LECTURE 11�Asset and Liability Management (ALM) on Islamic Bank

Islamic Banking Management

Wahyu JATMIKO, PhD

wahyujatmiko@ui.ac.id | w.jatmiko09@gmail.com

April 2022

​

Objectives

• Scope of ALM
• Techniques of ALM
• Gap Analysis
• Duration Analysis
• Simulation
• VaR

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

Scope of ALM

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

What is ALM?

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Source: https://corporatefinanceinstitute.com/resources/knowledge/strategy/asset-and-liability-management-alm/

Mismatch between Assets and Liabilities

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Assets

Liabilities

Shareholders’ Equity

1. Cash
2. Current Accounts
• BI
• Other banks
3. Investments in marketable securities
4. Receivables
• Murabaha
• Istishna
• Ijara
5. Financing
• Mudharaba
• Musharaka

Temporary Syirkah Funds

1. Deposits from customers
• Wadiah demand deposits
• Wadiah saving deposits
2. Other liabilities

1. Deposits from customers
• Mudharaba saving deposits
• Mudharaba time deposits

Mostly Long-Run

Mostly Short-Run

Other mismatch possibilities

Other than caused by the maturity transformation, mismatch can be also occurred due to:

• Exchange rate
• Investment / Financing Abroad
• Rate of return or payoff
• Fixed in one side, floating in the other
• Components of portfolio
• Vary in asset side, limited in liability one

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Mismatch induced risks

• Liquidity risk
• Market risk
• Credit risk
• Etc.

​

​

• Activity: Can you give practical examples of the above risks?

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Diamond–Dybvig model

• What drives the possibility of a run is demand for liquidity (a desire on the part of savers to be able to retrieve their funds at any time).
• If the underlying investment projects that financial intermediaries are funding are long-term, this creates maturity mismatch.
• The intermediaries’ assets (their claims on a portion of the returns to the investment projects) are long-term, but their liabilities (the savers’ claims on the intermediary) can be redeemed at any time, and so are short-term.
• Diamond and Dybvig show how such mismatch creates the possibility of a run.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Techniques of ALM

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

GAP Analysis Model

• Assets and Liabilities are rate sensitive in different degree.
• It is therefore necessary to identify the rate sensitivity among different groups of assets and liabilities and match identical groups of assets with liabilities.
• In the ALM process, Gap is generally used for quantifying the rate sensitive groups only (as compared to rate insensitive groups of liabilities like current deposits, float funds etc.)
• In other words, GAP is the “excess” of interest sensitive assets over interest sensitive liabilities or vice-versa.
• If Rate Sensitive Liabilities (RSLs) and Rate Sensitive Assets (RSAs) are equal (GAP = 0), Net Interest Margin (NIM) is free from any effect of interest rates movements.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

GAP Analysis Model

• This model measures the direction and extent of asset-liability mismatch through either funding or maturity gap.
• It is computed for assets and liabilities of differing maturities and is calculated for a set time period.
• This model looks at the gap that exists between the interest revenue earned on the bank's assets and the interest paid on its liabilities over a particular period of time. (Also known as the net interest income exposure of the bank).
• A positive gap indicates that assets are greater than liabilities, whereas, a negative gap indicates that liabilities are greater than the assets. The former is favourable.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

GAP Analysis Model

∆NII = (RSAs - RSLs) x ∆r

∆NII = GAP x ∆r

• NII = net interest income
• r = interest rates that impact the assets and liabilities in the relevant maturity bucket
• RSAs (Rate Sensitive Assets): Bank assets, mainly bonds, loans and leases, and the value of these assets is sensitive to changes in interest rates; these assets are either repriced or revalued as interest rates change.
• RSLs (Rate Sensitive Liabilities): Bank liabilities, mainly interest-bearing deposits and other liabilities, and the value of these liabilities is sensitive to changes in interest rates; these liabilities are either repriced or revalued as interest rates change.
• GAP is simply the differences between the RSA and RSL.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

GAP Analysis Model

• This analysis can identify the impact of the change on the net interest income of the bank, when the interest rates change across various time buckets.
• The positive gap indicates that it has more RSA than RSL whereas the negative gap indicates that it has more RSL.
• The gap report indicates how the bank or institution will get impacted with change in interest rates.
• For those having a Positive Gap (RSA > RSL) benefit from a rise in interest rates and vice versa.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Duration Analysis

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Duration Analysis

• After having determined the duration of all assets and liabilities on the bank’s balance sheet, the bank manager could use this formula to calculate how the market value of each asset and liability changes when there is a change in interest rates and then calculate the effect on net worth.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Duration Analysis

Given

• Total assets = $100 million
• Total liabilities = 95 millions

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Pop UP QUIZ

• The bank manager wants to know what happens when interest rates rise from 10% to 11%. The total asset value is $100 million, and the total liability value is $95 million.
• Calculate the change in the market value of the assets and liabilities and its net worth.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Simulation

• Simulation models introduce a dynamic element while doing the analysis of the interest rate risk.
• Gap analysis and duration analysis as stand-alone tools for asset-liability management suffer from their inability to move beyond the static analysis of current interest rate risk exposures.
• Basically simulation models utilize computer power to reconstruct the banking portfolio and running what-if scenarios.
• Ex: Stress testing

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Value at Risk

• The maximum expected loss that a bank can suffer over a target horizon, given a certain confidence interval.
• It helps to calculate the market risk of a portfolio for which no historical data exists.
• It is often used for measuring the market risk of a portfolio of assets and/or liabilities.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Value at Risk

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Source: https://www.google.com/url?sa=i&url=https%3A%2F%2Fefinancemanagement.com%2Finvestment-decisions%2Fvalue-at-risk-var&psig=AOvVaw0kViD3qJYNqy24aGII68J-&ust=1652330996723000&source=images&cd=vfe&ved=0CA0QjhxqFwoTCNCysOPS1vcCFQAAAAAdAAAAABAY

Value at Risk – Historical Method

• The historical method simply re-organizes actual historical returns, putting them in order from worst to best. It then assumes that history will repeat itself, from a risk perspective.

Wahyu Jatmiko | Asset and Liability Management (ALMA) on Islamic Bank

​

Source: https://faculty.etsu.edu/trainor/FNCE%203300/Var1.htm

Thank you

Wahyu JATMIKO, PhD

wahyujatmiko@ui.ac.id

w.jatmiko09@gmail.com