EBB20603 Risk Management in

Islamic Financial Institutions

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 Contents
1. Risk Management: Basic concepts and
Techniques
2. Risk Management Process
3. Financial Balance-Sheet and Income-
Statement Structure

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 Learning Objective
• Identify and explain the basic concepts and
theories related to risk management
process
• Comprehend resources for financial risk
identification

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Definition : Risk is defined as a condition of the real world in which there is a
possibility of positive or negative outcome from what is expected.

In Financial Institutions (FI), risks are uncertain future events that could
influence the achievement of the Bank’s objectives, including strategic,
operational, financial and compliance objectives

Uncertain future events could be:

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 Risk Management
• Risk Management is not the minimization
of losses but the optimisation of the risk
reward equation.
• The competitive advantage of a financial
institution is dependent on how well it
manages risk.

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 Risk Management
Risk management is the process by which
various risk exposures are
(1) identified
(2) measured/assessed
(3) mitigated and controlled
(4) reported and monitored

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 11 Principles of Risk Management
1. Creates and protects value
Good risk management contributes to the achievement of an agency’s
objectives through the continuous review of its processes and systems.
2. Be an integral part of organisational processes
Risk management needs to be integrated with an agency’s governance
framework and become a part of its planning processes, at both the
operational and strategic level.
3. Be part of decision making
The process of risk management assists decision makers to make
informed choices, identify priorities and select the most appropriate
action.

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 11 Principles of Risk Management
4. Explicitly address uncertainty
By identifying potential risks, agencies can implement controls and
treatments to maximise the chance of gain while minimising the chance
of loss.
5. Be systematic, structured and timely
The process of risk management should be consistent across an agency
to ensure efficiency, consistency and the reliability of results.
6. Based on the best available information
To effectively manage risk it is important to understand and consider all
available information relevant to an activity and to be aware that there
may be limitations on that information. It is then important to
understand how all this information informs the risk management
process.

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 11 Principles of Risk Management
7. Be tailored
An agency’s risk management framework needs to include its risk
profile, as well as take into consideration its internal and external
operating environment.
8. Take into account human and cultural factors
Risk management needs to recognise the contribution that people and
culture have on achieving an agency’s objectives.
9. Be transparent and inclusive
Engaging stakeholders, both internal and external, throughout the risk
management process recognises that communication and consultation is
key to identifying, analysing and monitoring risk.

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 11 Principles of Risk Management
10. Be dynamic, iterative and responsive to change
The process of managing risk needs to be flexible. The challenging
environment we operate in requires agencies to consider the context for
managing risk as well as continuing to identify new risks that emerge,
and make allowances for those risks that no longer exist.
11. Facilitate the continual improvement of organisations
Agencies with a mature risk management culture are those that have
invested resources over time and are able to demonstrate the continual
achievement of their objectives.

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 Risk Management Process*
• Establishing the context
• Risk Assessment
– Risk Identification
– Risk Analysis
– Risk Evaluation
• Risk Treatment
• Monitor & Review
• Communication and consultation

http://www.praxiom.com/iso-31000-terms.htm

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 Establishing the Context
External Parameters Internal Parameters
Internal stakeholders
External stakeholders Approach to governance

Local environment Contractual relationship

International environment Capabilities

Etc Cultures

Standards

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 Risk Assessment
• To find, recognize, and describe the risks that could affect the
Risk achievement of objectives.
identification

• To understand the nature, sources, and causes of the risks that you have
identified and to estimate the level of risk. It is also used to study
impacts and consequences and to examine the controls that currently
Risk Analysis exist.

• to compare risk analysis results with risk criteria in order to determine

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 Risk
Avoidance

Risk Risk
Retention Reduction
Risk
Treatment

Risk Risk
Control Transfer

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 Monitor & Review

Monitor: Review:
To supervise and to To determine whether
continually check and something is a suitable,
critically observe. adequate, and effective
way of achieving
established objectives.

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Communication & Consultation

Dialogue between an organization and its

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 Counter-
parts

Resources of
Financial
Risk
Management
contracts Markets

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