Overwhelming majority of 63% of Islamic Financial Institutions (IFIs) believe that strong commitment from boards, sharia’a supervisory boards and management is required to improve risk management in Islamic Finance, according to the findings of a survey.
Deloitte Islamic Finance Knowledge Center (IFKC), which made public the findings in Bahrain on Thursday, revealed that 65% of the institutions offering Islamic Financial Services (IIFS) that participated in study are considering the development of an enterprise risk management (ERM) programme.
“Only 59% of the IIFS that participated have implemented the IFSB’s risk management standard; 63% reported that they have not received any external rating, and less than quarter of the respondents had considered or received external rating from an Islamic rating agency. This constitutes a real challenge posed to industry participants and standard-setters such as the IFSB, AAOIFI, IIFM and the IIRA, to enforce best practices,” it said.
According to the survey, there is a need of creating a risk-aware culture is considered the most (68%) important benefit of ERM.
“The IIFS lack skilled risk experts, and institutions are required to invest in building capabilities in key risk management pillars – People, Process, Technology and Governance. 56% of the group studied have risk management software, and 44% of them lag behind in automation of risk information management. Risk function executives and policy-makers are faced with new international regulatory and governance requirements and are required to fully adapt to international best practices,” it said.
“The global financial crisis continues to hit hard, with almost all markets of the world economy, and indeed almost all sectors, having been directly or indirectly impacted by this major economic turbulence. The financial services – including Islamic Finance – are facing a catalogue of regulatory and practice-related reforms. This new wave of regulatory reforms, aimed at upholding best practices, has renewed emphasis on prudential oversight and good governance. These changes resulted greater pressure on financial institutions offering Islamic financial services (IIFS) to galvanize their risk exposures and governance capabilities. Moreover, the complexity of Sharia’a compliant debt and equity instruments has evolved, and types of risks, issues and investors, as well as market conditions, have emerged, all of which have made it imperative for IIFS to develop and adopt integrated risk management strategies, in order to protect their businesses and stakeholders.”
“In many jurisdictions there is now heightened awareness and scrutiny by national regulators and industry standard-setters to safeguard the interest of investors and customers. Key to this is the importance of public awareness and market education.
“Deloitte Islamic Finance Knowledge Center (IFKC) remains committed by producing relevant and timely thought leadership in Islamic Finance, which addresses and investigates important issues in practice and regulation. The prime objective of this approach is to produce timely relevant insights from the industry practice and to strive to promote the value of best practices amongst stakeholders. Lastly, this report focuses on the governance and structural aspects of an effective risk management framework in Islamic Finance. It presents an analysis of case studies developed, new insights in risk management practice to empower risk intelligence in Islamic Finance and suggests ways to manage risk in troubled times.”
The Islamic Finance Risk Intelligence survey, published by IFKC at Deloitte Middle East, assesses the status quo of risk management practice in the Islamic Finance industry. The report is based on a survey and group of case studies developed during the second half of 2011 encompassing 20 Islamic Financial institutions from the Middle East and South East Asia, with aggregate assets of more than $50 billion, and representing a range of Islamic Financial institutions. In addition, several interviews were conducted with industry leaders and risk management executives. The analysis included cross reference analysis of Deloitte’s research and analysis in risk management and made use of Deloitte’s Risk Intelligence Maturity Model in developing point of views on Islamic Finance risk intelligence. Needless to say, the overall questions and issues discussed with institutions and risk executives were structured around Deloitte’s four enterprise risk management (ERM) capabilities, namely Governance, Process, People, and Technology. Finally the report similarly benefited from revelations and reflections of the ‘Executive Roundtable on Risk Management’, organized by the Islamic Financial Services Board (IFSB), hosted by the Central Bank of Bahrain and supported by Deloitte IFKC, in December, 2011.