UNIVERSITI KUALA LUMPUR BUSINESS SCHOOL

RISK MANAGEMENT IN ISLAMIC FINANCIAL INSTITUTION

EBB 20603

IF 20

TOPIC:

AMBANK ISLAMIC BERHAD

PREPARED BY:

ZUL IRFAN HAZIM BIN SURURI (62211219262)

PREPARED FOR:

DR. OMAR ALEDDIN

1) Board of Directors and Managements
The Board of Directors for Ambank Islamic Berhad currently have seven members.
Tan Sri Azman Hashim as a Non-Independent and Non-Executive Chairman. Graham
Kennedy Hodges as a Non-Independent and Non-Executive Director. Next, Soo Kim
Wai as a Non-Independent and Non-Executive Director. Voon Seng Chuan as a
Senior Independent and Non-Executive Director. After that, Ambank Islamic have
other three Independent and Non-Executive Director which are Dato Shireen Ann
Zaharah Binti Muhiudeen, Seow Yoo Lin and Farina Binti Farikullah Khan. The
Board is collectively responsible for the long-term success of the Group and it is for
ensuring leadership within a framework of effective controls. The Board had set the
strategic direction, approves the strategy and takes the good action to ensure that the
Group is suitably resourced to achieve its strategic target. The Board also provides the
strategic leadership by articulating the needs of HR and plans to the executive
management team, Board of Director and all shareholders. Second, The Risk
Management Committee comprises three members, a majority of whom are
Independent Directors and is chaired by an Independent Director. The Committee
oversees the adequacy of risk management within the Committee provides further
oversight by reviewing the Sustainability Statement prior for submission to the Board
for approval. The Audit and Examination Committee and Governance Committee also
provide support in supplying sustainability initiatives at Board level. Shariah
Committee is responsible regarding the Shariah matters in the bank’s products.
Shariah Committee consists of five qualified Shariah scholars. Three of the members
serve as Shariah Committee for AmMetLife Takaful Berhad and two of the members
serve as Shariah Committee for development bank in Malaysia. Two of the members
are also registered Shariah Advisory Council with Securities Commission Malaysia.
Then, The Audit and Examination Committees (“AECs”) and its major subsidiaries
assist the Board to evaluate the effectiveness of the internal controls systems.

2) Credit Risk
The risk of financial loss comes from customers loan defaults. Exposure to credit risk
arises from lending, securities and derivative exposures. AmBank Group has a good
Credit Risk Management Framework that is informed by credit principles and policies
and own enacted by the Board. The Group mitigate the credit risk by a range of
compliance and monitoring procedures are used to assess the effectiveness of the
Credit Risk Management Framework. The Group engage major underperforming
customers to avoiding the impairment issue. It can be mitigated by using the proactive
collection strategies and manage the assets using prudent credit underwriting
standards.

3) Market Risk
The risk of AmBank Group experiencing losses as a result of changes in interest rates,
FOREX rates, volatility, credit spreads, correlations and fluctuations in bond, equity
price or commodity. The Group has a complex Market Risk Management Policy to
 support trading and balance sheet activities. Ambank Islamic apply an independent
risk measurement approach to quantify market risk within portfolios. A good market
risk management is important to facilitate trading and managing activities. Ambank
have identified a small number of market risks and developed mitigating strategies. It
will continue to diversify the revenue stream, particularly focusing on high yielding
revenue products and fee-based income, innovative new products and greater
understanding of our customers’ needs will fend off Irrational Competition. The
Stress Testing was conducted on regular basis with the goal of detecting future
changes in financial market including the ability to tolerate shifts in capital resources
and earnings to mitigate all potential losses.

4) Operational Risk
The risk of loss comes from inadequate internal processes, people and systems
or from external events. It includes legal risk and the risk of reputation loss, or
damage but excludes strategic risk. The objective of operational risk management to
ensure the risks are identified, assessed, measured, monitored and reported in a
structured strategy with suitable governance oversight. The Group strives to ensure
that residual risk exposures are kept as low as practicable based on sound risk or
reward analyses. Group maintains a controllable environment that including
standards, processes, policies and structure that serve the basis for organizational wide
internal controls.
The Operational Risk Appetite was established and it was a part of Group Risk
Appetite Framework (GRAF) which sets the tolerance level for operational risk that
Group willing to accept. Group used the method identified, assessed, measured,
monitored and reported by using the proper operational risk management tools. The
monitoring of the activities is conducted periodically to ensure the effectiveness of
functional activities at all operating levels.

5) Liquidity Risk
The risk that AmBank Group may be fail to meet payment obligations including
repaying depositors or maturing wholesale debt or that the Group has insufficient
capacity to fund increases in assets. The liquidity risk appetite is defined by the ability
to meet a range of regulatory and internal liquidity metrics mandated by the Board.
Using Liquidity Coverage Ratio (LCR), with a primary focus of ensuring a sufficient
buffer of liquid assets that could be easily converted into cash to meet the liquidity
needs for up to 30 calendar days. Group also using Net Stable Funding Ratio (NSFR),
outlining the requirements on maintaining stable funding profile via the composition
of assets and off-balance sheet commitments in order to reduce the risk to liquidity
position. The Group has an effective Market Risk and Liquidity Risk Management
Framework which is to govern the liquidity risk taking activities.

6) Shariah Risk
The Shariah Risk managed by following the business and operations that had been set
by Shariah Advisory Council (SAC) of BNM and Shariah Committee by Ambank
 Islamic. Ambank Islamic must followed the Shariah rules in their product and avoid
the prohibited elements. The way to mitigate the risk is establishment of Shariah Risk
Management that are accountable with Risk Management Committee. The function to
identify, measure, monitor and control of Shariah Non-Compliance risk and trying to
mitigate it. Ambank Islamic have their own Shariah Committee to discussed regarding
the Shariah matters. Shariah Risk Management is executed through three lines in
managing Shariah risk. The first lines are Business and Functional Lines. Second lines
are Shariah Risk Management, Shariah Review and Research. Lastly, Shariah Audit.
Shariah Committee is responsible to comes out with Shariah solutions to avoiding the
Shariah Risk in Ambank Islamic.

7) Shariah Governance Framework

AmBank Islamic complies with the rulings of Bank Negara Malaysia’s Shariah
Advisory Council and they have a Shariah Control Function Structure based on Bank
Negara Malaysia’s Shariah Governance Framework (SGF). AmBank Islamic
have their own Shariah Risk Management. The function to identify, measure,
monitor and control of Shariah Non-Compliance risk and trying to mitigate it. The
Shariah Research and Advisory (including Shariah Legal), Shariah Risk Management
and Shariah Review functions act as the second line of defence whilst the Shariah
Audit function, which is part of the Group Internal Audit Department, acts as the third
line of defence.

8) What extent the risk managements helps in reducing cost and losses of the bank?
Proper Risk Management can help Ambank Islamic to reducing the cost and losses of
the bank. The main goal is to mitigate the risk and trying to face it with the proper
solutions. For example, if the credit risk can be faced wisely by Group, profit of the
Group will become high and the cost can be reduced. It is possible to remove the risk
but with the proper risk management, the risk can be mitigated.

9) Islamic Risk Management Vs Conventional Risk Management

The major differences between Islamic and conventional risk management is the
conventional bank does not have the Shariah Risk in their operations but the Islamic
have this type of risk in their operations. The bank needs to following the Shariah
rules and avoiding the prohibited elements. In conventional, the type of risk are credit,
market, liquidity, operation and reputation risk. In Islamic, they also face these five
risks but they had been added by the unique risk such as equity investment,
commercial displacement, rate of return and Non-Shariah compliance risk. From this,
we can conclude that Islamic perspectives will face more risk compare with
conventional sector. For Islamic, they must be followed the Shariah rules but
conventional are free to do anything as long as it can give the high profit to the bank.