involvement in Risk Management Practices in Islamic banks in

Assessing the Risk Management Practices of Islamic Banks: Empirical Evidence from Malaysia and Pakistan

Prof Dr Rashidah Abd Rahman

Accounting Research Institute, UiTM, Malaysia

Siti Balqis Syed Mohamad Noor

Post graduate student, UiTM, Malaysia

Faisal Dean

Post graduate student, Aston Business School, Birmingham, UK

1

Introduction

• Overlooked on the importance of Risk Management Practices (RMP) > Financial crisis

• Strengthen Risk Management Practices (RMP) > critical to sustain business growth & continued profitability

• Market shifted to Islamic Banks > Growth of Islamic Banks

2

Risk Management Practices in Islamic Banks Background of study

3

RMP in IB

•Risk Management in Islamic Banking is not significantly different from conventional banking. There are additional risks that are unique to Islamic Banking (BIMB)

•Risk – manage, mitigate

•Risk Management Processes: Understanding risk and risk management, risk identification, risk assessment and analysis, risk monitoring (URM, RI, RAA,RM)

4

Problem statement

5

Risk is hazardous

RMP is very important

Process: URM,RI,RAA,RM

Boards’ governance: Risk

oversight role (BOD)

Faces more risk

RMP in IB is more important

Process: URM,RI,RAA,RM

Boards’ governance: Risk

oversight role (BOD)

Shariah consideration

Shariah supervisory boards (SSB)

Are we taking the right steps to

enhance RMP in IB?

Process > Level of RMP?

IN GENERAL IN ISLAMIC BANKING (IB) INDUSTRY

Islamic reputation To what extent

do the “process” give impact to the “level of

RMP”?

+

+

+

Enhancement of RMP

Enhancement of RMP

THINGS TO PONDER

Research Questions

Research Objectives

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1: To assess the level of risk management practices among Islamic Banks in Malaysia and Pakistan

2: To compare the level of risk management practices among Islamic Banks in Malaysia and Pakistan

Hypothesis

H1. There is a significant difference between Islamic

banks in Malaysia and Pakistan in risk management

practices H2. There is a significant difference between Islamic

banks in Malaysia and Pakistan in understanding

risk management H3. There is a significant difference between Islamic

banks in Malaysia and Pakistan in risk identification

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Hypothesis (continued)

H4. There is a significant difference between Islamic banks

in Malaysia and Pakistan in risk assessment and analysis

H5. There is a significant difference between Islamic banks in Malaysia and Pakistan in risk monitoring

H6. There is a significant positive relationship between risk

management practices and understanding risk

management, risk identification, risk assessment and

analysis, and risk monitoring 8

Research Methodology Questionnaire design

Part A • Company’s profile • Respondent’s profile Part B • Understanding risk • Risk identification • Risk Assessment and analysis • Risk Monitoring • Level of risk management practices

9

Research Methodology (continued) Questionnaire design

• Romzie Rosman, 2009 – conceptual study: need to be proven empirically

Adapted from previous empirical research (with some modification)

Al-Tamimi & Al-Mazrooei (2007): all

banks in UAE

Hassan (2009):

Islamic banks in Brunei

THIS STUDY (2011): Islamic

banks in Malaysia and

Pakistan

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RM PROCESS

URM

RI

RAA

RM

RMP

PART B

Research Methodology (continued) Targeted sample

• Managers and banks’ staff under risk management department or internal audit department or other department deals with risk management practices

• Sample: 15 personals x 17 Islamic banks listed by Bank Negara Malaysia = 255

• Sample: 15 personals X 18 Islamic banks in Pakistan = 270

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Final Sample

12

Malaysia = 119 Pakistan = 165

TOTAL OF 284 RESPONDENTS

13

Mal

aysi

a

Mea

n

Paki

stan

Mea

n

Mea

n o

f

Bo

th

T- T

est

Sig-

Leve

l

Risk Management Practices 5.83 5.77 5.80 0.5

Understanding risk

management 6.09 5.88 5.97 0.00

Risk Identification 5.64 5.43 5.52 0.01

Risk assessment and

analysis 5.93 5.85 5.89 0.27

Risk Monitoring 6.02 5.93 5.97 0.15

Level of Risk Management Practices

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VARIABLES MALAYSIA PAKISTAN OVERALL

Coefficient Prob. Coefficient Prob. Coefficient Prob.

CONSTANT 3.33 0.050* 3.29 0.034** 3.65 0.011**

URM 0.713 0.113 0.708 0.122 0.670 0.150

RI 0.317 0.002** 0.247 0.010** 0.342 0.031**

RAA 0.421 0.031** 0.352 0.051* 0.671 0.045**

RM 0.446 0.201 0.448 0.315 0.446 0.543

Adjusted R2 0.357 0.356 0.357

F-statistic 3.163** 3.139** 3.165**

Prob. (F-

statistic)

0.000 0.000 0.000

N 119 165 284

Regression Analysis Results

Conclusion

• Islamic banks in Malaysia and Pakistan are reasonably efficient in RM practices and risk management process

• There is a significant difference between Islamic banks in Malaysia and Pakistan in their understanding of risk management and risk identification

• More attention is needed on risk identification and risk assessment and analysis

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Significance of

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RM PROCESS

URM

RI

RAA RM

RMP

Practitioners: improvised

practice

Academician: Research & education

Regulators: improvised regulation

•Banking executives •Risk analysts •Person concern with bank supervision and practices

•Bank Negara Malaysia

All stakeholders: better evaluate the current

practice

•Government • Investors •Borrowers •Staffs

•Executive members •Board of directors •Shariah supervisory Boards

•Lecturers •Researchers •Students

THANK YOU

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