MANAJEMEN RISIKO PERBANKAN ISLAM: WEEK 3

Ronald Rulindo, PhD

Nur Dhani, PhD

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WEEK 3: OVERVIEW ON RISK MANAGEMENT IN ISLAMIC BANKING

Overview on Risk Management in Islamic Banking

• Risks in banking industry
• Banking Risks and Financial Stability
• International Initiatives to Promote Banking Stability
• Overview on Basel Accord: Basel I, Basel II, and Basel III
• IFSB and Prudential Standards in Islamic Bank
• Specific Risks in Islamic Banking
• Concept of Risk Transformation in Islamic Banking

RISKS IN BANKING INDUSTRY

Bank is a business of managing risks

BANKING RISK & FINANCIAL STABILITY

Banking business is risky

Big influence to people’s life

Has high impact to the economy

Banking crisis bring negative impact to country’s economy

• Why banking industry is heavily regulated?

BANK REGULATORS

OJK

• Pengaturan, perizinan, dan pengawasan perbankan

BI

LPS

DSN

• Lender of the last resort; pengawas makroprudensial dan sistem pembayaran

• Penyelenggara program penjaminan simpanan dan otoritas resolusi perbankan

• Otoritas Fatwa bagi Lembaga keuangan syariah

Otoritas Jasa Keuangan

Bank Indonesia

Lembaga Penjamin Simpanan

Dewan Syariah National

INTERNATIONAL STANDARD SETTERS

BCBS

• Formulate prudential standards for banking industry

IASB

IFSB

AAOIFI

• Formulate accounting standard for various industry, including banking industry

• Formulate prudential standards for Islamic financial services industry: Islamic banking, takaful, Islamic capital market

• Formulate accounting standard and sharia standard for Islamic financial institutions

Basel Committee on Banking Supervision

International Accounting Standard Board

Islamic Financial Services Board

Accounting and Auditing Organization for Islamic Financial Institution

BASEL COMMITTEE ON BANKING SUPERVISION (BCBS)

• BCBS is part of Bank for International Settlement (BIS), an association of central banks.
• BCBS was established by 10 Governors of Central Banks in 1974:
• Belgium, Canada, Franch, Germany, Italia, Japan, Netherland, Sweden, Swiss, UK, US
• BCBS aims to promote convergency in terms of banking standard and regulation.
• Standards issue by BCBS initially is targeted to international active banks and it is not complementary for all banks in the world to adopt BCBS standards.
• Many jurisdictions order their banking industry to adopt BCBS standards to increase confident of foreign investors on their banking industry.
• Some BCBS standards (particularly Basel Accord) are part of Financial Sector Assessment Program (FSAP) of the International Monetary Program (IMF) make countries, especially under the G-20 have to follow the standards, at minimum subject to comply or explain approach.

BCBS AND BASEL ACCORDS

BASEL ACCORDS*

• * Detail information on Basel Accord will be discussion on Capital Adequacy Section

• Establish regulation on capital adequacy requirement

• Introduce three pillar of Basel II to strengthen stability of banking industry

• Revise some regulations in the Basel II Capital Adequacy Ratio and introduce two regulatory ratio for bank’s liquidity management

Basel I

Basel II

Basel III

PILLARS OF BASEL II

PILLAR OF BASEL III

Basel III

Pillar I

Pillar II

Pillar III

Liquidity Requirement

• Capital, Risk Coverage, and Containing Leverage

• Risk Management & Supervision

• Market Discipline

• Global liquidity standard and supervisory monitoring

IFSB PRUDENTIAL STANDARDS

Liquidity Risk Management

Stress Testing

Sharia Governance

Core Principles for Islamic Finance Regulation

COMPATIBILITY OF IFSB STANDARDS AND BASEL III

HOW PRUDENTIAL ISSUES IN ISLAMIC BANK DIFFERENT WITH THOSE IN CONVENTIONAL BANK?

• There are similar risk management requirements and infrastructures that are required for both Islamic and conventional Bank:
• Some risks or risk managements instruments cannot be applied to Islamic bank;
• There are additional risk and additional risk mitigation that are specific for Islamic bank.

Diolah dari: Laporan Bulanan BUS Internal LPS.

BUSINESS MODEL OF ISLAMIC BANK

Diolah dari: Laporan Bulanan BUS Internal LPS.

SHARIA COMPLIANT CONTRACT (AQAD) OF ISLAMIC BANK

APPLYING AQAD ON ISLAMIC BANKING PRODUCTS

Bank

Syariah

1

2

3

4

1. Depositors keep their funds with IIFS. IIFS acts as a trustee and depositors funds are guaranteed. IIFS does not have liability to give return but it may give gift (hibah) as appreciation of using depositors funds (i.e. comingling) under Wadiah contract.

2. IIFS either extend financing or make investment of those funds or keep those funds with it as a safe custody.

3. IIFS earns profits from financing and/or investment.

4. IIFS Shares the profits as a gift (hibah), on its discretion, or return the funds on demand without any hibah.

Note: In case of losses, IIFS bears the risk according to contract.

Depositors/

Clients

Current / Saving Account - Wadhiah

STRUCTURING ISLAMIC BANKING PRODUCTS (1)

Unrestricted IAH

Restricted IAH

• Where IIFS has full discretion on the utilisation of funds.
• IIFS commingle the funds with shareholders funds.
• Investors are at the mercy of IIFS.

• Where investors identify the investment to be made.
• IIFS has no discretion on the utilization of funds.
• PSR is often negotiated.

Saving / Investment Account

- Muḍārabah

Bank

Syariah

1

2

3

4

1. Investors keep their funds with IIFS on certain pre agreed Profit Sharing Ratio (PSR). PSR is determined at the beginning of the contract and IIFS doesn't guarantee funds and profit from investment as per contract.

2. IIFS either extend financing or make investment of those funds.

3. IIFS earns profits from financing and/or investment.

4. IIFS Shares the profits according to PSR.

Note: In case of losses, IIFS does not bear risk at all, according to Muḍārabah contract.

STRUCTURING ISLAMIC BANKING PRODUCTS (2)

Note: Above mentioned structure is also referred to Murabhaha purchase orderer , where, customer promises to buy the asset (i.e. binding promise), however, it could be non-binding too. In addition, Bank may already have asset and sell it to customer under Murabaha. Please note that above mentioned structures is meant to facilitate the discussion, thus, actual scope may differ with above.

Murābahah Financing

1. Customer identifies a Shari’ah-compliant

asset and seller provides quotation,

at agreed price, term and conditions.

Bank

Seller

Customer

1

2

3

4

5

6

2.Customer approaches Bank for providing

financing under Murābahah contract.

3. Hence, Bank purchases the asset.

4. Bank sells the asset to customer at

cost + mark up.

5. Transfer of asset.

6. Repayment based on agreement.

STRUCTURING ISLAMIC BANKING PRODUCTS (3)

1. Customer identifies Shari’ah-compliant asset

and seller provides quotation at agreed

price, term and conditions.

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2.Customer approaches (lessee) Bank to provide

Ijārah financing.

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3. Bank purchases the asset.

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4. Bank leases the asset to customer as a lessor.

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5. Transfer of asset.

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6. Customer pay rental fees as a lessee to lessor.

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7. At the end of contract, either asset returns to

the Bank or customer buys it at nominal

price, where applicable.

Ijārah Financing

Bank

Customer

Seller

1

2

3

4

6

7

5

Please note that above mentioned structures is meant to facilitate the discussion, thus, actual scope may differ with above.

STRUCTURING ISLAMIC BANKING PRODUCTS (4)

Istisnā` Financing

1. Customer identifies asset, contractor provides

quotation, at agreed price, term and conditions.

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2. Customers approaches Bank to provide

Istisnā` financing.

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3. Bank gives Istisnā` financing to provide

specific asset at agreed price, date and

venue of delivery.

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4. Bank requests the specific asset to contractor.

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5. Seller delivers asset after constructions at

specific date.

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6. Customer make payments to Bank as per term

agreed in the contract.

Bank

Customer

Seller/

Contractor

4

6

3

2

1

5

Please note that above mentioned structures is meant to facilitate the discussion, thus, actual scope may differ with above.

STRUCTURING ISLAMIC BANKING PRODUCTS (5)

Salam Financing

1. Customer/Farmer requests Salam financing

to the Bank against specific kind of commodity

which is to be delivered on specified future date.

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2. Bank as a buyer makes full payment of

purchase price upon execution of Salam

contract.

​

3. Customer/Farmer delivers the specific kind of

commodity as per the contract to the Bank.

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4a. Bank may sell to third party other than the

original seller under the parallel Salam in which

Bank had entered.

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4b. Bank may sell the commodity in the spot market

or alternatively, Bank may hold the commodity

in anticipation of selling it at higher price.

Bank

Customer/

Farmer

Third party

Other than

original seller

4a

2

1

4b

Note: Above mentioned structures is meant to facilitate the discussion, thus, actual scope may differ with above.

Spot

Market

3

Please note that parallel Salam is independent of Salam contract. Hence, it is not inter-conditional or interdependent.

STRUCTURING ISLAMIC BANKING PRODUCTS (6)

1. Customer approaches Bank to provide

Muḍārabah financing

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2. Bank injects funds to the venture (customer

business) based on Muḍārabah contract

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3. Customer provides skill to the venture

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4. Profits from venture will be divided

according to agreed PSR

(Let’s assume the ratio is 60:40)

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5. Loss from venture (if any) will be borne

by the Bank*

*unless there is clear evidence that the loss is

due to customer misconducts and negligence

Muḍārabah Financing

Bank

Customer

1

2

3

4

4

5

Venture

What happens if there is loss?

Please note that above mentioned structures is meant to facilitate the discussion, thus, actual scope may differ with above.

STRUCTURING ISLAMIC BANKING PRODUCTS (7)

What happens if there is loss?

Mushārakah Financing

1.Customer approaches Bank to provide

Mushārakah financing;

​

2. Bank injects funds to the venture (customer

business) based on Mushārakah contract;

​

3. Customer injects fund (existing share) and

provides skill to the venture;

​

4. Profit from venture will be divided

according to agreed ratio

(Let us assume the ratio is 60:40)

Bank

Customer

Venture

1

3

2

4

4

Please note that above mentioned structures is meant to facilitate the discussion, thus, actual scope may differ with above.

STRUCTURING ISLAMIC BANKING PRODUCTS (8)

One Stop

Shopping

Bank

Buy and sale of assets

Direct investment

Leasing and trading of real estate

Fund management

Off-balance sheet assets

Investment in Sukuk

Neraca Bank Syariah

Sources of Prudential Issues

Requirement to comply with Sharī'ah

Different structure of products and services

Presence of PSIA

PRUDENTIAL IMPLICATIONS OF ISLAMIC BANKING PRODUCTS

Credit Risk

Equity Investment

Risk

RISKS IN ISLAMIC BANK (1)

Liquidity Risk

Market Risk

RISKS IN ISLAMIC BANK (2)

Rate of Return

Risk

Displace

Commercial

Risk

Sharī`ah non-

Compliance

Risk

Fiduciary

Risk

RISKS IN ISLAMIC BANK (3)

(a) Murābahah

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(b) Salam

Risiko yang timbul pada suatu tahapan kontrak dapat berbeda dengan risiko pada tahapan kontrak berikutnya

TRANSFORMATION OF RISKS IN ISLAMIC BANK

MAKASEEEH

Ronald Rulindo, PhD

Nur Dhani, PhD