and CII. Or the expcted rate of return and the realized rate of return.
81Liquidity RiskFunding liquidity risk – a bank’s inability to mobilize deposits to satisfy withdrawals. Also referring to deposit concentration risk.Eg.
82Deposit Liquidity Risk Asset Liquidity RiskUnable to execute transactions at the prevailing market price because there is no market appetite for the product.Inabiilty to dispose of the asset due to Shariah issues such as prohibitions of bay al-dayn (sale of debt)at discount.Deposit Liquidity RiskOverdependence on Corporate Deposits .Overall cost of deposits increases since corporates always demand higher rate of deposits on GIA.When an Islamic bank is overly dependent on corporate deposits, withdrawals due to maturities will create severe asset-liability mismatches. Cost overrun when the bank acquires funds from more costly money market sources such as Negotiable Islamic instruments (NII).
83Operational riskPotential loss resulting from inadequate systems, management failure, faulty controls, fraud and human error.Call for Board oversight to reduce operational risk.
84Legal riskLegal risks becomes apparent when a counterparty or an investor, losses money on a transaction and decides to sue the Islamic bank to avoid meeting its obligation.Case in Malaysia: Datok Nik Vs BIMBIn this way legal risk is synonymous with shariah risk
85Shariah RiskPotential loss to the bank arising from cost of litigations against the bank as result of contract invalidation through the court of law.Shariah risk can be avoided by attending to:Financial reporting requirementLegal documentation requirementMaqasid-Shariah requirement.
86Shariah risk in Islamic Financial Instruments Financial reporting: prior to PSA, bank must hold ownership of asset. Recorded as fixed asset.Legal documentation: transfer of ownership from bank to customer. Warranties.Maqasid approach: benefits outweigh the disbenefits.Losses arising from money paid by Islamic bank to customers when contracts were found invalid in favour of customers.Form over substance.Contracts and legal documentation are not consistent.Eg. Sale with no transfer of ownership title.Sale without warrantiesPurchase undertakings in Musharakah sukuk.
87Shariah riskShariah risk is the potential loss to the Islamic bank arising from cost of civil actions carried or absorbed by the bank from lawsuits by customers. The cost of the civil actions may include:Compensations and damages paid to customersReturning profit collected from the Islamic facilityCost of court proceedingsReputation risk.
88Shariah RiskThere are two aspects of financial transaction involving Islamic banking business, namely:The concept of the transaction: This concerns whether the contract is based on sale, ijarah, wakalah, musharakah and other common contracts in Islamic banking, where the pillars of ‘aqd are central.The legal documentation of the transaction that spelt out the rights, responsibilities and obligations of the contracting parties. In essence, it defines the relationship between the bank and the customer. Usually the documentation is based on civil law.
89Shariah Compliance: Consistency is Critical to avoid Shariah risk ‘AQADPrinciplesMAQASIDBenefits vs disbenefitsLEGAL/CONTRACTDOCUMENTATIONProtection of RightsFINANCIALREPORTINGAAOIFI/IFSB/IFRS
90Shariah Compliant Parameters Aqad-based – Contract-basedMaqasid al-Shariah (purpose of the Law) – impact on societyFinancial Reporting – actual strength and performance of companiesLegal documentation – identification and recognition of rights and obligations of contracting parties.
91Approved Islamic Finance Products BBA Home FinancingBay Inah Home FinancingBay Inah Personal Financing/Overdraft/credit cardTawaruk munazam personal financingCommodity murabahaIjarah thumma al-bayBai-bithaman Ajil Islamic Debt Securities (BAIDS)Discounted Bay al-dayn MuNifSukuk IjarahSukuk MusharakahIslamic Bonds
92Challenging issues in AQAD-based Islamic Finance Products Benchmaking profit rate against interest rate (LIBOR,KLIBOR).Profit Equalization Reserve (PER) – displaced commercial riskSale with condition to buyback at predetermined price between two and three parties.Profit generated over installment payments – time value of moneyPenalties on delayed paymentsBenchmaking sukuk rates against LIBORMusharakah with Purchase undertakings – fixed profit to one party only.Ijarah Sukuk - Sale with repurchase agreement at par value and not mark-to marketIjarah Sukuk – Ownership of asset by SPVProfit-rate swaps – speculation or gambling?
93#1 AQAD Method Aqad Agents of Contract Objective of Contract Subject MatterOffer & Acceptance
94Transfer of Ownership from Buyer to Seller Sale (Al-Bay’)Buyer & SellerTransfer of Ownership from Buyer to SellerPropertyPrice set on the spot
95Contract of Sale Example: Murabaha/BBA Sale Buyer and Seller eg. Seller owns asset/subject matter before making sale2. Subject mattereg. Mal mutaqawim – property with usurfruct3. Priceeg. Set on the spot4. Offer & Acceptanceeg. Verbal or in writing
96Method #2: Maqasid al-Shariah/Objective of Shariah To protect the interest of the public (society)- maslahah al-ammah by: 1. removing the harm ( ibqa) 2. securing of benefits (tahsil)
97Maqasid Shariah Removing the Harm Securing of Benefit #2 Maqasid MethodMaqasid ShariahRemoving the HarmSecuring of Benefit
98Objective of ShariahIslamic financial products as defined by AQAD methodology, should contain more benefits (masalih) and less or no harm (madarah).“ in gambling (maisir) and liqour (qimar), there are some sins and some profits. But the sins are greater than the profits” (Al-Baqarah: 168).
99“ in Gambling (maisir) and Liqour (qimar), there are some sins and some profits. But the sins are greater than the profits” (Al-Baqarah: 168).MudaratSinsProfitsManfaatGambling& Liqour
106Downside (Madarrah) of Credit-Financing MACROMICROEconomic BubblesBankruptcySubprime LoansForeclosureFinancial TurmoilUnemployment
107The upside (Manfaat) of Credit-Financing MACROMICROAllocation of CapitalWealth creationEconomic GrowthRich becoming richerLeisure, luxury and lifestyle
108MaqasidTo analyse(theoretical) and measure( empirical) impacts of financial intermediation based on aqad-based Shariah compliant products.Efficiency studiesProfitability studiesStudies on Consumer welfare and protectionStudies on Financial stability
109Maqasid – protecting public interest. Aqad-based products (ABP) SHOULD contain more benefits and less harm.What if, it was proven than they (ABP) contain more harm than good?eg. Abandon projects – customer cannot make recourse against bank as selling party?Defaulted BBA customer are required to make settlement based on the selling price.Sale with no transfer of ownership.Giving away clean inah personal financing at high profit rates– a way towards subprime inah?Conflict between Aqad and Maqasid?
110Method #3: Financial Reporting Proper recording of transactions to evident TRUE SALE.BBA – bank must put BBA asset on balance sheet prior to sale. I week, 1 month it depends.Once sold, it is recorded as BBA receivables.AITAB assets should be on banking book as leasing assets but now treated as “financing and advances”.External auditors (PWC, KPMG etc.) are not required by the authority to conduct Shariah audit. And they may not be not capable to do so.Conflict between AQAD and financial reporting?
111Islamic Bank Average Balance Sheet AssetsLiabilitiesMurabaha/BBAWadiah Dhamanah depositsAITABProfit Sharing Investment AcctIslamic Securities/SukukCapital
1121st October 2008AssetsLiabilitiesFIXED ASSET1. BBA asset15 October 2008AssetsLiabilitiesCURRENT ASSET2. BBA Receivables1/9/2008 Bank purchases Property from Vendor for $200,00015/9/2008 Bank Sells Property to Customer for $280,000
113BBA Legal Documentation ‘Do not Sell what you don not Own”Hadith (Sahih Bukhari)High Court Judge Datuk Abdul Wahab Patail says that thesale element in BBA sale is not a bona fide sale (Mayban Finance vs Taman Jaya)BBA Legal DocumentationSale and Purchase Agreement (SPA)Property Purchase Agreement (PPA)Property Sale Agreement (PSA)Deeds of assignment/Charge2. Bank do not havelegal + beneficial ownershipof property to make a valid sale1. No transfer of title from Customer to Bank
114Method #4: Legal Documentation BBA should be documented as a true sale and not as a loan. (Dato’ Nik vs. BIMB)Ijarah should be documented as operating lease and not a loan (Tinta Press vs. BIMB)Islamic bank has not practice fairness compared with conventional bank (Affin bank vs Zulkifli).Conflict between AQAD and documentation of AQAD?
115BBA Legal Documentation ‘Do not Sell what you don not Own”Hadith (Sahih Bukhari)High Court Judge Datuk Abdul Wahab Patail says that thesale element in BBA sale is not a bona fide saleBBA Legal DocumentationSale and Purchase Agreement (SPA)Property Purchase Agreement (PPA)Property Sale Agreement (PSA)Deeds of assignment/Charge2. Bank do not havelegal + beneficial ownershipof property to make a valid sale1. No transfer of title from Customer to Bank
116Shariah Compliance: Consistency is Critical ‘AQADPrinciplesMAQASIDBenefits vs disbenefitsLEGAL/CONTRACTDOCUMENTATIONProtection of RightsFINANCIALREPORTINGAAOIFI/IFSB/IFRS
119Market Risk:Trading Book Value at Risk (VaR) Bank purchases securities for both holding and trading.For holding, the securities are recorded in the banking book. Potential loss in the banking book is measured by Earning at Risk (EAR)For trading, the securities are recorded in the trading book. Potential loss in the trading book is measured by Value at Risk (VaR)
120Bond Trading Bond Price = Coupon / interest rates Price = $1000 per uniti= 10%Coupon = $100$1000 = $100/0.1An investors is deciding whether to purchase bond or not.He will only buy bond in order to make capital gain. Thus, he must buy low and sell high.If he expects, interest rate to increase, he will not buy the bond. This is because the bond price will fall and he losses out. Example:Buy at $1000. When interest rate increases to 20%, bond price will fall; $500 = $100/0.2. He buys at $1000 per unit and now the bond market value at $500. Loss = $500.VaR – what is the maximum loss the investor can absorb?
121Bond Trading Bond Price = Coupon / interest rates Price = $1000 per uniti= 10%Coupon = $100$1000 = $100/0.1An investors is deciding whether to purchase bond or not.He will only buy bond in order to make capital gain. Thus, he must buy low and sell high.If he expects interest rate to fall, he will buy the bond. This is because he will make profit since the bond price now increases. Example.$1000 = $100/0.1. When interest rate indeed fall down, say to 5%, bond price will increase to $2000. He will make a capital gain of $1000.$2000 = $100/0.05.
122VaRThe senior management is told that there is 1 in 100, say, chance of losing X dollars over the holding period.It means that there is a 1% chance that the bank will lose $50 million over 1 year.Var = $50m at 95% confidence interval implies that there a 5% possibility that the bank may lose $50m.
123VaR A VAR statistic has three components: a time period, a confidence level anda loss amount (or loss percentage).Keep these three parts in mind as we give some examples of variations of the question that VAR answers:What is the most I can - with a 95% or 99% level of confidence - expect to lose in dollars over the next month?What is the maximum percentage I can - with 95% or 99% confidence - expect to lose over the next year?You can see how the "VAR question" has three elements: a relatively high level of confidence (typically either 95% or 99%), a time period (a day, a month or a year) and an estimate of investment loss (expressed either in dollar or percentage terms).
124Value at Risk (VaR) VaR is potential loss VaR is the “maximum loss” at a preset confidence intervalConfidence interval reflects the risk appetite of the bankConfidence interval is also the probability that the loss exceed capital of the bank, triggering bank insolvency.Confidence interval is equivalent to the default probability of the bank.VaR shines for 3 main reasons:1. it provides a complete view of portfolio risk2. it is the basis of measuring economic capital3. VaR assigns a dollar value to risk………
125VaR and Its Application Senior management is told that there is 1 in 100, say, chance of losing X dollars over the holding period.There is a 1% chance that the bank will lose $50 million over 1 year.VaR= $50m at 99% confidence interval implies that there a 1% possibility that the bank may lose $50m.VaR is potential loss, thus when a VaR limit become binding, it will put pressure on the bank’s trading business to lower their risks.For example, the trading book = $200 billion and the VaR is $40 million. It means that there is 1% possibility that the bank may lose $40m from the trading book valued at $200 billion.Usually, if the economy gets worse, VaR limit will be lowered.
126Risk factors can be correlated The historical simulation Estimating VaRVariance-covarianceRisk factors can be correlatedThe historical simulationRisk factors based on past eventsMonte Carlo simulationRisk factors as random
127Stress Test: Serves to complement VaR VaR is used to provide a probabilistic prediction on losses that are likely to happen for a pre-specific holding period and confidence level.It is difficult to ensure that by using Var, extreme cases are fully covered.The purpose of stress testing is to determine the size of potential loss related to specific scenarios or extreme cases.The selection of scenarios is largely based on expert judgment.Stress testing show us how vulnerable a portfolio might be to a variety of extreme events.Stress testing can be conducted on stand alone basis ie. without VaR.
128Stress testingST is a standard risk management technique used to identify and quantify possible events of future changes in the financial and economic conditions that could have unfavourable effects on the Bank’s exposure.Conceptually, a ST is an approach to revalue a portfolio using different set of assumptions.The objective is to better understand the sensitivity of the portfolio to changes in various risk factors.This change is often expressed in terms of impact on some measure of bank earning, profitability and asset quality to understand its sensitivity to the risk factors being considered.
133Sensitivity TestsInstead of doing financial projection on a "best estimate" basis, a company may do stress testing on capital, NPF etc. where they look at how robust a financial instrument is in certain crashes. They may test the instrument under, for example, the following stresses:What happens if the market crashes by more than x% this year?What happens if interest rates go up by at least y%?What if half the instruments in the portfolio terminate their contacts in the 5th year?What happens if oil prices rise by 200%?
13410% drop on the stock market indexes Sensitivity testAsses the impact of large movements in financial variables on portfolio without specifying the reasons for such movementsExample10% drop on the stock market indexes
135ScenarioTestsConstructed in the light of historical events or in the contexts of a specific portfolioEg. Large US stock market decline 1987, Asian financial crises 1997, Russion default 1998,September
136Stress Test : How can changes in economic fundamentals affect bank’s capital? Extreme ScenariosChanges in interest ratesChanges in exchange ratesChanges in Equity pricesChanges in commodity prices
137Stress Test Credit Risk The Baseline case1% increase in NPL2% increase in NPL
139Financial Stability: Bank Capital Requirement Basel II
140Bank Negara Shariah Supervisory Board Shariah FrameworkIslamic BankingBank Negara Shariah Supervisory BoardAAOIFIFiqh Academy
141Islamic Financial Service Board Regulatory FrameworkIslamic bankingBasel IIIslamic Financial Service Board
142Minimum Capital Requirement Basel IIMinimum Capital RequirementSupervisory ReviewMarket DisciplineStandardized Based ApproachInternal Based Rating Approach
143Basel IIThe objective of Basel II is to protect depositors’ fund through an international standard concerning how much capital banks need to put aside to guard against losses arising from exposures to risks. This is done by establishing rigorous risk and capital management requirements designed to see that the bank holds sufficient capital reserves appropriate to the risk it is carrying through its lending and investment practices. Hence, the more the bank is exposed to risk, the greater is the amount of capital the bank needed to back up the assets. The three pillars if Basel II is shown in the following diagram:3 Pillars of Basel IIMinimum capital RequirementSupervisory ReviewMarket Discipline
144Basel IIThe objective of Basel is to protect the depositors since deposits mobilization is based on creditor-debtor contract.Loss due to default affects Bank’s capitalInsufficient bank’s capital leads to bank runs and foreclosure – financial instability.Thus, bank must hold sufficient capital as a back up to the amount of money they owe depositors
145Basel II Ratio Capital Adequacy Ratio (minimum = 8%) Capital Total CAR = Total Capital / (Credit risk + Market risk + Operational Risk)Risk-WeightsRisk weight assets are the sum of asset subject to market, credit and operational risk.
146Pillar 1: Capital Requirement The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces:1. credit risk – potential loss arising from non-performing loans and bad debts2.operational risk – potential loss arising from system and human error in running banking operation3. market risk. – potential loss caused by market volatilities that may erode value of investment in securities.4. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely:A) Standardized Approach: The risk-weights are based on available external credit ratings, say set by the regulatory authority or rating agencies.B)Foundation Internal Rating-Based Approach (IRB): The risk-weights set by the bank (i.e PD) and LGPD set by the regulators.C) Advanced Internal Rating-Based Approach (IRB)For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA.For market risk the preferred approach is VaR (value at risk).
147Capital RequirementThe capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital.The categorization of assets and capital is highly standardized so that it can be risk weighted. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords (Basel Accord).This framework is now being replaced by a new and significantly more complex capital adequacy framework commonly known as Basel II. While Basel II significantly alters the calculation of the risk weights, it leaves alone the calculation of the capital. The capital ratio is the percentage of a bank's capital to its risk-weighted assets.Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord.
148Standardized Rating Based Banks Determination of Capital Requirement in Basel IICommercial BanksStandardized Rating Based BanksRisk weights sets by regulators and external credit rating agenciesInternal Rating Based BanksRisk-weights sets by Bank and Regulator
149Capital RequirementTier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists primarily of 1) shareholders' equity but may also include preferred stock that is irredeemable and non-cumulative and 2) retained earnings.
150Pillar 2 : Supervisory Review The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk.It gives bank a power to review their risk management system.
151Pillar 3: Market Discipline The third pillar greatly increases the disclosures that the bank must make through regular financial reporting to the bank supervisors. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately.
152Impact of Basel II on Islamic Banking Capital Requirement Uneven Playing Field
153Standardized Approach: Conventional Bank Assets Amount Riskweights RWassetsLoans $600m 50% $300Hire-Purchase $300m 50% $150Personal Loans $200m 100% $200Bond $100m 50% $ 50TOTAL $ $700Capital ratio = (Regulated Capital / RWA)8% = RC / $700RWA = [($600m x 0.5) + ($300m x 0.5) + ($200m x 1.00) + ($100 x 0.5)]= $300m + $150m +$200m + $50m = $700RC = $700 x 0.08 = $56mNote Risk weight also known as conversion factor.Risk-weights set by external rating institutions and regulators.
154Standardized Approach: Conventional Bank : Exercise 1 Assets Amount Riskweights RWassetsLoans $ 1200m 50% $Hire-Purchase $600m 50% $Personal Loans $300m 100% $Bond $200m 50% $TOTAL $ $Capital ratio = (Regulated Capital / RWA)8% = RC / $700RWA = [($1200m x 0.5) + ($600m x 0.5) + ($300m x 1.00) + ($200 x 0.5)]= $RC =Note Risk weight also known as conversion factor.Risk-weights set by external rating institutions and regulators.
155Islamic Bank Under Basel 2: Higher Capital Requirement Assets Amount Riskweights RWassetsMurabaha $600m 50% $300AITAB $300m 50% $150Personal F $200m 100% $200Sukuk $100m 50% $ 50TOTAL $ $700Capital ratio = (Regulated Capital / RWA)8% = RC / $700RWA = [($600m x 0.5) + ($300m x 0.5) + ($200m x 1.00) + ($100 x 0.5)]= $300m + $150m +$200m + $50m = $700RC = $700 x 0.08 = $56mNote Risk weight also known as conversion factor.
156Islamic Bank with Musharakah financing under Basel 2: Higher Capital Requirement Assets Amount Riskweights RWassetsMurabaha $500m 50% $250AITAB $300m 50% $150Personal F $200m 100% $200Sukuk $100m 50% $ 50Musharakah $100m % $250TOTAL $ $900Capital ratio = (Regulated Capital / RWA)8% = RC / $900RWA = [($500m x 0.5) + ($300m x 0.5) + ($200m x 1.00) + ($100 x 0.5) + ($100 x 2.5)]= $250m + $150m +$200m + $70m + $250 = $900RC = $900 x 0.08 = $72.00mNote Risk weight also known as conversion factor.
157Stress on Islamic bank capital Since the risk-weight for Musharakah is 250%, the bank is charged higher capital from $56m to $78m. The bank has to come up with $22m more capital to meet regulator’s requirement in order to undertake the Musharakah project.In this sense, the Musharakah project places stress of Islamic bank capital.Basel II assumes that Islamic deposits are similar with conventional deposits.In conventional deposits, the deposits and interest income are guaranteed.This is not the case for Islamic deposits since they are based on profit-sharing system. In this manner, the bank need not provide capital guarantees.
158Bank Negara Malaysia (BNM) Guidelines on Profit-Sharing Investment Account (PSIA) with risk absorbentIn order to highlight the more accurate nature of mudarabah deposits (PSIA) and its impact on bank capital, BNM has provided a new formulation for determining regulated for Islamic banks.PSIA will be used to finance a relatively more risky projects based on mudarabah, istisna and musharakah contracts.The formulation capital adequacy ratio (CAR) = Capital/ (RWA less (1-α)RWA funded by PSIA less (α)RWA in the form of PER)When α = 1, the bank holds all risks in the balance sheet.When α is say 30%, the bank carry risks only from wadiah dhamanah deposits and general mudarabah deposits.Then 70% of the risks (1-α) = (1-0.3), is carried by PSIA deposits.Then CAR will be less than CAR without α as a risk-absorbent factor. This will reduce stress on Islamic banking capital.Hence, the smaller the α i.e. the more risks carried by PSIA, the lower is the CAR.
159Modified Formula Incorporating the Risk nature of Mudarabah Deposits RWCAR Islamic = [Capital Base] /[(TRWAIslamic)Less(1-) (Credit and Market Risk Weighted Asset funded by PSIA)()(proportional of Credit and Market Risk Weighted Assets funded by PSIA in the form of PER)]
160Islamic Bank with Musharakah financing under Basel 2: Higher Capital Requirement Assets Amount Riskweights RWassetsMurabaha $500m 50% $250AITAB $300m 50% $150Personal F $200m 100% $200Sukuk $100m 50% $ 50Musharakah $100m % $250TOTAL $ $900Capital ratio = (Regulated Capital /( RWA – [1-α]RWA funded by PSIA –[α] RWA funded by PSIA as PER)α= 30%(1-α) = 70%RWA funded by PSIA = $250m (musharaka)RWA as PER = $2m (by assumption)RWA = [($500m x 0.5) + ($300m x 0.5) + ($200m x 1.00) + ($100 x 0.5) + ($100 x 2.5)]= [$250m + $150m +$200m + $70m + $250] - (0.7)($250) – (0.3)($2) = $900m - $175m - $0.6m = $724.4mRC = $724.4 x 0.08 = $57.95mNote Risk weight also known as conversion factor.PER = Profit Equalization Reserve.
161(1-) represents the quantum of PSIA recognized as a risk absorbent for RWCR computation purposes and approved by Bank Negara Malaysia. = 1 means all risks carried by bank = 0 means all risks carried by PSIA.The smaller the , the lower is RWCR.
162Corporate Governance and Risk Management: Basel II Pillar 3 on Market Discipline Scandals and failure of energy giant Enron, WoldCom and Global Crossing and now the Subprime Banking crises in the USA that saw the fall of giant Lehman,Morgan Stanley,AIG etc.
163Basel II Pillar 3Aims at strengthening market discipline, i.e the pressure that financial markets may exert on bank managers so as to promote safe and sound bank management.Pillar 3 defines a number of disclosures requirements aimed at increasing the transparency of each bank’s risk profile and risk policy.
164Corporate Governance Boards were provided with misleading information Breakdown in the process by which information was transmitted to the board and shareholders.Breakdown involving financial engineering and nondisclosure of economic risksOutright fraud.Regulatory authorities must upgrade work to protect all stakeholders.Legislations to mend perceived failures in corporate governance practices.
165Board and Corporate Governance The primary responsibility of the board is to ensure that it develops a clear understanding of the bank’s business strategy and the fundamental risks and rewards it implies.The board must make sure that risks are transparent to managers and to stakeholders through adequate internal and external disclosureThe board must characterize an appropriate “risk-appetite” for the firm.system of limits and risk metrics.
166Business Strategy, Board and Risk Management Avoid risk by choosing not to undertake some activities.Transfer risk to third parties through insurance, hedging and outsourcing, subject to Shariah rules.Mitigate risk such as operational risk, through preventive and detective control measures.Accept risk, recognizing that undertaking certain risky activities should generate shareholder value.Board should ensure that business and risk management strategies are directed at economic rather than accounting performance.Board must make sure that the bank has put in place an effective risk management program that is consistent with these fundamental strategic and risk appetite choices.It must make sure that there are effective procedures in place for identifying, assessing and managing all types of risk ie. business risk, operational risk, market risk, liquidity risk, credit risk, shariah risk, rate of return risk and displaced commercial risks.
167Basel II and IFSBHigh risk-weights for Musharakah Financing to imply that bank bears business risk and the general investment account holders (GIA) do not.Recent PSIA guidelines will test risk appetite of depositors.
168Limits and Limits Standard Policies. Market-risk limits serve to control the risk that arises from changes in the absolute price (or rate) of an asset.Credit risk limits serve to control and limit the number of defaults as well as limiting a downward migration in the quality of the credit portfolio.It is best practice for institutions to set down on paper the process by which they establish risk limits, review risk exposures, and approve limit exceptions and to develop an analytical methodology used to calculate the bank’s risk exposures.For many banks, best practice risk governance will call for the development and implementation of sophisticated risk metrics such as value at risk (VaR) measures for market and credit risk.
170ISLAMIC FINANCIAL SERVICES BOARD (IFSB) GUIDING PRINCIPLES OF RISK MANAGEMENTFOR INSTITUTIONS(OTHER THAN INSURANCE INSTITUTIONS)OFFERING ONLY ISLAMIC FINANCIAL SERVICES (IIFS)December 2005
171IFSB’S Guiding Principles of Risk Management 1. General Requirement Principle : IIFS shall have in place a comprehensive risk management and reporting process, includingappropriate board and senior management oversight,to identify, measure, monitor, report and control relevant categories of risks and, whereappropriate steps to comply with Shariah rules and principles andto ensure the adequacy of relevant risk reporting to the supervisory authority.
172IFSB’S Guiding Principles of Risk Management 2. Credit RISKPrinciple : IIFS shall have in place a strategy for financing, using various instruments in compliance with Shariah, whereby it recognises the potential credit exposure that may arise at different stages of the various financing agreements.
173IFSB GP RISK MANAGEMENT CREDIT RISK Principle :IIFS shall carry out a due diligence review in respect of counterparties prior to deciding on the choice of an appropriate Islamic financing instrument.
174IFSB Credit Risk Principle 2.3 IIFS shall have in place appropriate methodologies for measuring and reporting the credit risk exposure arising under each Islamic financing instrument.
175IFSB Credit Risk Principle 2.4 IIFS shall have in place Shariah compliant credit risk mitigating techniques appropriate for each Islamic financing instrument.
177IFSB’S Capital Adequacy Standards (CAS) KEY OBJECTIVES OF CASSets out a common structure for the assessment of Islamic Institutions Offering Financial Services (IIFS) capital adequacy requirements, which will support transparency and consistent methodology for all IIFS.A common approach without compromising Shariah rules and principles by substantially enhancing the transparency of true obligations within IIFS operations.Promotes a level playing field at a global level as far as common assessment is concerned especially for the minimum capital requirements in respect of both credit and market risks arising from each financing mode at different stages of a contract.Recognition of investment account holders account holders (IAH) as partners in IIFS operations should result in a more effective use of capital.
178IFSB’S Capital Adequacy Standards To ensure that Islamic banks can absorb a reasonable level of losses before becoming insolvent.To provide protection to depositors and/ or PSIA – the higher the CAR, the higher the level of protection.To promote stability and efficiency of the financial system by reducing the likelihood of Islamic banks become insolvent.To ensure that the Islamic banks’ capital position commensurate with its overall risk profile and strategy.
179IFSB’S Capital Adequacy Standards GENERAL PRINCIPLES OF CASIIFS are required to use the substance of the Shariah rules and principles governing the contracts to form the basis for an appropriate treatment in deriving their minimum capital adequacy requirements.Capital adequacy requirements vary according to the transformation of risks at different contract stages.
180IFSB’S Capital Adequacy Standards General Principles of cas On basis of either Mudarabah or Wakalah contract, credit and market risks of the investment made by the IAH shall normally be borne by themselves, while the operational risk is borne solely by the IIFS (unless proven negligence, mismanagement or fraud).
181IFSB’S Capital Adequacy Standards Credit risk is measured according to the Standardised Approach of Basel II, except for certain exposures arising from investments by means of Musharakah or Mudarabah contracts in assets that are not held for trading.Until adequate historical data are available, the IFSB employs Basel’s risk weights.
182IFSB’S Capital Adequacy Standards MARKET RISK Apart from market risk exposures arising from equity, foreign exchange, commodities, the exposures also include trading positions in sukuk and inventory risk, which results from IIFS holding assets with a view to re selling or leasing them.In the case of equity investment made by means of Musharakah or Mudarabah contract where the underlying assets are commodities held for trading, market risk provisions for commodities are applicable.For inventory risk, only simplified approach is applicable.
183IFSB’S Capital Adequacy Standards OPERATIONAL RISKS Shari’ah noncompliance risk is a type of operational risk facing the IIFS which can lead to non recognition income and resultant losses.The extent of losses from non compliance with Shariah rules and principles cannot be ascertained owing to lack of data.Supervisory authorities have discretion to impose a RW higher than 15% as they deem fit to cater for the Shari’ah noncompliance risk of a particular IIFS.
184IFSB’S Guiding Principles on Corporate Governance GUIDING PRINCIPLES ON CORPORATE GOVERNANCE FORINSTITUTIONS OFFERING ONLY ISLAMIC FINANCIAL SERVICES(EXCLUDING ISLAMIC INSURANCE (TAKAFUL) INSTITUTIONS (IIFS)AND ISLAMIC MUTUAL FUNDS)
185IFSB’S Guiding Principles on Corporate Governance GENERAL GOVERNANCE APPROACHPART 1Principle : IIFS shall establish a comprehensive governance policy framework which sets out the strategic roles and functions of each organ of governance and mechanisms for balancing the IIFS’s accountabilities to various stakeholders.
186IFSB Guiding Principles on Corporate Governance IIFS shall ensure that the reporting of their financial and non-financial information meets the requirements of internationally recognised accounting standards which are in compliance with Shariah rules and principles and are applicable to the Islamic financial services industry as recognised by the supervisory authorities of the country.
187IFSB’S Guiding Principles on Corporate Governance Part 2: RIGHTS OF INVESTMENT ACCOUNT HOLDERSPrinciple : IIFS shall acknowledge IAHs’ right to monitor the performance of their investments and the associated risks, and put into place adequate means to ensure that these rights are observed and exercised.
188IFSB’S Guiding Principles on Corporate Governance Part 2: RIGHTS OF INVESTMENT ACCOUNT HOLDERSPrinciple : IIFS shall adopt a sound investment strategy which is appropriately aligned to the risk and return expectations of IAH (bearing in mind the distinction between restricted and unrestricted IAH, and be transparent in smoothing any returns.
189IFSB’S Guiding Principles on Corporate Governance PART 3: Compliance with Shraiah rules and principlesPrinciple : IIFS shall have in place an appropriate mechanism for obtaining rulings from Shariah scholars, applying fatawa and monitoring Shariah compliance in all aspects of their products, operations and activities.
190IFSB’S Guiding Principles on Corporate Governance PART 3: Compliance with Shraiah rules and principlesPrinciple : IIFS shall comply with the Shariah rules and principles as expressed in the rulings of the IIFS’s Shariah scholars. The IIFS shall make these rulings available to the public
191IFSB’S Guiding Principles on Corporate Governance Part 4 : Transparency of Financial Reporting in respectof Investment AccountsPrinciple : IIFS shall make adequate and timely disclosure to IAH and the public of material and relevant information on the investment accounts that they manage.
192Best wishes on your examination Thank YouBest wishes on your examination