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. Outline.
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.
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
“existence of uncertainty about future outcomes”
“difference between expected and actual result”
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 bank’s ability to meet its business objectives.
Islamic Banking is safer as it is not based on INTEREST?
Depositors are liable to share losses, therefore solvency risk is mitigated?
(a) comply with the Sharī`ah rules and principles,
(b) comply with applicable regulatory and internal policies and procedures; and
(c) take into account the integrity of risk management processes
For example, for working capital financing, Salam and Mudaraba contracts could be used
Always try to buy the asset-to-be- financed on “sale-or-return” basis
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.
In operating Ijārah, 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 Ijārah 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.
- Diversity sources of funds
- Reduce concentration of funding base
- Rely on marketable assets
- 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
- The risk that arises from the Islamic banks’ failure to perform in accordance with explicit and implicit standards applicable to their fiduciary responsibilities
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: firstname.lastname@example.org
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