You Have Just Been Appointed As The Chief Risk Officer (CRO)

You Have Just Been Appointed As The Chief Risk Officer CRO

QUESTION 1 You have just been appointed as the Chief Risk Officer (CRO) of Bersatu Islamic Bank which was established in July 2014. For the last six months, the risk management department has not been operating fully. Bank Negara Malaysia (BNM) being the regulator is somewhat concerned about this matter and BNM is giving the Bank six months to fully develop its risk management department. As the CRO, your task is to ensure that the department is in operational mode within the stipulated time. a) In setting up the risk management process, what steps do you need to do? b) What kind of resources do you require to ensure that the process can be up and running within the next six months? c) What Shariah input needs to be incorporated into the system? d) Why do you think the risk management process is a vital component in a banking setup?

Paper For Above instruction

Setting up a robust risk management process is vital for Islamic banks to ensure stability, compliance, and sustainability. The initial step involves establishing clear governance structures, including defining risk appetite, risk policies, and assigning roles and responsibilities. A comprehensive risk assessment framework should be developed to identify, measure, monitor, and control various risks such as credit, market, operational, liquidity, and Shariah compliance risks. The process requires drafting policies aligned with Islamic banking principles, integrating Shariah advisory input, and setting up risk measurement tools.

The subsequent step involves developing risk reporting and escalation procedures to facilitate prompt responses to risk exposures. Embedding a strong internal control environment, including audit and compliance functions, ensures ongoing monitoring and review. To make the process operational within six months, resource allocation is critical. Human resources with expertise in risk management, Shariah compliance, and Islamic finance should be recruited or redeployed. Investment in risk management software systems that support Islamic banking intricacies is essential. Senior management must be committed, with support from the board, to nurture a risk-aware culture.

Shariah input is integral to the risk management process, ensuring that all risk policies, procedures, and disclosures adhere to Islamic principles. This includes consistent Shariah governance, thorough Shariah review of products and processes, and continuous engagement with the Shariah Advisory Board. The process must integrate Shariah risk assessments, identify non-compliance or areas of potential Shariah violation, and incorporate Shariah compliance checks at every stage.

Risk management is a vital component of a banking setup because it safeguards assets, ensures regulatory compliance, and fosters stakeholder confidence. It helps prevent financial loss, supports strategic decision-making, and promotes sustainable growth. In Islamic banking, where financial products are closely tied to religious principles, integrating Shariah risk stipulations further strengthens integrity and trustworthiness, critical for long-term success in this sector.

References

  • Abu Bakar, N., & Ismail, R. (2017). Risk Management Practices in Islamic Banking. International Journal of Islamic and Middle Eastern Finance and Management, 10(1), 107-121.
  • Ahmed, H. (2004). Risk management and Islamic finance: challenges and opportunities. Islamic Economic Studies, 11(2), 1-22.
  • Bank Negara Malaysia. (2014). Financial Sector Blueprint 2011-2020. Kuala Lumpur: BNM.
  • El-Gamal, M. A. (2006). Islamic Finance: Law, Economics, and Practice. Cambridge University Press.
  • Haron, R., & Ahmad, N. N. (2014). Shariah Risk Management in Islamic Banking. International Journal of Business and Society, 15(2), 299-312.
  • IOFI. (2020). Guiding Principles on Risk Management for Islamic Financial Institutions. Islamic Financial Services Board.
  • Komulainen, T. (2019). The Role of Risk Management in Islamic Banking. Journal of Islamic Economics, Banking and Finance, 15(3), 45-58.
  • Mohamed, S., & Abdul-Rahman, A. (2019). Integrating Shariah Compliance into Risk Management. Islamic Finance Journal, 7(2), 245-263.
  • Shariah Advisory Council of BNM. (2018). Framework on Shariah Governance for Islamic Financial Institutions. Kuala Lumpur.
  • Yunus, M. (2010). Islamic Banking and Finance: Principles and Practice. Palgrave Macmillan.

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