Risiko Operasional

Pertemuan 1

Risiko operasional adalah jenis risiko yang melekat pada setiap aktivitas dan

merupakan risiko yang diketahui paling awal. Risiko operasional terkait erat dengan kegiatan

operasional bank, sebelum risiko financial dan risiko non finansial lainnya.

Risiko operasional adalah risiko kerugian yang diakibatkan oleh pengendalian internal

yang kurang memadai, kegagalan proses internal, kesalahan manusia (human error),

kegagalan sistem, dan/atau adanya kejadian-kejadian eksternal yang mempengaruhi

operasional bank. Selain itu, kegagalan memenuhi peraturan, disebut dengan risiko kepatuhan

(compliance risk), dan risiko bisnis seringkali dimasukkan dalam kategori risiko operasional.

Risiko operasional bisa menyebabkan terjadinya risiko-risiko lainnya. Yang lebih unik

lagi setelah risiko-risiko lain terjadi, dampak akhirnya pun bisa kembali ke risiko

operasional. Sehingga jika digambarkan dalam suatu siklus, risiko operasional-lah yang

menjadi starting point sekaligus menjadi destination point dalam siklus risiko tersebut.

Kesadaran terhadap risiko operasional bisa dimulai dengan melihat potensi faktor

penentunya. Faktor ini bisa berasal dari suatu yang terlihat sepele hingga suatu yang

memang sudah terlihat membahayakan dari awalnya. Risiko bisa terjadi karena salah ketik

jumlah tabungan atau pembiayaan yang disetujui atau jumlah pembayaran cicilan debitur.

Selain yang disebabkan oleh faktor internal, biasanya relatif lebih bisa diantisipasi, risiko

operasional juga bisa diakibatkan oleh faktor eksternal yang sulit diprediksi. Misalnya

banjir, angin puting beliung, gempa, hacking sistem IT oleh pihak luar maupun kerusuhan.

Definisi dan Cakupan Risiko Operasional Bank Islam

Basel II mendefinisikan risiko operasional sebagai ―risk of loss resulting from inadequate or failed internal processes, people or system, or from external events‖.

Sementara itu, IFSB mendefinisikan risiko operasional yang dihadapi bank Islam lebih dari sekedar risiko manusia, risiko sistem dan proses internal, serta risiko karena kejadian eksternal. Namun, juga mencakup risiko kepatuhan atas ketentuan syariah dan risiko fidusia.

I. Risiko manusia

Manusia, dalam hal ini para karyawan bank Islam, adalah kunci keberhasilan bisnis

bank. Jika seorang karyawan mengerjakan pekerjaan sesuai dengan yang

diamanahkan, target bank akan tercapai, dan sekaligus ia telah berperan besar dalam

mengelola risiko operasional terkait pekerjaannya. Dan begitu juga sebaliknya.

Secara umum, risiko operasional akibat faktor manusia bisa terjadi karena dua

hal: faktor kesalahan (human error) dan faktor pelanggaran (human fraud).

Kesalahan manusia bisa diakibatkan karena kelalaian, kesalahan pengambilan

keputusan maupun kebingungan karyawan dalam melakukan kegiatan operasional.

Karena judulnya ―kesalahan‖, maka sangat mungkin kelalaian ini dapat diperbaiki,

misalnya pendokumentasian kesalahan yang pernah dilakukan yang lebih dikenal

dengan ―buku dosa yang paling sering dilakukan‖. Selain kesalahan, cara-cara

pencegahannya juga dicatat agar lain waktu kesalahan serupa dapat dihindari.

Yang berat adalah jika risiko ini terjadi karena kesalahan yang disengaja/pelanggaran.

misalnya dalam bentuk pencurian, penggelapan dana, pelaporan keuangan yang

sengaja dimanipulasi, insider trading, dan sebagainya. Biasanya pelanggaran

semacam ini dinisbatkan untuk pemenuhan kepentingan pribadi si pelaku.

Dubai Islamic Bank (DIB) telah mencatatkan sejarah bahwa tidak efektifnya

pengendalian internal menyebabkan bank gagal dalam mencegah pelanggaran atas

termin kredit yang dilakukan oleh salah satu karyawannya. Akibatnya, DIB mengalami

kerugian sebesar USD 138 juta atau sekitar 7% dari total DPK pada 1998.

Selain karena faktor kesalahan dan pelanggaran, risiko manusia juga mungkin

diakibatkan oleh risiko personalia. Risiko ini biasanya disebabkan oleh

buruknya sistem manajemen sumber daya manusia pada suatu institusi.

Risiko-risiko terkait sumber daya manusia sebagaimana didiskusikan diatas begitu

berbahaya bagi bank Islam. Oleh karena itu, perhatian khusus dari manajemen bank Islam

tentu diperlukan untuk mengelolanya. Beberapa cara pencegahan bisa dilakukan

manajemen bank Islam, diantaranya melalui proses rekrutmen karyawan yang dibuat

secara tailor-made dengan budaya bank Islam tersebut.

II. Risiko teknologi o dukungan teknologi diperlukan untuk melakukan percepatan operasional, memenuhi

kebutuhan nasabah, serta menenuhi kebutuhan internal bank terhadap knowledge

management. Sayangnya, belum banyak bank Islam di Indonesia yang sadar

sepenuhnya bahwa investasi di teknologi yang umumnya mahal, sangat penting

untuk dilakukan.

o Minimnya investasi teknologi pada bank Islam menimbulkan akibat yang cukup miris. Masyarakat cenderung memiliki perspektif bahwa teknologi bank Islam masih terbelakang, kalah jauh dibandingkan bank konvensional. iperlukan ahli-ahli IT yang kompeten dan disaat yang sama memahami filosofi keuangan Islam dan teknis operasional perbankan syariah.

III. Risiko kepatuhan

Risiko ini bisa disebabkan karena ketidakpatuhan bank Islam terhadap aturan yang

berlaku, baik itu aturan syariah maupun regulasi yang berlaku dimana bank Islam

beroperasi. Begitupun norma yang biasa berlaku pada masyarakat, selama aturan-

aturan tersebut tidak bertentangan dengan prinsip syariah Islam. Pelanggaran atas

kepatuhan, khususnya terhadap ketentuan syariah, bisa membuat batalnya akad

yang dilakukan bank Islam.

Bila akad tersebut menghasilkan laba, maka laba itu tidak boleh diakui sebagai

pendapatan. Untuk itu, diperlukan adanya sistem pengendalian internal yang dapat

mencegah terjadinya risiko tersebut, misal dengan membentuk divisi kepatuhan,

Dewan Pengawas Syariah (DPS), dan komite audit. Mereka memastikan bahwa bank

syariah tidak melakukan pelanggaran atas kepatuhan, terutama kepatuhan syariah.

IV. Risiko fidusia

Risiko fidusia terkait dengan fungsi bank Islam sebagai intermediator yang salah satu perannya adalah menyalurkan dana berbasis akad bagi hasil, seperti mudharabah dan musyarakah. Risiko ini timbul saat bank Islam gagal memenuhi perjanjian yang telah disepakati sebelumnya dengan nasabah, baik karena ketidakpatuhan terhadap syariah maupun adanya salah kelola dana nasabah.

Salah satu hal yang bisa menunjukkan terjadinya risiko ini adalah pergerakan pendapatan/laba yang sangat fluktuatif atau pemenuhan rasio kecukupan modal yang naik-turun. Akibatnya, bank Islam akan mengalami kesulitan dalam memenuhi fungsi intermediasinya, khususnya kepada nasabah deposan. Bank akan sulit memenuhi kebutuhan penarikan dana giro dan tabungan wadiah atau memberi bagi hasil yang menarik kepada nasabah tabungan dan deposito mudharabah.

Bila terjadi, risiko ini dapat menimbulkan risiko reputasi dan dapat berlanjut pada risiko penarikan dana oleh nasabah atau penarikan modal oleh pemegang saham. Bila tidak segera diselesaikan, dapat berdampak pada timbulnya risiko likuiditas pada bank Islam. Risiko fidusia dapat dicegah perbaikan kebijakan pembiayaan, seperti melalui seleksi yang tepat sebelum menyalurkan pembiayaan, dan penerapan kebijakan manajemen aset-hutang yang tepat.

V. Risiko legal

Risiko legal bisa terjadi saat bank Islam atau karyawannya melakukan tindakan

melanggar hukum dan mengakibatkan bank harus melakukan sejumlah kewajiban sebagai sanksi atas tindak pelanggaran tersebut. Atau ketika bank Islam terlibat

kasus hukum akibat salah menginterpretasikan hukum dan regulasi. Selain itu, risiko

legal juga mungkin terjadi akibat perubahan undang-undang dan regulasi lainnya.

Oleh karena itu, bank Islam sangat membutuhkan adanya ahli hukum seperti kondisi saat ini.

Lebih lanjut, risiko legal juga bisa terjadi saat bank Islam melakukan inovasi produk-produk perbankan Islam yang belum memiliki payung hukum. Misalkan. Saat bank Islam melakukan akad murabahah, bank Islam harus memiliki komoditas murabahah yang pada umumnya harus dibeli terlebih dahulu dari pemasok. Setelah bank memiliki aset secara penuh, barulah bank boleh menjualnya kepada nasabah dalam bentuk akad murabahah.

Secara legal, skema ini memerlukan dua kontrak yang berbeda, dan jika dilakukan akan meningkatkan biaya transaksi pada bank Islam. Kondisi ini terkesan memaksa bank Islam untuk menjalankan skema murabahah seperti yang banyak dipraktikkan saat ini. Bank meminta nasabah untuk memilih sendiri komoditas yang diinginkannya, setelah itu ―seolah-olah‖ nasabah akan diminta menjadi wakil bank dalam membeli komoditas tersebut.

Selanjutnya, jika aplikasi pembiayaan murabahah disetujui, bank akan mentransfer langsung dana tersebut ke rekening nasabah sekaligus melakukan pendebitan otomatis dalam rangka pembayaran ke pemasok. Akhirnya, hanya ada satu akad yang perlu dibuat bank atas pembiayaan murabahah ini.

Hal serupa kasus diatas pun menjadikan tantangan dalam inovasi produk bank Islam lainnya, seperti inovasi akad musyarakah mutanaqisah (musyarakah menurun).

Dalam akad ini, cicilan yang dilakukan oleh nasabah membuat kepemilikan nasabah berangsur meningkat seiring menurunnya porsi kepemilikan bank. Yang menjadi pertanyaan: apakah untuk itu, bank harus berkali-kali melakukan akad jual beli dan karenanya komposisi kepemilikan terus berubah sepanjang waktu? Tentu akan sangat memberatkan jika harus seperti ini.

Oleh karena itu, inovasi pada produk-produk bank Islam sudah seharusnya tidak hanya membahas mengenai struktur, pricing, dan strategi pemasaran saja. Aspek legalitas pun menjadi sangat penting untuk dapat dipertimbangkan disini. Terlebih karena salah satu yang membedakan produk bank Islam dan bank konvensional terletak pada akadnya.

VI. Risiko reputasi

Risiko yang juga dikenal sebagai ―headline risk‖ atau mungkin dimasa kini bisa

diibaratkan sebagai “twitter risk” ini biasanya tidak hanya berpotensi menimbulkan

kerugian pada bank yang bersangkutan namun juga industri bank secara umum.

Risiko ini juga dapat memicu meningkatnya risiko penarikan dana nasabah, modal

pemegang saham, dan risiko likuiditas. Risiko ini dapat dimitigasi melalui

pelaksanaan supervisi yang teratur, standarisasi prosedur operasional perbankan

syariah, evaluasi mandiri oleh tiap bank Islam, dan sebagainya. Risiko ini sangat

dekat dengan risiko stratejik.

Identifikasi Faktor Penentu Risiko Operasional

Secara umum, risiko operasional bisa dibagi ke dalam dua kelompok, yaitu risiko

operasional berdasarkan

1. Faktor penyebab terjadinya

Berdasarkan penyebab terjadinya, risiko operasional dapat disebabkan

oleh faktor internal dan eksternal.

Contoh dari faktor internal ini adalah kesalahan atau pelanggaran yang

dilakukan oleh karyawan, manipulasi laporan keuangan, pelanggaran aspek

legal secara disengaja, kesalahan dalam sistem IT, inovasi produk yang

tidak tepat, dan ketidakpatuhan terhadap syariah. Risiko jenis ini biasanya

lebih dapat diterka probabilitas terjadinya.

faktor eksternal yang dapat menimbulkan risiko operasional antara lain adalah

sistem IT yang di-hack pihak yang tidak bertangungjawab, perubahan regulasi,

bencana alam, dan faktor lain yang berada di luar kuasa manajemen bank

Islam. Risiko ini lebih sulit untuk diterka probabilitasnya, bisa terjadi secara

tiba-tiba dan kapan saja.

2. Frekuensi dan dampak terjadinya

1. Risiko yang frekuensinya sering namun dampak terjadinya kecil biasanya

bisa diterima oleh bank Islam. Risiko ini lebih dapat diterka probabilitas

terjadinya dan lebih memungkinkan untuk dicegah dengan penerapan kontrol

internal yang baik. Contoh: kesalahan dalam transaksi, kurang lengkapnya

data isian pada borang penarikan /setoran/transfer

2. Sementara itu, risiko yang frekuensinya terjadinya rendah namun bisa

menimbulkan dampak yang besar, seperti bencana alam, bisa dikelola,

misalnya dengan membagi atau mentransfer risiko tersebut dengan perusahaan

takaful.

3. Adapun risiko dengan frekuensi keterjadian rendah dan kalaupun terjadi

dampak kerugiannya masih bisa ditolerir oleh bank Islam, dapat dikelola

dengan proses kontrol internal yang memadai. Contoh risiko jenis ini,

misalnya peminjaman uang intra-day ‗ilegal‘ oleh teller. Risiko ini biasanya

jarang terjadi karena adanya mekanisme segregrasi tanggung jawab dan cross-

checking saldo berlapis yang dilakukan oleh operational officer dan head

teller setelah jam operasional bank Islam berakhir.

4. Lebih lanjut, risiko yang kemungkinan frekuensi terjadinya tinggi dan bila

terjadi menimbulkan dampak yang bisa mengacaukan bank sudah sepatutnya untuk dicegah dengan supervisi ketat. Selalu ada kesempatan bagi private

banker untuk menyalahgunakan data maupun penggelapan dana nasabahnya.

Terhadap risiko seperti ini diperlukan supervisi yang jelas dan pelaksanaan

kontrol internal yang baik dan disosialisasikan termasuk kepada nasabah private

banking tersebut agar bertransaksi sesuai prosedur. Mempercayakan transaksi tanpa

mengikuti prosedur, dalam hal ini menandatangani blanko kosong dan menitipkannya

kepada seorang yang sudah terlalu lama menduduki jabatan yang sama bisa

diibaratkan seperti memberi kesempatan orang tersebut untuk berbuat pelanggaran.

Pengukuran Risiko Operasional Bank Islam

Secara umum, kerugian yang mungkin muncul akibat risiko operasional

pada bank bisa dibagi dalam tiga kelompok, yakni :

1. kerugian yang perlu dibayarkan kepada pihak eksternal,

2. kerugian penurunan aset bank akibat dampak risiko,

3. serta kerugian untuk mengembalikan keadaan seperti sebelum saat risiko

terjadi.

Risiko Operasional berdasarkan frekuensi dan dampak terjadinya

Secara sederhana, perhitungan risiko operasional bisa diukur dengan

mengklasifikasikan risiko operasional yang bisa diekspektasi dan yang tidak bisa

diekspektasikan. Kerugian atas risiko yang bisa diekspektasikan pada umumnya

sudah diantisipasi manajemen dengan memasukkannya pada pricing yang akan

dikenakan pada klien.

Perhitungan risiko operasional lebih sulit dilakukan atas risiko yang tidak

bisa diekspektasikan, namun berpotensi menimbulkan dampak yang katastropik,

seperti gempa bumi, banjir, gunung meletus, dan sebagainya.

Jenis risiko ini tidak bisa dihitung dengan VAR biasa, namun dapat

diminimalisir dengan upaya-upaya preventif serta bekerjasama dengan institusi

takaful. Lazimnya jenis risiko ini memiliki distribusi kerugian berbentuk fat tail.

Model yang bisa digunakan, misalnya extreem value theory (EVT).

Pengukuran Risiko Profesional

Basel II menetapkan bahwa bank harus mengalokasikan sebagian modalnya untuk berjaga-jaga atas munculnya risiko operasional.

Sebelumnya, Basel I masih memberi perhatian besar kepada risiko kredit dan menyatakan bahwa risiko operasional masih dapat dicakup dalam 8% CAR (capital adequacy ratio) yang dipersyaratkan kepada bank. Lebih lanjut, Basel II merekomendasikan tiga metode pengukuran risiko operasional, yakni basic

indicator approach (BIA), standardised approach (SA), dan

advanced measurement approach (AMA).

Dengan metode BIA, bank diharuskan untuk menyiapkan 15% dari rata-rata pendapatan kotornya selama tiga tahun terakhir untuk persiapan sekiranya risiko operasional benar-benar terjadi. Metode BIA banyak menuai kritik karena terlalu mensimplifikasi dan terkesan ―top-down.‖ Metode ini tidak mengakomodir faktor lain yang penting dipertimbangkan, seperti keragaman aktivitas bisnis, ukuran, dan pertumbuhan aset bank.

Untuk mengatasi permasalahan tersebut diperkenalkan juga metode SA. Meski

masih terkesan ―top-down‖, metode ini sudah memasukkan keragaman aktivitas

bank. Modal operasional dihitung melalui rata-rata pendapatan kotor bank dari 8

aktivitas utama bank selama tiga tahun terakhir dikalikan dengan bobot yang telah

ditentukan. Aktivitas-aktivitas tersebut mencakup corporate finance, trading and

sales, retail banking, commercial banking, payment and settlement, agency

services, asset management, dan retail brokerage. Adapun pembobotan akan

ditetapkan oleh regulator berdasarkan perhitungan atas nilai rata-rata pendapatan

kotor atas aktivitas-aktivitas tersebut pada industri perbankan.

Namun, SA pun menuai kritik karena berpotensi terlalu membebani bank dengan

rasio kecukupan modal yang tinggi. Hal ini karena adanya kemungkinan double counting risiko atas 8 aktivitas bisnis tersebut, yaitu dikenakannya perhitungan

atas risiko kredit, karena kerugian akibat gagal bayar, dan risiko operasional,

karena menetapkan pricing yang terlalu tinggi atas aktivitas-aktivitas bisnis

tersebut. Oleh karena itu, diperkenalkanlah metode alternative standard approach

(ASA).

Metode ini hanya menghitung risiko atas kerugian akibat gagal bayar yang terjadi pada aktivitas retail banking dan commercial banking dikalikan dengan faktor tertentu yang ditetapkan oleh regulator. Sementara itu, untuk mengakomodir bank yang sudah memiliki pengukuran risiko operasional sendiri berdasarkan data internalnya, Basel II memberi kesempatan penggunaan metode AMA.

Berdasarkan metode ini, bank diperbolehkan menghitung risiko operasionalnya sendiri selama perhitungan tersebut mendapat izin dari regulator dimana bank beroperasi. Bank yang menggunakan metode AMA, diharuskan menghitung risiko operasionalnya berdasarkan data kerugian internal akibat risiko tersebut minimal selama tiga tahun terakhir.

Kerugian yang diperhitungkannya pun harus memperhatikan seluruh aktivitas yang dilakukan bank. Semua faktor tersebut diperhitungkan untuk menghitung kebutuhan modal minimum yang dipersyaratkan regulator atas risiko operasional bank yang bersangkutan. Atas kondisi ini, para ahli manajemen risiko berpendapat agar bank dapat menggunakan judgement dan scenario analysis dalam memperhitungkan kerugian akibat risiko tersebut

Lalu metode yang manakah yang paling memungkinkan untuk digunakan oleh bank Islam di Indonesia? IFSB (2005) menetapkan bahwa bank Islam dapat menghitung modal berdasarkan risiko operasional dengan menggunakan metode BIA atau SA sebagaimana ditetapkan dalam Basel II. Namun, kedua metode ini perlu disesuaikan sebelum digunakan oleh Bank Islam. Penggunaan pendapatan kotor sebagai indikator dasar risiko operasional bisa menjadi ―salah kaprah‖.

Karena mayoritas pembiayaan bank Islam didasarkan pada akad-akad

yang beragam, seperti jual beli, sewa, dan syirkah.

Selain itu, terkait dengan penggunaan akad syirkah berbasis bagi hasil, seperti mudharabah dan musyarakah, pendapatan bagi hasil yang menjadi hak nasabah harus dikeluarkan dari perhitungan pendapatan kotor. Untuk itu, akan lebih baik bagi bank Islam untuk menggunakan metode AMA dengan mendesain sendiri metode dan alat pengukuran risiko yang dihadapinya.

Pendekatan berbasis risiko operasional yang terkandung dalam akad-akad yang

digunakan bank Islam dapat menjadi alternatif yang bisa digunakan. Upaya ini diharapkan dapat menghasilkan perhitungan yang lebih tepat sehingga diharapkan

dapat menurunkan jumlah modal yang harus dicadangkan bank Islam atas risiko

operasionalnya. Jika ini dapat dicapai, bank Islam akan lebih luas bergerak dalam

menyalurkan pembiayaannya karena tidak lagi terkendala dengan aturan penyediaan modal minimum.

Membangun Sistem Manajemen Risiko Operasional

1. penyusunan kebijakan manajemen risiko operasional

2. pengidentifikasian risiko operasional

3. penyusunan skema proses bisnis

4. penentuan metode perhitungan risiko operasional yang paling tepat digunakan

5. penentuan kebijakan mitigasi risiko operasional 6. penentuan bagaimana melaporkan dan menyajikan manajemen risiko

operasional tersebut kepada pihak yang memerlukannya 7. pelaksanaan analisis risiko operasional termasuk penyusunan database

risiko operasional dan stress testing 8. pengalokasian modal bank untuk mempersiapkan sekiranya terjadi kerugian

akibat risiko operasional.

Liquidity Risk on Islamic Banking

Pertemuan 2

Importance of Liquidity Risk

Liquidity is required by the bank to accommodate every fluctuation of their balance sheet,

both expected as well as unexpected, and provide adequate funds for the bank to grow. On the

other hand, when the bank is in dire need of liquid funds, and yet cannot receive it except

with difficulty and at an unreasonable price, then the bank can be said to experience liquidity

risk.

Timing when liquidity risk appears:

1. The availability of funds when depositors withdraw their funds,

2. when paying maturing liabilities,

3. fulfilling debtors‘ financing demands and

4. rebalancing investment portfolio. History has shown that liquidity risk is one of the major causes of bank bankruptcy.

1. The bankruptcy of Long Term Capital Management in America in 1997,

2. the Indonesian banking crisis of 1997,

3. the bankruptcy of Northern Rock bank in the UK in 2007 and

4. the case of Century Bank in Indonesia in 2008 were all triggered by liquidity risk.

The surplus side: The bank offers depository services to members of the society with

excess funds while allowing them to withdraw their funds any time they need. Even if there

are time limitations, it is usually less than a year. The bank‘s offer becomes attractive with

its promise of providing return to members of the public depositing theirs funds with it. This

way, the bank is able to collect funds from a large number of individuals, increasing the size

of the deposits collected.

The deficit side: This pooled investment fund is channelled to entrepreneurs requiring

financing for various business activities. It is the banks that will be responsible in monitoring

process the entrepreneur‘s business activities.

Process of Liquidity Risk

• The bank will always experience liquidity mismatch due to the dominant profile of

deposits being short term while the bank‘s financing portfolio is predominantly long

term.

Inherent Problem:

• Problems arise if at a particular time, most of the depositors withdraw their funds

from the bank, while the bank is unable to immediately liquidate the funds

they‘ve invested in their debtors.

Scope and definition of liquidity risk

Liquidity risk is the risk that emerges from the Islamic bank‘s potential inability in fulfilling obligations that have reached their maturity date.

This risk occurs as a consequence of the temporal mismatch in between the

sources of the bank‘s funds, the third party funds, and the financing contract to the bank‘s various debtors, especially if the financing done by the bank often default or experience returns that are less than what is initially expected.

Often the main trigger of bankruptcy experienced by banks, both large and

small, isn‘t from the losses it experienced, but due to the inability of the bank to fulfil their liquidity shortage.

1. A bank is said to be stable when the maturity of its assets and liabilities match; asset value is preserved, and the financial assets issued is fully backed by gold or

a collection of deposits. 2. It should also be added that problems with insufficient liquidity can lead not only

to the collapse of one bank but may cause the instability of the whole financial

system [Llewellyn, 1999]. 3. It is worth mentioning that it is the reason why after the last financial crises the

necessity of liquidity risk management forced the Basel Committee to introduce that risk as the element of Basel III framework [Hartlage, 2012]

The IFSB defined liquidity risk as the potential loss that can be experienced by an Islamic bank due to its inability to promptly meet its matured liabilities or the Islamic bank‘s inability in funding its asset increase at an acceptable cost without suffering significant losses.

• Bank Indonesia defined liquidity risk as risk that occurs due to the bank‘s inability to

meet its matured liabilities from its cash flow and/or other high quality liquid assets that

can be easily collateralised without disturbing the bank‘s activity and finance.

• Liquidity risk can even be defined as the risk occurring from excess liquidity or

liquidity shortage due to difficulties in transacting an asset, difficulties in securing

financing at a reasonable cost, and the lack of liquid assets to fulfil liabilities.

Assets and liabilities should be grouped according to their nature and ordered by

their relative liquidity

• Liquid assets are normally defined as assets that will realize their benefit or can be

converted into cash in less than a year, while fixed assets normally refer to non-

financial assets such as land, properties, automobiles, and the like. As such, the

categorization of assets into liquid and fixed assets is unsuitable for the Islamic

banking industry

• Most of the contracts can be placed in more than one category, whether murabahah,

salam, qardh, ijarah, or istisna’, but trading-based (murabahah and salam) and qardh

should be categorized as the Islamic bank‘s liquid assets. If these contracts are placed

into intermediate- or long-term asset categories, some of the potential impacts are

asset illiquidity, vulnerability to rate-of-return risks in a changing business

environment, increased risk of nonperformance, a perception of higher prices,

and eventually an active contribution to inflation.

• Similarly, ijarah and istisna’ should be trated as intermediate-term instruments under

the notion that these two contract types are normally applied for the procurement of

heavy machinery, property, infrastructure, or other high-cost assets. If these contracts

are categorized as short-term assets, the financial burden upon the debtors would

become quite heavy while the object of the contract cannot yet be guaranteed to

produce revenues for the debtor within such a short timeframe.

• Meanwhile, if they are categorized as long-term instruments, the fact that they are

based on debts (muajjal contracts) means that a longer contract duration increases

debtor nonperformance risks and rate-of-return for the bank. Murabahah, salam,

ijarah, and istisna’ are basically trade contracts with debt elements, where the price (or

margin/rent) cannot be changed once it has been set in the mutual agreement.

Asset and liability on Islamic bank

• The format of the balance sheet should reflect this by displaying the concept of

hedging between assets, liabilities, and equity. Islamic bank must not carelessly

use third-party capital or funds in its operational activities.

• For example, in qardh financing, the bank must not use funds that would be expected

to provide positive returns (such as investment accounts), and should instead rely on

funding sources with the same zero-return characteristics in the form of third-party

funds under qardh (zero-cost of fund) contracts. With regards to capital management,

the bank should classify its capital into several categories: capital allocation, capital

for infrastructure and marketing, regulatory capital, capital buffer, and capital

reserves. An Islamic bank may distribute its capital allocations to various business

and banking operations that can be expected to create profits for the bank.

• In allocating these funds, the bank should develop strategic and business plans, set

reasonable risk and return targets, divide its risk and return targets appropriately

throughout its portfolio, and then fit the results with the risk-and-return profiles of the

financing proposals being considered for approval.

• When the bank finances infrastructure and marketing expenditures, it may place itself

as a mudharib rather than a shahibul maal to guarantee that it would be able to utilize

the funds in an effective and efficient manner; as the funds have been entrusted to the

bank‘s management, any indiscretions in the usage of these funds would adversely

affect not only the fund owner but also the bank since neither side would be able to

obtain a profit share if there were no profits to begin with. Therefore, the bank should

not focus solely upon the productivity and profit when it makes decisions about its

capital allocations, but also upon the efficiency of financing activities for

infrastructure and marketing (non-banking activities).

Bank run and systemic risk: the case of Indonesia

1. As the industry is undergoing a period of rapid growth, it has to be accompanied by a robust liquidity risk management program; such a program is

currently not being prepared effectively by banking regulators 2. The practices of the Islamic banking industry reveal a less-than-ideal liquidity

management. The banks have an orientation towards short-term financing and only a minimum contribution to long-term financing.

3. Depositors show a sensitive liquidity behavior and may withdraw their funds if the economy is in downturn or deposit interest offers a better return and;

4. Indonesia has a less developed Islamic money market with limited Islamic liquid instruments to provide Islamic banks a short-term liquidity.

5. The future development of the Islamic banking industry demands a proper

liquidity management, given the complexities of banking activities and economic conditions.

Managing liquidity risk is more challenging in the current financial market because significant financial innovations and global market developments have transformed the nature of liquidity risk (BIS, 2008a:2).

These conditions have made banks more susceptible to financial market issues such as excessive loans leading to a deep depreciation in currency (Asian economic crisis 1997-1998) as well as the issues associated with sub-prime mortgage (global financial crisis 2008-2009).

In practice, the banks regularly find imbalances (gaps) between the asset and the liability side that need to be equalized because, by nature, banks accept liquid liabilities but invest in illiquid assets (Zhu, 2001:1).

Financial ratio is used to observe the liquidity ratio. However, this ratio might

be higher in a country with:

a. no government intervention to help banks meet the funding gaps,

b. risk averse financial institutions,

c. fixed interest rates deposits and,

d. difficulty in hedging.

Liquidity risk management on Islamic banking

Financial Ratios to used:

1. The first form of ratio is the ratio of liquid assets to liquid liabilities. However, lack of

securities market could affect this ratio. 2. Ratio of demand deposits to private sector credits. Given that the credits to

private sector are illiquid and long-term tenor commitments, raising the share of demand deposits could trigger liquidity mismatch and invite liquidid risks.

3. Non-Performing Loan (NPL) ratio. A high NPL is the source of asset-liability

imbalance and because of that, banks might have difficulties providing liquidity to serve liquidity withdrawals from depositors.

4. Loan to Deposit Ratio (LDR). A high LDR ratio should be accompanied by high liquidity reserves in the banks; otherwise banks could fail to meet the

short-term demand for liquidity from depositors.

Process of liquidity Risk Management

1. Liquidity Management Policies

liquidity management policies vary across banking institutions, but at least the

four components below should be incorporated in the policies (Greenbaum and

Thakor, 1995:521-559):

1. The policies must contain the specific goals and objectives of

managing liquidity, including the short-term and long-term strategies of managing liquidity.

2. The policies determine the roles and responsibilities of the bodies

involved in the liquidity management process, including asset and

liability management policies, and the relationship with other financial institutions and regulators.

3. The policies determine the structure of identifying, reporting,

monitoring, and reviewing the bank‘s liquidity conditions. 4. The policies set the limit of liquidity risk and prepare a contingency

plan to handle and mitigate liquidity pressures 2. Asset Liability Committee (ALCO)

• BOD assigns a special body to carry out and organize the policies at the lower level,

namely Asset Liability Committee (ALCO). On the practical level, ALCO arranges

the strategies to implement the liquidity management policies in cooperation with the

Business Risk Management Committee, the Operational Risk Management

Committee, and the Financial Risk Management Committee. Particularly, ALCO:

i. manages and monitors the daily liquidity position and collaterals on the asset and liability sides;

ii. detects any liquidity imbalance;

iii. determines strategies to mitigate liquidity imbalance; and iv. maintains good relationships with external parties to cooperatively

manage and anticipate liquidity pressures.

2. Asset Liability Committee (ALCO) ensures that managers have responsibility to

a. transform the liquidity management policies, objectives, and

strategies of the decision makers to the operational level and

manage liquidity, adhering to their lines of authority and

responsibility; b. ensure the effectiveness and soundness of the liquidity

management process operationally; c. monitor the implementation of the liquidity management processes

and deliver the related information to decision makers.

3. Effective MIS

Process of liquidity Risk Management: Asset Liability Imbalances and Maturity

Mismatch Risks

•

Notes:

• Liquid: federal fund certificates, short-term securities, temporary investment instruments, non-renewing loans.

• Non-liquid: mortgage, consumer loans, commercial loans, premises, and equipment.

• Volatile: seasonal deposits, vulnerable deposits, short-term borrowings, large CDs. • Stable: stable demand deposits, passbook/statement, saving, consumer CDs, long-

term deposits, capital notes, equity capital.

The two main causes of liquidity risk are asset-liability imbalance and maturity

mismatch which can happen because of two conditions (Helmen et al., 1994:164-165):

liquid assets are available in larger portions than volatile liabilities, a scenario known

as liquidity gap, or the predicted amount of funds needed on the asset side is higher than the

predicted amount of funds available on the liability side, a condition known as liquidity

need (see figure).

Identifying and mitigating these two causes of liquidity risk may eliminate:

(i) the funding liquidity risk when the depositors withdraw their short-term deposits and

(ii) the market liquidity risk when there is a disruption in the financial

markets which makes normally-liquid assets illiquid (Sharma, 2004:1).

Factors Triggering Asset-Liability Imbalance and Maturity Mismatch Risks:

1. depositors prefer placing their funds in the short-term tenor of deposits.

The asset-liability imbalance potentially occurs because the short-term tenors of

deposits are liquid, while the long-term investments are illiquid.

2. the combination of a high deposit rate to attract more funds from depositors and

the high credit rate imposed on entrepreneurs.

However, when a business faces a downturn, the high credit rate reduces the

entrepreneurs‘ ability to repay the interest and principal of the debts and leaves banks in a

difficult position to repay the depositors‘ deposits.

3. big companies become the dominant depositors and locate funds in the short-term

tenor of deposits

Banks would need immediate liquidity if the liquidity behavior of big companies is

uncertain and unpredictable and these companies redeem their deposits without prior notice

or immediately at the same time.

4. an asymmetric or unequal distribution of information among depositors,

banks, borrowers, and regulators 5. the business cycle which plays an important role in causing asset-liability imbalance

• In particular, the ratio of total return from bank credits to total payments of interest

on deposits should always be positive. If it is found negative, the banks should:

i. increase total equity or; ii. increase interest on bank credit to prevent asset-liability imbalance and

maturity Mismatch risk. iii. Nonetheless, increasing interest on bank credit might potentially

increase NPL and interrupt performance of the asset side. As such,

banks are suggested to diversify their funding sources or increase the

contingent liquidity sources to manage the regular demand for

liquidity banks ought to maintain a standby account on the asset side. According to Helmen et al. (1994: 151), such an account should consist of:

a. Currencies (cash in vault). These are the liquidity that banks hold to meet daily

transaction needs and that will be placed in the central bank if there is a surplus;

b. Central bank certificates. These are the safe and liquid deposits in the central bank; c. Other commercial bank deposits. These are the bank‘s short-term deposits in the other

commercial banks. Although these are less liquid than the central bank certificates,

these deposits can also be redeemed on short notice; d. Cash items in the process of collection. These include the checks deposited in the

central bank or the other commercial bank deposits for which credits have not yet been received.

1. Principally, any endeavor by Islamic banks to construct a sound

liquidity management program should be arranged across real business transactions (Antonio 1999:46-53).

2. In view of such key features, Islamic banks minimize the liquidity risk from both internal and external perspectives. Sharia values and

principles, which permeate the industry from the inside, treat the bank

management, shareholders and stakeholders as trusted business

partners (Yaqoobi, 2007:3). 3. Islamic banking operations are free from modes of injustice such as

Riba, speculation, and Gharar (excessive uncertainty). Instead,

each party should believe in and support the other and share the risks equitably; they are forbidden from seeking to defeat other

parties (Qur’an, 26:176-183). 4. Fourthly, Islamic banking applies a profit and loss sharing (PLS)

concept that mandates a sharing of risks among business

participants which minimizes liquidity risks.

Strategies in liquidity risk mitigation

1. Asset-liability management

2. Treasury activity in the financial market

3. Access to sources of funds: internal versus external

4. Maintaining the liquidity standard

According to BCBS (2013), high-quality liquid assets has the fundamental

characteristics: low risk, ease and certainty of valuation, low correlation with risky assets,

listed on a developed and recognized exchange, active and sizable market, low volatility,

and flight to quality.

Liquidity problems have a serious implication for the bank, especially Islamic

banks, for three reasons.

1. Islamic banks do not have access to short-term liquidity instruments in the market due

to prohibitions on usury and selling debt. 2. the assets of an Islamic bank is relatively concentrated in trade or commodity

finance like salam, murabahah and istishna’ assets, where all these assets are

illiquid and cannot be easily traded in the secondary market. 3. Islamic bank cannot access the liquidity loan facility from the central bank as the

lender of the last resort the way conventional banks are able to.

Investment Risk

Pertemuan 3

Syirkah as a Distinct Trait of Islamic Banks

Equity risk investment: equity risk investment as the risk originating in capital

participation partnership contracts in business or financing activities where the bank actively

bears a part of the risk.

This risk coversmanagement track record and business plan quality, the quality of

the human resource involved and the risk evaluation of the contract.

Syirkah means partnership, or the alliance of two or more parties.

The varying forms of classic syirkah in Islam also has differing characteristics depending

on the capital contribution involved.

1. Non-binding, where any partner can exit the alliance at any time of their choosing. 2. It will dissolve if one of the partners died. This characteristic gives a disadvantage to

classical forms of partnerships compared to the modern ones, as it is considered to have more

risk and less-stable.

Out of all the forms of partnership in syariah literature, the form of partnership often used

in banking is mudharabah (silent partnership) and musyarakah. Mudharabah is the form of

partnership composed of the capital owner (shahibul mal) and the entrepreneur (mudharib),

contributing their time and skills. In a musyarakah contract, all the parties contribute both in

the form of capital as well as its management. Unlike an ijarah contract where someone may

be in the position of managing wealth but only with the status of a paid worker (expenses for

the firm), the mudharib has the rights to a portion of the business‘ profits, including

dividends.

Mudharib is also different from representatives in an agency (wakalah) contract, where

the representative is paid according to the fee in the management contract, and the contract

is not tied to the length of the business‘ life. In Islamic banking, mudharabah is used both to

collect funds, as well as for financing, while musyarakah is more often used in financing.

This is because in a musyarakah contract, the bank can control the daily performance of the

debtor better.

In an Islamic bank, the balance sheet consists of 4 components: assets, liabilities,

temporary syirkah funds and equity.

The account group of temporary syirkah funds collecting sources of funds in the form of

syirkah contracts – usually mudharabah and musyarakah – is situated between the account

groups of liabilities and equity. This is because funds collected through a syirkah contract do

not have to be returned to the investor if the Islamic bank as the fund manager experiences

business loss that is not caused by its negligience. Thus, the syirkah fund cannot be included

among the liabilities. On the other hand, this category also cannot be included in equity,

because the investors of a syirkah contract do not gain the right to vote on the direction of

the firm the way shareholders can.

Basic Concept of Investment Risk

In an Islamic bank, the investment activity can be:

1. investment in the capital market, or 2. investment through syirkah-based contract.

This definition of investment is wider in investment banks and venture capitals, but in a

commercial bank, syirkah-based contract is used in the asset and liability side, and direct

investment seldom occurs except in the form of financing

DISPLACED COMMERCIAL RISK Characteristics:

1. The condition where the bank experiences loss or loses profit in trying to retain

their depositor‘s funds. 2. Related with the movement of the benchmark return/interest rate, which will

affect the interest rate of other banks, thus affecting the Islamic bank‘s relative

competitive position. 3. Usually applicable only to country with dual banking system.

4. Depositors will relocate their funds to other banks due to the fluctuations in the

profit that they share caused by internal factors like the reduction in an Islamic

bank‘s asset value and/or other external factors like the rise in the return

offered by other banks. Changes in expected rate of return can trigger the

movement of funds into other banks

RATE OF RETURN RISK

Islamic banks use investment schemes in fund collection and sale financing (murabahah)

that is similar to credit (debt based) in channeling funds. Thus income from asset is constant

and periodical, while the amount of profit available for depositors is variable. If there is any

mismatch of liquidity, maturity as well as rate between the two sides, then the bank will be

exposed to rate-of-return risk.

Profit sharing and exposure to investment risk

Characteristics of Equity based investment:

(i) there is incentive for the capital owner to monitor the individual and company, (ii) risk sharing,and (iii) there is no absolute obligation to repay the investor when the firm encounters

difficulties, while repayment is unavoidable in debt, and the debtors inability

to pay the debt will end in insolvency.

Dari reputational risk dan operational risk bisa menjadi investment risk.

Faktor yang ada dalam masalah syirkah

(i) Investor‘s mindset (ii) Moral hazard due to asymetric information (iii) Monitoring and regulation

Investment risk in Mudharabah

Characteristics of mudharabah :

1. idiosyncratic uncertainty (risk),

2. extreme linearity of the profit 3. discretionary power of the entrepreneur. 4. In financing contract, mudharabah is a partnership contract between the bank as

investor/fund owner (shahibulmaal) and the debtor as the fund manager/entrepreneur

(mudharib) 5. No limit on investor number 6. Principal capital could only be gained when the fund is not eroded by losses. 7. Debtor not accounted to pay the principal (when losses) unless: (i) the debtor is

negligent in managing the funds, where indicators of this must be agreed upon at

the beginning of contract, and (ii) the debtor violates the mudharabah contract‘s

agreement.

Another characteristics

Calculation of profit-sharing cannot be based on :

(i) expected operating profits, (ii) principal capital invested in the debtor by the bank, or (iii) a fixed nominal.

• (1a) The bank channels Rp100 million as mudharabah capital. The

financing will end on 17/12/2012. The agreed-upon profit-sharing ratio

between the bank and the client is 40%:60%. • (1b) The debtor presents land certificate valued around Rp100 million as

collateral to the bank in case of negligence or fraud. The certificate is a

collateral, and this is one of the methods of risk mitigation.

• (2a) The debtor gains operating profit of Rp10 million and gives the bank its

share of profit (40% x Rp10 million = Rp4 million) along with the principal

capital (Rp100 million

operational risk is present due to the possibility of fraud as well as mistakes in decisionmaking.

• (2b) The bank returns the land certificate to the debtor.

• (3a) The debtor experiences a loss of Rp15 million due to force majeur.

Because of this, the bank bears the Rp15 million.

Investment risk occurs. • (3b) Bank returns the land certificate to the debtor. • (4a) The debtor experiences a loss of Rp80 million due to personal

negligence, the debtor allows and the bank has the right to liquidate

the collateral.

Fiduciary risk occurs. • (4b) and(4c) The bank retrieves its principal capital (Rp100 million) from

the liquidation proceeds and returns the rest to the debtor. • (4d) The debtor receives Rp25 million in excess of collateral liquidation

after returning the amount of the bank‘s mudharabah principal capital.

On the fund collecting side, mudharabah contract is used in unrestricted Profit

Sharing Investment Account (PSIA), also called mudharabahmutlaqah. The grey

highlight shows that PSIA is safeguarded by PER and IRR since it is of a higher priority,

though shareholder‘s equity is higher still than PSIA.

The isssue of moral hazard due to asymmetric information can be overcome since

theoretically the bank is involved in the project‘s management. Yet this does not mean that

the cost of monitoring and control is then reduced. Musyarakah also faces the same risk as

other syirkah-based contracts; it faces investment risk due to the return generated being

lower than what is expected.

Basel III Recognition of investment risk in syirkah-based contracts

Calculation of risk-weighted asset

• Basel III emphasis on: o Tier 1 capital, consisting of ordinary stock and retained earning

• Tier 2 capital that had been allowed to be 100% of Tier 1 is now limited to 50%

of Tier 1, while anything categorised as unrealised gain will be monitored. Tier 3

is completely removed.

The Impact

relative competitiveness of Islamic banks to conventional banks In islamic bank, CAR is still problematic due to PSIA categorization (trading

book or bank book)

PSIA cannot be considered as equity capital, Even though the PSIA‘s risk is not

borne by the bank but directly held by the account holder, the PSIA cannot be

included in equity capital.

The effect of including PSIA in the capital adequacy calculation is how it reduces α (alpha) of

Risk Weighted Asset (RWA) with unrestricted PSIA as part of the denominator, and adjusted

with the RWA from PER and IRR from investment account holder (that will reduce the risk for

the bank). IFSB allows the central bank or the banking authority in every country to determine α

depending on the stability of the nation‘s banking and finance system.

Countercyclical and capital conservation buffers

Basel III has 2 buffers to anticipate the occurrence of systemic risk, neither is part of Basel

II, and these are countercyclical buffer and capital conservation buffer. A buffer

(between 0% to 2.5%) for countercyclical buffer is applied on assets that are loss absorbing

capital (like common equity), depending on a country‘s condition. The purpose of this

buffer is to safeguard the banking sector from uncontrolled credit growth.

The volume of capital conservation buffer is 2.5% of RWA. This buffer should consist of

Tier 1 asset ir common stock, and if it is inadequate, the bank is not allowed to distribute

dividends, plan buybacks, or distribute bonuses, until the 7% ratio is fulfilled (4.5% common

equity and 3.5% capital conservation buffer). islamic bank should adjust both buffer because

of the PER and IRR.

Investment risk mitigation tools in syirkah contracts

Profit to equity issued

Supporting contracts: rahn, kafalah, tabarru’

Post profit sharing audit

Incentive compatible contract

There are several smoothing techniques explained in the technical guide to smoothing

published by the IFSB(2010), to reduce displaced commercial risk, among these are:

1.Allowing a part or the mudharib‘s entire share of profit to be given to PSIA account

holders.

With this method, Islamic financial institutions vary the percentage of profit that they receive as the mudharibin order to increase the share allocated to PSIA account holders. The mudharib’sprofit stated in the contract is the maximum amount the bank can receive, while the actual amount varies.

2. Partially transferring the shareholder‘s retained earnings.

With this method, the Islamic bank transfers its profit to PSIA account holders based on a gift contract (hibah). This activity should be done with the discretion of the shareholders, and my approving it, the shareholders accept the displaced risk the bank would prefer to avoid and it is borne by the shareholders.

3. Profit Equalization Reserve.

Profit should be set-aside in the reserve (PER) before it is distributed to PSIA account

holders and shareholders. This way, the size of PER will be inversely proportional to

the profit received by shareholders and PSIA investors, and since the mudharib’s

share of profit is residual from those of the PSIA investors, then the bank‘s share of

profit is also automatically reduced. What needs to be observed is that PER is usually

used to cover profit decrease for PSIA, but it can also be used to cover for potential

dividend reductions too. Thus PER can also be used to smooth dividend payout to

shareholders, if the management wishes. There are also intergenerational issues,

where the profit generated by investment at year t can be retained and used to cover

for decreased return at year t+1, while it isentirely probable for the investors in t+1 to

consist of different people from investors in t.

Strategic Risk Management

Pertemuan 4

Like all institutions, Islamic bank is constantly faced with competition, from the

beginning of its establishment and as the bank continues to be a going concern. To face

this, the bank requires a mature strategy, executed effectively, in order to survive the

competition and even emerge victorious.

Many institutions that had been historically profitable have had to be closed du e to

bankruptcy because the management was unable to maintain a workable level of profit for

the company.

In order to survive in the midst of a dynamic and competitive business environment, the Islamic bank should observe two important factors, which is:

1. Ideological factors and

Ideological factors determine how far the Islamic bank is committed in practising

various syariah principles in its operational activities. The farther an Islamic bank strays

from Islamic syariah, the less any blessing remains in the Islamic bank itself as it

approaches near indistinguishability from conventional banks.

The public will doubt of any excellence of the Islamic financial system since the

failed bank became an example of how an Islamic bank does not manage to survive in

competition. If the Islamic bank ignores the ideological aspect, then it may have been

able to survive for long periods in a business environment, but it will also have lost any

identity and blessing.

2. strategic factors.

Strategic factors will determine the Islamic bank‘s ability in interacting with their

competitor. Both factors must be fulfilled and balanced by the Islamic bank in a holistic

way. If the Islamic bank ignores the aspect of accuracy of strategy, then it can be assured

that the Islamic bank would not survive long and will be easily defeatable in business

competition by conventional banks.

Definition and Scope of Strategic Risk in Islamic Banking

Definition and Scope of Strategic Risk in Islamic Banking IFSB and Basel III states that

operational risk does not cover strategic risk and reputation risk, clearly separating

operational risk from the two of them.

In many literatures, strategic risk is stated as risk occurring due to inaccuracy in the

formulation or execution of a strategic decision as well as the failures in anticipating

changes in the business environment.

Strategic risk usually occurs from some of the following causes: the bank uses a strategy

that doesn‘t fit well with the bank‘s vision and mission, the bank fails to comprehensively

analyse the strategic environment, and/or there is a discrepancy in the strategic plans

between strategic levels.

Determinants of Strategic Risk and Its Mitigation

Changing business landscape

Entrance of new competitor

Many of those clients have migrated to them from bigger banks. The larger banks

have been slow to react after underestimating small banks. They now need to accept the

presence of a competitor they couldn‘t afford to ignore anymore. Time can make the

difference: the small competitor is not always unable to compete with larger rivals, and

there is no guarantee that customers will always be loyal to their first choice.

Risk of changes in business competition and its risk mitigation methods

o Emergence of new substitution product

Microfinance as the shadow banking

o Improper of strategy formulation

see table “Incorrect strategy formulation risk and its risk mitigation methods‖

o Innovation challenges

One of the larger changes in, SMS banking, mobile banking, and other

services. the banking industry is the birth of the ATM (automated teller machine). The

number of ATMs that a bank has (along with other accessibility factors like bank

location and number of branches) is also a key factor for consumers in choosing a

bank.

Not only ATM, other innovations that are also required by the customer

nowadays as part of good banking service includes other technological services like

non cashandcash deposits machine (CDM), e-banking services, which usually covers

internet banking, phone banking

Innovation challenges risk and its risk mitigation methods

Incorrect strategy formulation risk and its risk mitigation methods

Changes in the macroenvironment

In some countries, Islamic banks developed in a dual banking system, which is influenced by the macroeconomic conditions both directly and indirectly. Thus all changes in the macro economy, whether in macroeconomic indicators, government and banking authority policies, as well as the beginnings of regional cooperation agreements (AEC, APEC, AFTA, etc) will also affect the strategy that must be prepared by the Islamic bank.

Changes of stakeholder behavior

Various changes in the worldalso influences the behaviour of the bank‘s various stakeholders, like clients, suppliers, stockholders and employees. Clients that at the beginning have been loyal even when experiencing long service time and brusque treatment no longer regard that as acceptable. Suppliers, that previously are able to

wait on delayed-payments, now have their own policies on collecting and prefer

on abandoning customers that are difficult to work with.

Shareholders are also the same, requiring rate of returns that are more and more competitive and compatible with their increasing targets. Employees are also more aware that they are the key to a bank‘s successes, and expect competitive remuneration and good treatment from their employing bank. If not, the threat of their alternative choice is clear, it is better for them to resign and work for a more ‗caring‘ institution.

Issues Related to Strategic Risk

Unhealthy competition among Islamic banks

Synergies between Islamic financial institutions versus systemic risk

Specialisation between Islamic banks

Reputational risk on Islamic bank

Introduction to Stress Testing in Banking

Pertemuan 5

Stress testing is a risk management technique used to evaluate the potential effects on an

institution‘s financial condition, of a set of specified changes in risk factors, corresponding

to exceptional but plausible events. Stress testing includes scenario testing and sensitivity

testing.

Scenario testing uses a hypothetical future state of the world to define changes in risk

factors affecting an institution‘s operations. This will normally involve changes in a number

of risk factors, as well as ripple effects that are other impacts that follow logically from

these changes and related management and regulatory actions. Scenario testing is typically

conducted over the time horizon appropriate for the business and risks being tested.

Sensitivity testing typically involves an incremental change in a risk factor (or a limited

number of risk factors). It is typically conducted over a shorter time horizon, for example an

instantaneous shock. Sensitivity testing requires fewer resources than scenario testing and

can be used as a simpler technique for assessing the impact of a change in risks when a quick

response or when more frequent results are needed.

Purposes

1. Risk identification and control – Stress testing should be included in an institution‘s

risk management activities at various levels, for example, ranging from risk

mitigation policies at a detailed or portfolio level to adjusting the institution‘s

business strategy. In particular, it should be used to address institution-wide risks, and

consider the concentrations and interactions between risks in stress environments that

might otherwise be overlooked.

2. Providing a complementary risk perspective to other risk management tools –

Stress tests should complement risk quantification methodologies that are based on

complex, quantitative models using backward looking data and estimated statistical

relationships. In particular, stress testing outcomes for a particular portfolio can

provide insights about the validity of statistical models at high confidence intervals,

for example those used to determine VaR.

3. Supporting capital management – Stress testing should form an integral part of

institutions‘ internal capital management where rigorous, forward-looking stress

testing can identify severe events, including a series of compounding events, or

changes in market conditions that could adversely impact the institution

4. Improving liquidity management – Stress testing should be a central tool in

identifying, measuring and controlling funding liquidity risks, in particular for

assessing the institution‘s liquidity profile and the adequacy of liquidity buffers

in case of both institution-specific and market-wide stress events.

Stress tests help financial institutions to:

overcome the shortfall of VAR models (as they deal with tail events neglected by

many such models)

communicate extreme scenarios throughout the institution, thereby enabling

management to take the necessary precautions (limit systems, additional capital,

and so on) manage risk better in more volatile and less liquid markets

bear in mind, during less volatile periods, that the probability of disastrous

events occurring should not be neglected

General consideration of stress testing

o Stress testing programs should take account of views from across the organisation and

should cover a range of perspectives and techniques

o Institutions should have written policies and procedures governing the stress testing

program. The operation of the program should be appropriately documented.

o An institution should have a suitably robust infrastructure in place, which is

sufficiently flexible to accommodate different and possibly changing stress tests at an

appropriate level of granularity.

o An institution should regularly maintain and update its stress testing framework.

The effectiveness of the stress testing program, as well as the robustness of

individual components, should be assessed regularly and independently

Methodology and Scenario Selection

Stress tests should cover a range of risks and business areas, as well as at the institution-wide level. An institution should be able to integrate effectively, in a meaningful fashion, across the range of its stress testing activities to deliver a complete picture of institution-wide risk.

Risks included:

credit risk, including counterparty and reinsurance risk

market risk, e.g., general market, specific, cash flow mismatch, interest rate, foreign exchange, commodity

insurance risk, e.g.,, liquidity risk, operational and legal risk, concentration risk, contagion risk, risk to reputation , securitization risk , new business risk, regulatory risk , inflation risk

The following risks have proven to require specific attention in light of experience of

financial market turmoil: Risk Mitigation, Securitization and Warehousing Risks, Risks

to Reputation, Counterparty Credit Risk ,Risk Concentrations

Risk concentrations may arise along different dimensions: single name

concentrations, concentrations in regions or industries, concentrations in single risk

factors, concentrations in indirect exposures via posted collateral or hedge positions,

concentrations in off-balance sheet exposure, contingent exposure or non-

contractual obligations by reputational reasons

Types of stress testing

Single Factor

sometimes referred to as sensitivity testing. Single-factor stress testing involves

applying a shift to a specific risk factor affecting a portfolio .

Risk factors commonly used in sensitivity testing include changes in interest rates,

equity prices and exchange rates.

Standardised single factor shocks

Standardised single-factor shocks have been issued by several organizations, the most prominent of which is probably the Derivatives Policy Group (DPG).

The standardized movements in the risk factors suggested by the DPG include:

o A parallel shift in the yield curve of 100 basis points up and down

o Yield curve steepening/flattening by 25 basis points

o Stock index changes of 10% up and down

o Movements of 6% up and down in major currencies (20% for other

currencies) relative to the US dollar

Multiple Factor

Many financial institutions run stress test scenarios in addition to sensitivity tests. Scenario

analysis involves applying simultaneous moves in multiple risk factors such as interest rates,

exchange rates and stock prices, to a portfolio.

Historical or Hypothetical

Historical scenario testing involves revaluing a portfolio using values for the risk factors

that existed during historical stress events.

Hypothetical scenarios can be used when:

o no historical stress event is suitable for the portfolio in question o risk managers want to stress test new or different combinations of risk factors o

hypothetical scenarios can be created by imagining extreme, but plausible, events that have not yet happened.

o Such scenarios may build upon, or expand, historical scenarios

One of the most popular methods of creating hypothetical scenarios is to combine worst-case

movements in the risk factors. Unfortunately, the worst-case scenario method can also create

implausible scenarios as it ignores any correlation between the different risk factors. It is

more useful to construct scenarios that reflect the combined effects of multiple risk factors

and therefore incorporate possible correlation among the risk factors in times of stress.

Types of Stress Testing by aggregation; Individual exposures, Individual institutions,

System-wide: on bank by bank* data (―bottom up‖) and on aggregate data (―top down‖)

Types of Stress Testing by methodology; Sensitivity analysis, Scenario analysis, Contagion

analysis

Subjective Shocks

Rather then use standardized changes in the risk factors, many banks choose to run

sensitivity tests based on their own subjective opinion of a relevant risk factor shock and its

magnitude. As this is an entirely subjective approach, it depends critically on the ability of

individual risk managers to choose risk factor shocks and magnitudes that are both plausible

and relevant to their portfolio.

Conducting stress tests

Once a set of scenarios has been developed, the next step is to analyze the effect of each scenario on the value of the portfolio.

This can sometimes be done in the same way as a simulation to calculate VAR.

Stress tests can be run by inputting the stressed values of the risk factors into VAR

models and recalculating the portfolio value using the new data.

Methodology of stress testing

using Extremme Value Theory

Extreme value theory (EVT) is a branch of statistics dealing with extreme deviations from

the mean of statistical distributions. In other words, it is the study of the tails of distributions

Focus on extreme tail behavior is important because it has been shown that actual return

distributions display a higher probability for extreme events (fat tails). The key aspect of

EVT is the extreme value theorem.

Given certain conditions, the distribution of extreme returns in large samples converges to a

particular known form, whatever the initial or parent distribution of the returns. The theorem

tells us what the distribution of extreme values should look like in the limit, as the sample

size increases.

This distribution is characterized by three parameters: o location (corresponds to the mean)

o scale (corresponds to the standard deviation)

o shape (or tail)

The tail parameter (or tail index) defines the specific distribution to be used and is the most

important as it gives an indication of the heaviness or fatness of the tails of the distribution.

Extreme Value Distributions

Suppose we have a sample of return observations from some unknown distribution. Then,

using extreme value theory, we can say that for a large class of underlying distributions,

the distribution of excess returns x converges to a Generalized Pareto distribution (GPD) as

the threshold u is progressively raised. A GPD is a distribution that models the excess

losses above a threshold

How Useful is EVT?

Parametric VAR models work by fitting a certain distribution (usually normal) to observed return data. However, because most observations lie close to the center of any empirical distribution, these approaches tend to fit curves that accommodate these central observations. For the purposes of VAR, however, it is the observations in the tail of a distribution that are the most important.

The EV approach, on the other hand, is specifically designed for tail behavior and is therefore free of these problems.The EV approach to value at risk calculation is very useful because it does not make very strong assumptions about the shape of this unknown distribution.

Mechanical of stress testing

Selected Methodological Issues

1. Selecting macroeconomic scenarios 2. Foreign exchange (FX) risk 3. Interest rate risk 4. Credit risk 5. Interbank contagion risk 6. Liquidity risk 7. Equity price & real estate price risk

Macro Scenarios for Stress Tests

Historical scenarios

e.g. the 1997 turbulence and subsequent slowdown in East Asia. Hypothetical scenarios

recognizing the limitations of macro models, especially for large shocks, would it be

possible to use the central bank‘s existing macro model?

Stochastic simulations based on the model?

o Scenario design: relative sizes of shocks to the risk

factors o Assessing likelihood of the scenarios

Interest Rate Risk

Duration is the key indicator, because

This allows to express changes in capital adequacy ratio as

where

Interest rate risk-issues

Adequacy of the available data, including

o Do banks report residual maturity properly?

o Does the indicator capture the whole balance sheet?

o Are off-balance sheet contracts included? Simplified method: residual maturity plus weigths proposed by Basel Committee

Nonlinearity (duration changes with large changes in interest rates)

NPV may differ from the regulatory capital

Correlation between risk-weighted assets and assets

Indirect interest rate risk (see under credit risk)

Credit Risk Modeling

The most significant source of risk. Also, the most in need of strengthening

1. Mechanical approaches o Assume an inflow of new NPLs. Function of existing NPLs, performing loans,

or a weighted sum of the two

o Assume ↑ provisions on existing NPLs; Increase in provisioning rate,

Credit migration within NPLs (―transition matrix‖) o Credit expansion model: inflow of new loans, followed by credit migration to

and within NPLs

o Do the above by sectors (e.g. corporate & household)

2. Approaches based on corporate sector data (leverage, interest coverage)

& possibly household sector data Logit model predicting individual bankruptcy probabilities as a function of age,

size, industry characteristics & corporate soundness indicators (earnings, liquidity, financial strength)

Include interest and exchange rates on the right hand side (to capture the indirect risk)

Link to individual banks through their exposures to the various groups of companies

Predict bank potential losses (also taking into account collateral)

3. Approaches based on loan performance data (including the VAR model already

estimated) Advantages are available for household sector (with rapid lending growth in many countries) and Should be more readily available than leverage and Disadvantage is

Lagging indicators of asset quality Introducing Contagion Risk

Need to compile data for the following matrix

Exposure = all uncollateralized lending (including both on- & off-balance sheet exposures)

Currently, only data on total exposure of a bank to interbank market are available

Two types of the contagion stress test

o “Pure” contagion test: A ―fraud‖ in a bank; impact on other banks through

interbank exposures

o “Macro” contagion test: Macro shocks are grossed-up to trigger failure of

weakest bank; followed by interbank contagion

Implementation (example for 4 banks)

E11 E12 E13 E14

E21 E22 E23 E24

E31 E32 E33 E34

E41 E42 E43 E44

Si‘ = (Ci-E1i)/(Ai-Ei1), where i=2, 3, and 4.

Capital adequacy

ratio Pi

CAR>=10 0.02

9=<CAR<10 0.05

8=<CAR<9

2

6=<CAR<8

25

4=<CAR<6 50

CAR<4 100

estimate as a part of the EWS model

S2‘‘=(C2-E12-P3*E32-P4*E42)/(A2-E21-P3*E23-P4*E24)

S3‘‘=(C3-E13-P2*E23-P4*E43)/(A3-E31-P2*E32-P4*E34)

S4‘‘=(C4-E14-P2*E24-P3*E34)/(A4-E41-P2*E42-P3*E43)

Aggregate stress test vs. interbank contagion stress test

Impact on Aggregate each Failure of Matrix of

stress test bank’s individual interbank

shock capital banks exposures

ratio

Aggregate Second round impacts for bank failures

stress test triggered by

output contagion

Equity & Real Estate Price Risk

Equity price risk—similar to FX risk o Net open positions in equities

o Need to include off-balance sheet exposures

Banks’ exposure to real estate price risk

Direct exposure (investment in real estate)

Credit exposure (developers etc.)

Degree of real estate collateralization

o loan to value ratio o default probability (from credit risk stress test)

Concentration Risks (Credit)

Simple example: sensitivity analysis for large exposures

More sophisticated example

Run regressions for default probability on corporate data (company-by-company), with dummy variables for the sectors/regions

Ways to define default probability (actual default—run a logit regression; or set a threshold for interest coverage ratio)

For a set of a bank‘s exposures to sectors/regions, calculate implied default probability

Liquidity Risk

Focus on bank liquidity stress tests

Results reported off-site, validate during on-site visits

Off-site cross-check (sensitivity analysis)

o Overall risk: assume a % of deposits withdrawn (percentages determined based on past bank runs, vary for different maturities)

o Concentration risk in deposits (same as above, but for a percentage of the largest

deposits)

Pathways of Risk Management in Islamic Banks

Pertemuan 6

Islamic Banks as A Real Implementation of Risk Management

Current innovations in financial products (financial engineering) leads to :

1. To gain short-term profits and market share, 2. Tendency for excessive leverage 3. Based upon speculation, 4. Excessive risk-taking, and 5. Tendency to gamble on future market price movements of the underlying assets. 6. Market prices of these assets did not reflect the actual productivity of the economy,

but: a. the result of information distortion through rumors, b. the subjective perception of market actors, c. misleading signals about the state of the real economy.

Financial market capitalization grew higher than value of the real economy created

a market bubble. In banking it is called => credit multiplier effect

These practices thrived in an environment of incomplete information, bolstered by

moral hazard and bankers‘ excessive risk-taking behavior, without the counterbalancing

influence of sound risk management practices, diversification strategies, and risk-

hedging activities.

Islamic banks offer a different approach that eliminates:

1. interest, 2. speculative activities 3. excessive risk-taking (gharar), 4. gambling (maysir), 5. various unwarranted risk.

The persistence in preserving these unique features contributes towards Islamic banks‘

resilience in the face of the global economic crisis, and helps to improve the stability of

both domestic and global economic systems.

The sharing of investment profits and losses improves the bank’s stability.

1. Investment depositors are treated as investors (quasi-equity holder) who

share both profits and risks with the bank. 2. In an unrestricted mudharabah, the bank only shares profits while any losses

would be absorbed by the investment account holder.

The sharing of investment profits and losses improves the bank‘s stability.

If the bank turns negligent for any reason whatsoever, it stands to suffer from a whole

variety of risks such as reinvestment risk, rate of return risk, displaced commercial

risk, reputation risk, and fiduciary risk.

Islamic banks are also forbidden from engaging in interest-based finance and the

trading of debts in the secondary market, while their financing activities are limited to

contracts that can be directly tied to real assets.

The conventional finance industry sees the Islamic financial industry (and its

Islamic banking powerhouses) as being rather inflexible and even unproductive.

Factors that impending speculative behavior in Islamic bank:

1. The execution of financial activities without interest, 2. the requirement for financial transactions to be linked to real assets or

investments, 3. the need for sellers to physically acquire assets before selling them, 4. and the prohibition upon the trading of debts

Why? Because it means any parties in any given transaction to bear the risks

that arise from their activities.

Sharia compliance implementation :

1. it prevents the ingress of prohibited elements (interest and uncertainty) 2. providing a weighted evaluation for each activity proposal according to

the potential maslahat (benefits), ethics, and transparency.

Challenges to Islamic Banking

1. Strong influence of the conventional financial industry upon its internal

performance, especially with regards to market risks and interest-based monetary policies. 2. Moral hazard: trustworthy and trusty

1. Islam holds that any lateness in the repayment of a debt or the sharing of profits

should not be liable to a fine or penalty. 2. banking fines and penalties cannot be accounted as sources of income for the bank. 3. difficulty in distinguishing between debtors in genuine trouble (who deserve a debt

restructurization or some extra time for the repayment of their debts) and those acting

with malicious intent 4. social sanctions can be an acceptable solution. Community Collateral: The loan is

given out collectively, and any nonperforming debtor would be bailed out by the other

members of the micro financing group, with the informal consequence that the group

will no longer trust the nonperforming individual in the future

5. Using conventional measures: a. collaterals, b. third-party guarantor and c. periodic

audits. Strong influence of the conventional financial industry

3 Absence of judicial- and super-regulatory institutes: a. Systemic risk in Islamic bank due to few bad apples b. There is a number of cases that have invited controversy throughout the global

Islamic banking industry, such as the use of bai‘ al-inah and tawwaruq.

Blueprint for Islamic Banking Regulation

a. Strengthening the regulatory and supervisory framework

b. The anticipation of systemic risk through Basel III

BCBS devised a global financial reform package meant to:

1. improve the banking sector‘s ability to absorb the impact of economic and

financial crises,

2. improve management and governance practices and enhance transparency and

disclosures in the banking sector, and 3. strengthen resolutions for banks with systemic and/or multinational

operations.

Like Basel III, the current IFSB focuses on the macroeconomic and micro prudential

treatment of potential systemic risks.

c. Issues related to future regulations

Multi license system:

1. the restructurization of bank capital, 2. the regulation of governance through limits on ownership shares, 3. better approval processes for banking products and activities.

If a bank wishes to obtain the license to undertake activities in a higher-risk category,

the bank must upgrade its license by fulfilling a number of requirements such as better debt-

to-equity ratios and capital adequacy ratios. The bank must also obtain licenses for additional

products and investments, such as in the case of a commercial bank that wishes to expand

into investment banking or open a new branch office.

d. Pathway for Islamic banking regulations and its future improvements

reinforcement of Islamic banks‘ intermediation function for the real and productive

economic sector

Islamic banks working under a ―co-opetition‖ strategy must contribute towards

the development of an institutional infrastructure for Islamic businesses.

Islamic banks should continue to improve their governance and risk management

systems. regulators should reinforce their monitoring and oversight systems.

Potentials and Challenges to the Growth of Islamic Banks

a. New paradigms in the development of Islamic banking

1. bancassurance: to achieve the goal of financial inclusion This product shifts the

bank‘s activities into takaful territory, even though technically bancassurance

products are still provided by takaful firms and the bank is only involved with

their distribution.

2. The potential for the securitization of financing assets in Islamic banking

is inherent in such products as real estate sukuk (istisna’), salam sukuk in the

agricultural sector, and the like.

b. The scope of risks faced by Islamic banks

c. From Profit Sharing towards Risk Sharing

d. Islamic product engineering in Islamic banks

Strategic Issues in the Implementation of Risk Management by Islamic Banks

Synergy between financial services institutions

o Standardization regulatory and supervisory

framework o Strengthening sharia board‘s supervisory

framework o Conducting the Islamic ethical business o Determinants of financial crises