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
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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
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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)
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Problem statement
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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
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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
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Malaysia = 119 Pakistan = 165
TOTAL OF 284 RESPONDENTS
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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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