BASIC OPERATION OF ISLAMIC FINANCIAL INSTITUTION

Principles in Operation of IFI The principle of MAGHRIB Payment system Financing Funding

Product development Financial instrument Innovation such as micro financing, micro takaful

Regulation and supervision CAR and other financial ratio Protection of deposit Efficiency Inspection program by authority Auditing Liquidity Sharia advisory GCG

Asset and Liability General Structure ASSET – Cash and short term funds – Deposit and placement with bank and other IFI – Short term investment (sukuk) Fixed Asset – Property, plant, equipment – Other tangible asset – Intangible asset TOTAL ASSET

Liabilities – Deposit from costumer – Deposit and placement with bank and other IFI – Bills and acceptance payable – Provision for tax and zakat – Ordinary share capital – Reserve – Share holder’s equity TOTAL LIABLITIES AND SHAREHOLDER’S EQUITY – Bank commitment and contingencies

Liquidity Management Definition: convertibility into cash – Liquidity risk includes both the risk being unable to fund its portfolio of asset at appropriate maturities Sources: banking business, macro factor Managing liquidity; liability side, asset side and balancing both Sources of Liquidity problem; bank’s balance sheet, rational depositors who are very sensitive with return and large portion of short term time deposit

RISK MANAGEMENT IN ISLAMIC BANK

CHARACTERISTIC OF RISK MANAGEMENT  Risk Identification  Risk Measurement  Risk Anticipation  Risk Monitoring

Risk Identification 1.It involves the process of financing. There are three aspects in this regard, namely the process of Islamic financing transaction, the process of revenue sharing for third party fund and reserve transaction. 2.Management Process. This can be found in the system and accounting operational procedure and Chart of Account (CoA), system and procedure information technology operation, system and operational procedure of year end report, system and operational procedure for product development. 3.AAOIFI, IFSB

Cont’d Human Resources. This kind of uniqueness can be seen in capability requirement which is not only in banking but also Sharia knowledge. 2.Tecnology. This can be found in Business Requirement Spesification (BRS) for financing which is based on revenue sharing and BRS for third party fund. 3.External environment. This can be found through the existence of dual regulatory body, namely central bank and Sharia Board. 4.Damage. This can be happened during the termination/void of ijarah contract or IMBT.

Risk Measurement  Risk measurement conducted by way of periodic evaluation on assumption, data sources and other procedure that used to measure risk. The ideal risk measurement occurred when there is business activities, products, transaction and other material risk.

Risk Anticipation Objective :  Prevention. In this case, IFI have to obtain endorsement and approval of Sharia board to prevent misleading transaction process. Apart from this, IFI also need fatwa when central bank views that the approval of Sharia board is not sufficient or beyond its authority.  Detection. Monitoring of Islamic bank comprises two aspects, namely banking aspect by central bank and Sharia aspect by Sharia board  Recovery. Correction over mistake in term of banking aspect involve central bank, and sharia board in term of Sharia aspect

Risk Monitoring

PROCESS OF RISK MANAGEMENT  In order to implement this process, IFI have to identify the existing and future risk, then IFI conduct continuous risk measurement, monitoring and controlling. These processes continue until become cycles.  The process of risk identification, measurement, anticipation and monitoring should concern the following aspects:

Cont’d... 1.Risk identification conducted by analyzing: a)Risk characteristic that inherent in their activity b)Risk of product and business activity 2. Risk measurement conducted through: a)Continuous evaluation on correct assumption and procedure to measure risk. b)Completion on risk measurement conducted when there is a change of business, product, transaction and material risk