CHAPTER 6: RISK MANAGEMENT - Coggle Diagram
WHAT IS RISK AND UNCERTAINTY ?
Risk is the existence of uncertainty about the future outcome, the unknown is random, and cannot be predicted or
3 TYPES OF RISK FROM ISLAMIC PERSPECTIVES
Necessary risk and must be undertake to reap the profit or reward.
EX.: leasing contract/asset – Owner is responsible for the asset
Risk related to excessive gharar (uncertainty)
Sale can be void due to uncertainty in quantity, quality, price and time of
Risk that does not fall in the above two categories, examples of these risks
can be operational risk, liquidity risk
Change the plan to avoid the problem
•Reduce the impact or likelihood of loss
•Accept the risk via contingency budget
Outsource the risk to the third party who can
manage the risk through takaful contract
TYPES OF RISK EXPOSURE
Risk of the counterparty failing to meet its obligation on time and in
accordance with the agreed terms.
Volatility in default rates and credit qualities dictates credit risk and
therefore there is uncertainty on net income.
It is the risk originating form instrument and assets traded in markets.
MARK UP RISK
Murabahah’s mark up rate is fixed but the benchmark may change
Price risk happen when there is default on the first contract
LEASED ASSET VALUE RISK
Market risk = reduction in residual value of the leased asset upon expiry of
the leased term or early termination
FOREIGN EXCHANGE RISK
The value in the currency in which payable are due may appreciate
The value in which receivable are due may be depreciate
SECURITIES PRICE RISK
In case of IFI investment in sukuk
Others, the secondary market for sukuk may not be very liquid.
In the case of profit and loss sharing investment done by the bank
where the IFI may loss their capital invested.
*Risk arising from the management of the financial resources of
the financial institution.
1) Liquidity risk
2) Asset & Liability management
3) Hedging risk
Islamic financial institution have limited opportunities to access
external fund to meet their obligations
RATE OF RETURN RISK
Uncertainty in the return earned by the Islamic banks on the
Return received by bank below than account holder/depositor
DISPLACED COMMERCIAL RISK
The risk when an Islamic bank is under the pressure of paying its
investment depositors a rate of return higher than what has been agreed in the contract due to the fact the banks have underperformed.
Results from competitive pressure from conventional
The risk of withdrawal by depositors may due to lower rate of return by the ibs
Risk arising from a failure in governing the institution, negligence in conducting business and meeting contractual
Risk of loss resulting form inadequacy of failure of internal
process, as related to people and systems or from external risk
The risk that arises from the institution's failure to perform in accordance with explicit and implicit standards applicable to its fiduciary responsbilities
• Lack of transparency creates the risk of incurring losses due to
the bad decision made on incomplete of inaccurate information
• Related to the structure and functioning of the shariah
There two types which are:
Due to non-standard practice
Due to failure to comply with shariah rules
The risk that the trust of the clients of Islamic bank is damaged
due to irresponsible action or behaviour of management
May be due to irresponsible by a single institution that taint and
tarnish the reputation of other Islamic bank in the industry