Beruflich Dokumente
Kultur Dokumente
BANKS IN PAKISTAN
TABLE OF CONTENT
Contents
ABSTRACT........................................................................................................................1
Acknowledgments..............................................................................................................2
Chapter 1: Introduction......................................................................................................3
Background........................................................................................................................3
Research Statement..........................................................................................................5
Purpose of study................................................................................................................5
Objective............................................................................................................................5
Significance of the study....................................................................................................5
Chapter 2: Literature review..............................................................................................6
Risks Management in conventional banks........................................................................6
Risks Management in Islamic bank...................................................................................9
Risks Management comparison of Islamic and conventional banks...............................12
Chapter 3: Methodology..................................................................................................15
Methodology....................................................................................................................15
Sample selection.............................................................................................................15
Data collection and Questionnaire...................................................................................16
Data analysis...................................................................................................................16
Reliability of the measures..............................................................................................17
Chapter 4: Analysis..........................................................................................................18
Awareness of the Risk managers about various type of Risk of the Bank along with
measurement level..........................................................................................................18
Awareness of the different type of the risk identification technique plus it measurement
level..................................................................................................................................23
Exercise of different risks management technique and the frequency of the uses.........26
Awareness regarding risk mitigation approaches & acceptances level..........................29
Awareness of risk mitigation techniques & measurement...............................................31
Attitude of management towards risk management practices........................................33
Conclusion.......................................................................................................................35
References.......................................................................................................................36
Annexure - Questionnaire................................................................................................39
ABSTRACT
The study was conduct to find out the comparison of Risk management
practices of Islamic and conventional banks operating in Islamic Republic of
Pakistan. Close ended questioner is used for data collection which covers the
following aspects; awareness and measurement level of risk and risk
identification techniques, risk mitigation approaches, and risk mitigation
techniques, use of risk management techniques and management attitude
toward practices regarding risk management. Data is collected from ten
banks and one respondent from the risk management department from each
of the selected banks. Frequency tabulation is use for the analysis and
Cronbachs alpha is use for reliability of the collected data. Finding of the
study was that there is difference between the two banking system
awareness regarding different kind of risk, risk identification techniques and
risk mitigation techniques and approaches. Islamic banks are less aware as
compared to conventional banks. And difference found in the use of
mitigation techniques also. Islamic banks use only traditional techniques and
conventional banks use advance techniques beside the use of traditional
techniques. Islamic banks staff are not that much qualified like conventional
banks. The research is beneficial for fund manager, depositor and especially
for Islamic banks.
Acknowledgments
All praise is due to Almighty ALLAH, the most merciful and the most
beneficent, WHO bestowed upon us health, power of communication and
opportunity to successfully complete our undergraduate studies. Countless
salutation is upon the Holy Prophet Hazrat Muhammad (Peace Be upon
Him), the most perfect and torch of guidance and knowledge for humanity as
a whole.
We feel honored to express our sincere gratitude to Mr. Muhammad Kamran
for his supervision, guidance and encouragement throughout this research.
We always found him very much alive, full of zeal, vitality and intellectual
curiosity. Without his ideas, remarks and endless interest this work could not
have been carried out and completed.
CHAPTER 1: INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Risk management is one of the building blocks for banking sector. Now a
days all the banks are facing different kind of risk because of the volatility in
the environment such as liquidity risk, credit, market, interest rate and
foreign exchange risk so such kind of risks create difficulties in the successes
and
survival of the
survey suggests that forty % of the respondent are knew that significance of
risk management is commonly understood throughout their organization and
suggestion was to build and improve the culture of the risk management.
The effect of 2008 financial crisis was on both financial and non-financial
sector and because of this every organization want to increase risk
management practices. Initially financial organization meet regulatory
requirement for risk measurement and they were wrong to think meeting
regulatory requirement is the only solution for risk management. In the
practices
of
risk
management
there
are
mainly
three
aspects
risk
identification; risk measurement and mitigation of the risk. All these aspects
are different in interest based banking system and interest free banking
system. Because of one system is totally dependent on interest and other
one is totally independent. In interest free economic system the concept of
risk is also different. Risk is viewed from 2 dimensions. Gharar (uncertainty)
is prohibited and there will be freedom in contract. In interest based
economic system there are no restrictions. And depositors are also not bound
to share the risk on the other side the profit and loss will be share which
mean share the risk.
investigated throughout the world but in the emerging banking sector like in
Islamic bank system is very small or approximately zero. In Islamic Republic
of Pakistan Islamic banking is also important part of the economy and also in
the development stage. Therefore the researcher needs to find out the gap
between both the Islamic and non-Islamic system operating in Islamic
republic of Pakistan in term of risk management practices.
1.1 RESEARCH STATEMENT
To investigate Comparison of Risk Management Practices between Islamic
and conventional Banks in Pakistan.
stage
inefficiency, market power, capital ratio and net interest margin are variables
that clarify credit risk. Suggestions are bound to increase essential bank
administrative policy issue. Exercise of bank level variables such as before
time notice indicators and the role of bank competition and personal
responsibility in determining credit risk.
Linbon (2004) conducted a study on risk versus efficiency in large banks of
United states of America. He says that bank efficiency depends on profit
creation and its relationship with risk of those banks. He found that
profitability of a bank is responsive to credit risk along with solvency risk and
not responsive to liquidity risk and with the investment.
Ham(2004) has conducted study on exchange risk and interest rate of Korea.
He found that most of the Korea commercial Banks are facing both exchange
rate and interest rate risk. He also shows that credit policy and the degree of
interest rate are the factors, which are extensively linked by the efficiency of
Korean Banks. The outcomes showed that improvement in financial
management and risk management practices are very important in support
of booming liberalization.
Ninimaki(2004) mentioned in his article that the attitude of the investor to
risk depending on the structure of the bank in term of risk management. He
also found that if the banks are competing in loan market only than the
deposit insurance effect on risk will be zero. On the other side, deposit
insurance increases risk taking if Banks are competing for deposits only.
Otherwise, the banks will pay them high deposit rates.
Wetmore(2004) checked out the relationship between loan-to-deposits ratio
and liquidity risk of a large commercial bank. He found from his study that
LTD ratio had maximized over the period studied, because of changes in
asset-liability management practices. And concludes that from his study that
there is always positive relation between loan-to-deposit and market risk
findings of the study were three kinds of risks faced by the United Arab
Emirate commercial banks, which were operating risk, credit risk, and mostly
Foreign Exchange risk. In terms of efficiency United Arab Emirate banks is
very efficient in managing risk, and risk identification and risk assessment
and analysis are the most influencing variables in risk management
practices. Result showed that there is a significant difference between the
practices of risk management of United Arab Emirate Foreign and National
Banks.
Shafiq & Nasr ( 2010 ) examine the study about risk management practices
of commercial banks of Pakistan. They found that there is a general
understanding of risk management and risks of employees in the unit for risk
management of commercial banks in Pakistan. The study shows that the
majority of the daily work they do are risky by nature. The main types of
risks: Foreign exchange, interest rate, operational, liquidity and credit risk.
The foreign exchange risk is essential because Pakistan is part of the global
market and spills of international financial crises, such as currency
fluctuations and inflation affect Pakistan banks drastically. Each of the
independent variable individually regressed dependent on RMP show
encouraging results.
Risks Management in Islamic bank
Literature suggested that different methods of risk management in financial
institutions are the need of the time, shortly after the financial crisis of the
world in the last decade faced. Especially the United States require a lot of
time to restore their economies with serious regulatory changes. Many
analysts after the crisis, differences in relation to the identification and
management of risks in various banks and financial institutions and
organization before and during the crisis, which was a self-destructive
thoughts that such a loss for the world economy
11
Risk Management defined the need to identify the important risks, the
method of measuring the risk of the development of consistent and accurate,
better the importance of risk reduction, prevention, and transfer through the
calculation of risk-weighted return and appropriate control procedures risk
situation of the company. For banks, the regulatory response is not essential
to avoid bankruptcy or financial harassment. Bank staff requires reliable
identification, risk measurement and management, pursue cultural and
monitor the best risk-reward ratio.
In Islamic theory, the term risk is also common. To understand this concept
of Islamic standpoint, we need to pull together the two dimensions of risktaking
without
any
permission
and
information
of
contract
without
community prohibit us clearly from gambling, as shown in these verses (AlBaqara, verse 219 Sura Al-Ma'ida verse 90) gambling or game of chance
referred to inArabic as maysir.
Alielgari ( 2003) argues that the concept of risk of a jurist in their studies of
the theory identified the Contract has nothing to do with the concept known
to risk in modern financial Studies. This distinction is important, because
when lawyers refer to some "at risk" Contracts and make the viewpoint
Shariah perspective unacceptable, some Practitioners of Islamic finance as a
reference to the risk in the jargon of the financial world. That is not true. We
should take great advances in study of risk and technical risk management in
the financial sector. In this study, he concluded that However, we have our
own Theory that relates the unique concept of risk from an Islamic
perspective.
Ahmed, Ahmed, & Naqvi, (2011) conducted a study on liquidity risk of Islamic
bank. Banks as intermediary try to manage the supply and demand of
liquidity for making good relation with stakeholder and run the business
activity safely. This study aims to examine the determinants of firms level
risk liquid listed Islamic banks in Pakistan. To this end, the liquidity risk is
being used as the dependent variable, while the age, profitability, leverage,
tangibility of assets, and size are used as independent variables. The results
show that age, leverage and profitability are the important factors to the
liquidity risk of Islamic banks are to be defined in Pakistan, while liquidity risk
has statistically insignificant relationship with size and profitability of Islamic
banks in Pakistan.
Hassan (2009) conducted a study on risk management practice of Brunei
Darussalam and the aim of this study was to determine the extent to which
Islamic banks of Darussalam use practices for risk management (RMP) and
techniques with different types of risk. This study found that the three main
types of risks that Islamic banks Brunei Darussalam face are foreign
exchange risk, operating risk and credit risk. It also found that Islamic banks
13
are very efficient in managing risk where RAA and RI are the most influencing
variables in RMPs. The results show evidence of efficiency in the treatment of
credit risk Islamic banking system in Brunei Darussalam.
Khalid & Amjad (2012) conduct the study about the practice of risk
management and techniques deal with different kind of risk in interest free
banks of Pakistan. Standardized questionnaire is used covers six aspects
which are understand risk and risk management; credit risk analysis; risk
assessment and analysis; risk management practices; risk monitoring and
risk identification. According to conclusion of the study, interest free banks in
Pakistan
are
efficient
in
managing
risk
where
understanding
risk
management, risk management and credit risk management are the most
influencing variable in risk management practices of Islamic banks in
Pakistan.
study about
liquidty risk management of both the convetional and islamic banks. The
objective of the study was that the liquidty risk associated with solvency of
Banks for the purpose of to find out the management of liquidty risk via
compartive analysis of interest based banks and interest free banks.This
article describes the significance of theReturn on Assets (ROA), Capital
Adequacy, Networking capital , Return on Equity and Size of the firm with the
management of liquidity risks in interest based and interest free banks in
pakistan. Four year of Secondary data is used in this study, i.e 2006-2009. In
both model the study had given positive but insignificant relationship of networking capital to net assets & size of the banks with risk of liquidity. In
addition, capital adequacy ratio in interest based banks is found to be
positive and significant at 10% significance level on the other side return on
assets in interest free banks is found to be positive& significant at 10%
significance level.
14
the Islamic banks have been differently affected than conventional bank.
Factors associated with Islamic banks business model has "helped. Negative
impact on profitability in 2008, while weaknesses in risk management
practices in some Islamic banks led to a larger decline in profitability in 2009
compared with conventional banks.
Hussain & Al-Ajmi (2012) argued in the study of risk management practices
of the interest based and interest free banking systems in Bahrain. The
reason of this paper was to give experimental support for risk management
Practices of banks operating in Bahrain. Banks working inside Bahrain are
found to have a very plain understanding of risks and risk management, and
the classification of appropriate risk assessment, risk analysis and risk
management. For the control of risk they have credit scrutiny and practices
regarding risk management. In addition, they proved that credit, liquidity and
operational risks they have different approaches to the main risks for nonIslamic and Islamic banks. Additionally, risk management practices by the
degree to which managers are implicit to be determined risks and risk
15
study on practices
Chapter 3: Methodology
Methodology
There are five private conventional and five Islamic banks are selected for
data collection. Now days there are only five full-fledged Islamic banks
operating in Pakistan so thats why the study select five private conventional
banks out of 17 for maintaining the balance between both of them.
Sample selection
There are 17 privates conventional banks are operating in Pakistan and for
the study take as sample five conventional Banks of 17 banks and in Pakistan
16
only five full-fledge Islamic banks are operating in Pakistan For comparison of
risk management practices five full-fledge Islamic banks are selected and for
keeping the balance five conventional are also selected and that selection of
conventional was based on random sampling method. Only privates banks
are selected because full fledge Islamic public banks are not yet establish in
Islamic Republic of Pakistan.
The selected five full-fledged Islamic Privates banks are;
1 Meezan Bank,
2 BankIslami Bank.
3 Dubai Islamic Bank
4 Dawood Islamic Bank
5
risk
identification;
risk
assessment
and
analysis;
risk
17
management activity from each of the selected bank is required for data
collection.
Data analysis
Cronbachs alpha is used for evaluating reliability through this deviation will
be measured of the answers of respondents within a scale. Use of frequency
table is very common beside the frequency table correlation analysis is also
part of the analysis of the study.
Reliability of the measures
For measuring the internal consistency of the question the researcher need
Cronbachs Alpha. With the use of Cronbachs Alpha measuring of error is not
a difficult task actually Cronbachs Alpha is simply coefficient of reliability, (or
consistency) it is not a statistical test. Coefficient greater or equivalent to
(0.7) is up to standard (Nunnally, 1978). The questionnaire consists of 103
questions and the reliability among them is (.736) which is good result mean
acceptable
Reliability Statistics
Cronbach's Alpha
N of Items
.736
103
18
Chapter 4: Analysis
The outputs of the questionnaires are sub sectioned in the following heading
Awareness of the Risk managers about various type of Risk of the
Bank along with measurement level
Table 1 communicate that there are little differences between the two set
of the banks as regards the understanding of different types of risks. There is
same awareness of Investment/Credit, Operational/ Performance, Liquidity,
Environmental and Rate of Return Risks but regarding other type o risk like
interest rate , sharia noncompliance risk and price risk there is huge
difference between the two different banking system awareness and also
little bit difference exist in foreign exchange risk. These results are almost
same like the pervious study Huq, Azad, & Rahman,
19
Risk Techniques
Islamic Banks
Conventional Banks
5
5
0
4
100
100
0
80
5
5
5
5
Operational 5
100
Risk
Performance/
Risk
Environmental Risk
5
Rate of Return Risk
5
Sharia non-compliance Risk
5
Price risk
1
Type of Highly
Only
Risk
Aware
Neutral
100
100
100
20
Unaware Not at all
5
5
1
5
aware
Aware
Islami
convention Islami
convention Islami
convention
Islami
con
al
al
al
al
100
Investment
Risk
Liquidity
80
100
20
Risk
Interest
100
20
Rate Risk
Foreign
20
100
Performance 60
100
60
20
Exchange/
Currency
Risk
/
Operational
20
20
20
Risk
Environment 40
100
40
al Risk
Rate
of 40
40
Return Risk
Shari'a non- 100
20
compliance
Risk
Price risk
100
21
20
Only
Neutral
Risk
Concerned
Concerned
Isla
conve
Isla
conve
Isla
mi
ntiona
mi
ntiona
Credit
10
100
Risk/
20
20
Invest
ment
Risk
Liquidit 80
22
80
Not
Not
at
all
Concerned
Concerned
conve
Isla
conve
Isla
conve
mi
ntiona
mi
ntiona
mi
ntiona
y Risk
Interes
t
100
10
Rate
Risk
Foreign
20
40
60
80
20
80
Exchan
ge/
Curren
cy Risk
Perfor
mance
/
Operat
ional
Risk
Enviro
60
20
20
80
Rate of 60
20
20
60
20
nment
al Risk
20
20
Return
Risk
Shari'a
10
non-
compli
ance
Risk
Price
risk
23
40
60
20
60
20
100
Risk Techniques
Inspection
by
Islamic banks
the 5
Conventional Banks
100
100
100
100
100
100
statement 5
analysis
Risk survey
40
20
Process analysis
20
100
SWOT analysis
80
100
Inspection
by 2
40
100
outside expert
24
Benchmarking
Scenario analysis
Internal
20
20
80
100
40
80
communication
According to the result of table 3.2 there is difference between the levels of
awareness regarding identification methods. There is similarity somehow like
both sets of banks are highly aware about the mention identification
techniques like check up by the risk manager, FSA and substantial inspection
or audit. Regarding remaining techniques of risk identification majority of the
respondents in interest bases banking systems are highly aware as
compared to interest free banking system like SWOT analysis 60 % of
respondents are highly aware in conventional and on the other side only 40
% are highly aware so same difference exist in the remaining techniques
also. Results are almost same like the pervious study by Huq, Azad, &
Rahman, (2010). So with respect of all these result so our 2 nd hypothesis is
also proved.
H2 There is a variation between the interests based and interest free banks
in the practices of risk identification.
Neutral
Unaware
Aware
by
25
Not
at
all
aware
Isla conve
Isla conve
mi
ntiona
mi
ntiona mi
ntiona
mi
ntiona mi
ntiona
Inspecti 10
on
Only Aware
100
Isla conve
c
Isla conve
Isla conve
c
the
bank
risk
manag
er
Audits
10
or
100
physica
l
inspecti
on
Financi
10
al
100
statem
ent
analysi
s
Risk
20
20
60
10
20
20
40
20
60
40
40
40
20
20
survey
Process
analysi
s
SWOT
40
60
Inspecti 20
40
40
20
analysi
s
on
by
outside
expert
26
20
40
20
60
Bench
20
20
20
40
20
20
20
Internal 20
40
80
60
20
40
markin
g
Scenari
20
20
o
analysi
s
20
60
20
20
commu
nicatio
n
management
techniques.
As
the
result
show
that
all
the
respondents of both sets of the banks use credit rating, value at risk, internal
based rating system and credit scoring, For gap analysis 100 % respondents
are from Islamic side and 80 % are from the conventional and the same
percentages are for stress testing management techniques. 80 % of the
Islamic banking industry use scenario analysis and in conventional 100 % are
use scenario analysis for management of risk. In case of duration analysis
100 % of Islamic banks are use but on the other side only 20 % use duration
analysis. All of the respondents of Conventional banks use maturity analysis
but
in
Islamic
banking
system
only
40
use
maturity
matching
management techniques and the same case for credit committees. The use
of risk adjusted return is very high (100 %) also in conventional banks and
very low only 20 % in Islamic banks. The pervious study result differences
are difference in case of duration analysis, value at risk, gap analysis and
Credit committee use in Pakistan is very high with comparison of Bangladesh
study conducted by Huq, Azad, & Rahman, (2010) and remaning variable
reluts are almost same.
Table 4: Use of risk management techniques
Type of risk
Islamic
Banks
Conventional
Banks
Credit Ratings
Gap Analysis
Scenario Analysis
5
5
4
100
100
80
5
4
5
100
80
100
Duration Analysis
100
20
40
100
20
20
Value at risk
5
Simulation 3
100
60
5
5
100
100
techniques
Stress testing
5
Risk
adjusted 1
100
20
4
5
100
100
return on capital
Internal Based 5
100
100
rating system
Credit Scoring
Credit
100
60
5
5
100
100
Maturity 2
Matching
Earning at risk
committees
28
5
3
In the 2nd table of (4) is regarding the using frequency of the management
techniques in the previous table 4.2. The results show that the using
frequency of both of the banking system is different. Islamic bank use
management techniques most of the time and frequently but in conventional
banks is note case like that they are not stuck to frequently or mostly but
they rarely use most of the techniques except credit scoring and credit
committees mostly use by all of the respondents of the sample. Results are
almost same with Huq, Azad, & Rahman, (2010).
According to the finding our study there is gap between the two sets of so
our 3rd hypothesis is also proved H3. There is a gap between the interest
based and interest free banks in the understanding of risk and risk
management practices.
Table 4.2: Frequency of use risk management techniques
Type
Mostly used
of
Frequently
Neutral
Rarely used
used
Not
at
all
aware
Risk
Isla
conve
Isla
conve
Isla
conve
Isla
conve
Isla
conve
mic
ntiona
mic
ntiona
mic
ntiona
mic
ntiona
mic
ntional
20
20
Credit
10
Ratin
20
80
gs
Gap
20
20
60
60
40
20
20
20
Analy
sis
Scena
rio
Analy
29
60
40
sis
Durati 80
20
20
80
80
80
on
Analy
sis
Matur
20
20
20
20
60
60
20
20
ity
Match
ing
Earni
20
60
40
40
40
80
60
60
40
40
100
80
100
80
ng at
risk
Value
at risk
Simul
20
ation
techni
ques
Stress 60
testin
g
Risk
20
adjust
ed
return
Intern
al
Based
rating
30
20
syste
m
Credit
80
100
20
60
100
40
Scorin
g
Credit
comm
ittees
about risk reduction, sharing, transferring and risk retaining approaches and
only 20 % of respondent are aware about
Approaches
31
Islamic Banks
Conventional Banks
80
20
20
100
Risk
may
be 3
transferred
Risk may be shared
Risk may be reduced
5
60
40
2
5
100
100
100
In the table 5(b) the result shows that level of use of risk mitigations
approach is very high in Islamic banks as compared to conventional banks
like in case risk avoidance 60 % of Islamic banks are only agree to use this
approach and on the other hand no one use this approach. 20 % of
respondent are only agree to use risk retaining approach in conventional
banks but not at all in Islamic banks. In case transferring and sharing the
risks 40 % respondent of the Islamic banks are highly agree to use but no
one from the conventional banks. For risk reduction mitigation approach 80
% of the respondents use in Islamic banks and only 20 % of the respondent
use in conventional banks are highly agreed. So the the result show that in
Islamic banks the respondents are highly agreed to use the risk mitigation
approaches and the conventional banks are only agreed to use some of the
approaches. The result shows that the pervious study results are higher than
the study conducted in Pakistan the using risk mitigation approaches.
Table 5.2: level of acceptance of various risk mitigation approaches
Type of Highly
Only
Risk
Agreed
Agreed
Isla conve
Isla conve
mi
32
ntiona mi
Neutral
Diagreed
Highly
Disageed
Isla conve
ntiona mi
Isla conve
ntiona mi
Isla conve
ntiona mi
ntiona
Risk
60
20
20
100
20
40
40
40
20
60
20
60
80
20
20
60
may be
avoided
Risk
20
may be
retaine
d
Risk
40
40
may be
transfer
red
Risk
40
may be
shared
Risk
80
20
may be
reduced
reserves
and
guarantees
of
mitigation
techniques.
Third
party
Risk Techniques
Islamic Banks
Conventional Banks
Collateral
100
100
60
80
100
100
80
40
100
20
5
5
100
100
80
100
Arrangement
Third
party 3
enhancement
Loan loss reserves
On
balance
sheet 4
netting
Guarantees
Parallel contracts
Over
the
5
1
Counter 4
derivatives
Table 6.2 communicate the level of using the risk mitigation techniques. All
the respondents highly use collateral arrangement in conventional banks and
in Islamic 80 % of the respondents highly use collateral arrangement. Third
party enhancement is highly use in interest free banks as compared to
interest based banks along with the same case is for loan loss reserves
highly use in interest free banks as compared to interest based banks. The
using level of on balance sheet netting conventional is neutral and from
34
Islamic side majority of respondents are not uses on balance sheet netting.
The uses of guarantee in Islamic is very high all of the respondent use it and
on the other hand conventional banks are using it neutrally. Parallel contract
are highly use by interest free banks as compared to interest based banks.
So the results suggest that Islamic banks are not that much aware about risk
mitigation techniques as compared to interest based banks but the interest
free banks using level of risk mitigation techniques is more than that of
conventional banks which show that Islamic banks need high awareness
about all these techniques. Results are almost same with the pervious study
of Huq, Azad, & Rahman, (2010).
Table 6.2: Level of using specific risk mitigation techniques
Type of Highly
Risk
Neutral
Not Used
Used
Not at all
Used
Isla conve
Collater
Only Used
Isla conve
Isla conve
Isla conve
Isla conve
mi
ntiona mi
ntiona mi
ntiona mi
ntiona mi
ntiona
80
100
20
40
20
20
60
20
20
40
20
20
60
40
20
al
Arrange
ment
Third
20
party
enhanc
ement
Loan
loss
reserve
s
35
On
40
20
60
40
20
20
balance
sheet
netting
Guarant 10
ees
Parallel
20
100
100
80
contrac
ts
Over
20
60
80
60
the
Counter
derivati
ves
and
conventional
banks
management
attitude
toward
risk
management is not that much positive. So its mean that the Islamic banks
36
7:
Attitude
of
Management
towards
risk
management
practices
Type of Highly
Only
Neutral
Risk
Positive
Positive
Isla conve
Isla conve
Negative
Highly
Negative
Isla conve
Isla conve
Isla conve
mi
ntiona mi
ntiona mi
ntiona mi
ntiona mi
ntiona
Credit
10
100
Risk
Liquidit
10
y Risk
Interest
60
20
20
40
20
40
Rate
10
0
Risk
Foreign
20
40
60
20
40
20
20
80
Exchan
ge Risk
Perform
ance
Risk
37
80
20
Conclusion
The finding of the study concludes that there is variation between the two
systems in term of awareness of risk identification, mitigation and
management techniques. For risk identification conventional banks are more
aware than Islamic banks and conventional banks use advance techniques
for risk identification beside the traditional techniques of risk identification
and on the other hand Islamic banks use only traditional techniques for
identification of risk and they need to come up with the advance techniques
which is beneficial for future because banking industry is develop with
passage of time and such traditional techniques lead them to failure. Islamic
banks need qualified staff also for risk management department because
majority of them are unaware about the advance techniques. In case of the
approaches of risk mitigation the finding of the study conclude that the
conventional banks awareness regarding risk mitigation approaches are
more than that of the Islamic banks. Islamic banks also need awareness
regarding approaches of risk mitigation. They are not aware actually
otherwise Islamic banks use the risk mitigation approaches more than that of
the conventional banks. Islamic banks are not that much aware about risk
mitigation techniques also as compared to conventional banks but the
Islamic banks using level of risk mitigation techniques is more than that of
conventional banks which show that Islamic banks need high awareness
about all these mitigation techniques. The Islamic banks management is
more highly positive towards risk management practice and on the other
hand conventional banks management attitude are not that much highly
positive toward risk management practices like Islamic banks. which shows
that management of Islamic banks want to manage their practices of risk but
they need awareness and for the need of such awareness they need qualified
staff and on the other hand conventional banks management need to focus
also on the practice of risk management for the survival in the market.
38
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Annexure - Questionnaire
Questionnaire
Respondent Name:
Respondent Designation:
41
Respondent Company:
42
Questionnaire
Question 1-a: Awareness of different types of risk faced by
respondents
a)
b)
c)
d)
Risk Techniques
Credit Risk/ Investment Risk
Liquidity Risk
Interest Rate Risk
Foreign Exchange/ Currency
Islamic
Conventional
e)
f)
g)
h)
i)
Risk
Performance/ Operational Risk
Environmental Risk
Rate of Return Risk
Sharia non-compliance Risk
Price risk
Only Aware
Neutral
Unaware
Not
Isla
Conven
Isla
Conven
Isla
Conven
Isla
Conven
aware
Isla Conven
mic
tional
mic
tional
mic
tional
mic
tional
mic
tional
ent Risk
b) Liquidity
Risk
c) Interest
a) Credit
at
Risk/
Investm
Rate
Risk
d) Foreign
Exchang
e/
43
all
Currenc
y Risk
e) Perform
of
ance/
Operatio
nal Risk
f) Environ
mental
Risk
g) Rate
Return
Risk
h) Sharia
noncomplia
nce Risk
i) Price
risk
44
Highly
Only
Neutral
Not
Not
Concerned
Isla Conven
mic
Concerned
Isla Conven
Isla
Conven
Concerned
Isla Conven
Concerned
Isla Conven
tional
mic
tional
mic
tional
mic
tional
mic
tional
ent Risk
k) Liquidity
Risk
l) Interest
of
j) Credit
at
Risk/
Investm
Rate
Risk
m) Foreign
Exchang
e/
Currenc
y Risk
n) Perform
ance/
Operatio
nal Risk
o) Environ
mental
Risk
p) Rate
Return
Risk
45
all
q) Sharia
noncomplia
nce Risk
r) Price
risk
46
Question
3-a:
Awareness
of
the
respondents
of
the
risk
manager
Audits or physical inspection
Financial statement analysis
Risk survey
Process analysis
SWOT analysis
Inspection by outside expert
Benchmarking
Scenario analysis
Internal communication
Conventional
Highly
Techni
Aware
Only Aware
Neutral
Unaware
Not
at
all
aware
ques
Isla
a) Inspecti
on
Conve
Isla
Conve
Isla
Conve
Isla
Conve
Isla
Conve
mic ntional
mic ntional
mic ntional
mi
ntional
mic ntional
by
the
bank
risk
manage
r
b) Audits
or
physica
47
l
inspecti
on
c) Financi
analysis
d) Risk
survey
e) Process
analysis
f) SWOT
analysis
g) Inspecti
analysis
j) Internal
al
statem
ent
on
by
outside
expert
h) Bench
markin
g
i) Scenari
o
commu
nication
48
Islamic
Conventional
a) Credit
Mostly Used
Frequently
Neutral
Rarely Used
Not
at
Isla
Conven
Used
Isla Conven
Isla
Conven
Isla
Conven
used
Isla Conven
mic
tional
mic
tional
mic
tional
mic
tional
mic
tional
Rating
s
b) Gap
Analys
is
c) Scena
rio
Analys
is
d) Durati
on
Analys
is
49
all
e) Maturi
at risk
h) Simula
ty
Matchi
ng
f) Earnin
g
at
risk
g) Value
tion
techni
ques
i) Stress
testin
g
j) Risk
adjust
ed
return
50
Question
5-b:
Level
Islamic
of acceptance
Conventional
of
various
risk mitigation
approaches
Highly agreed
Risk
Only agreed
Neutral
Disagreed
Highly
Isla
Convent
Isla
Convent
Isla
Convent
Isla
Convent
Disagreed
Isla Convent
mic
ional
mic
ional
mic
ional
mic
ional
mic
ional
may
be
avoide
d
Risk
may
be
retaine
d
Risk
may
be
transfe
rred
Risk
may
be
shared
51
Risk
may
be
reduce
d
Collateral Arrangement
Third party enhancement
Loan loss reserves
On balance sheet netting
Guarantees
Parallel contracts
Over the Counter derivatives
52
Islamic
Conventional
Only used
Isla Convent
Neutral
Isla Convent
Not- used
Isla Convent
mic
ional
mic
ional
mic
ional
mic
ional
mic
ional
netting
Guarant
ees
Parallel
s
Over the
Collater
al
Arrange
ment
Third
party
enhance
ment
Loan
loss
reserves
On
balance
sheet
contract
Counter
derivativ
es
Neutral
Negative
Highly
Isla
Convent
Isla
Convent
Isla
Convent
Isla
Convent
Negative
Isla Convent
Credit
mic
ional
mic
ional
mic
ional
mic
ional
mic
ional
Risk
Liquidit
y Risk
Interest
Rate
Risk
Foreign
Exchan
ge Risk
Perform
ance
Risk
54