TK 6413
Islamic Risk Management
OPERATIONAL RISK
Prof. Dato’ Dr. Kamaruddin Sharif
Norhazlina Ibrahim
Nur Aziah Che Abdul Aziz
0900127
0900323
Operational Risk
Definition of Operational Risk (IFSB):
IIFS shall consider the full range of material operational risks
affecting their operations, including the risk of loss resulting from
inadequate or failed internal processes, people and systems or
from external events. IIFS shall also incorporate possible causes of
loss resulting from Sharī`ah non-compliance [1] and the failure in
their fiduciary responsibilities [2].
[1]Sharī`ah non-compliance risk is the risk that arises from IIFSs’ failure to
comply with the Sharī`ah rules and principles determined by the Sharī`ah Board of
the IIFS or the relevant body in the jurisdiction in which the IIFS operate.
[2]Fiduciary risk is the risk that arises from IIFSs’ failure to perform in accordance
with explicit and implicit standards applicable to their fiduciary responsibilities. As a
result of losses in investments, IIFS may become insolvent and therefore unable to (a)
meet the demands of current account holders for repayment of their funds; and (b)
safeguard the interests of their IAH. IIFS may fail to act with due care when
managing investments resulting in the risk of possible forgone profits to IAH
Examples of Operational Loss Events
Examples of Operational Loss Events
Operational Risk Framework
4 steps in managing
Operational Risk
Operational Risk Framework
Operational Risk Processes

Identification of risk through Incident Data Collection (IDC).
- Based on 7 event types.
- Fraud case need to be reported to eFIDS BNM.

Assessment of risk through Risk Self Assessment and Control
Self Assessment (RCSA).
- Questionnaires based assessment.
- Risk Scorecard: severity and probability matrix.

Quantitative assessment of risk by using Value at Risk (VaR).

Mitigation of risk through Action Plan, Risk Transfer and
Outsourcing.

Monitoring of risk through Key Risk Indicators (KRI).
Operational Risk Dimension
Operational
Risk Effect
Operational
Risk Event
Legal Liability
Internal Fraud
Operational
Risk Causal
Regulatory,
Compliance and
Taxation Penalties
External Fraud
Loss or Damage
to Assets
Employment
Practices and
Workplace Safety
People
Effect
Monetary
Losses
Restitution
Process
Damage to
Physical Assets
Governance
IT System
External
Causes
Event
Resulted
in
Business
Disruption and
System/
Infrastructure
Failures
Loss of Recourse
Write-down/
Write-off
Clients, Products
and Business
Practices
Execution,
Delivery and
Process
Management
Reputation
Business
Interruption
Effect NonMonetary
Losses; e.g.
Reputational
Damage or
Forgone
Income
Roles & Responsibilities
Business Unit
1st
line
of defense
Establishing an independent operational risk
management and control process which covers the
design, implementation and review of its operational risk
measurement and methodology.
Operational Risk
Management
2nd line
of defense
Responsibilities include establishing the framework for
measurement of operational risk and control.
Direct responsibility for managing specific operational risk
issues pertaining to their field of expertise.
Bank-wide Support
Units
Audit
Primary responsibility for the management of operational
risk in order that accountability and ownership is as close
as possible to the activity that creates the risk thereby
ensuring that effective action is taken to manage them.
3rd line
of defense
Independently ensuring that the ORM process is
appropriate and functioning as designed by conducting
regular reviews of the ORM process and measurement.
Incident Data Collection
Incident Data Collection
Risk Control Self Assessment
Risk Control Self Assessment
Risk Control Self Assessment
Key Risk Indicators


Threshold setting is depending on the organization risk
tolerance level.
Threshold could have few layers.
Capital Charge

3 methods in calculating capital charge:
1) The Basic Indicator Approach (BIA)
- Alpha ( ) is standardized at 15%.
2) The Standardized Approach (TSA)
- Beta factors (β) is based on specific 8 BASEL
Business Lines.
3) Advanced Measurement Approaches (AMA)
- Risk factors are measured according to bank’s
internal Operational Risk management system
using quantitative and qualitative criteria.
- Determining the capital requirement is subject
to the Central Bank’s approval.
- To fulfill criteria set before implementing AMA.
Basic Indicator Approach

Formula:
Standardized Approach

Formula:
Standardized Approach

8 BASEL Business Lines:
Standardized Approach

Alternative Standardized Approach (ASA) only for retail and
commercial banking business lines:
KRB = βRB x m x LARB
where:
KRB
= the capital charge for Retail Banking business line
βRB
= the beta for Retail Banking business line
m
= 0.035 (replace gross income as exposure indicator)
LARB = total outstanding retail loans and advances (non-risk
weighted and gross of provisions), average over the
past three years
Gross Income Computation
Net Interest Income
Comprising:
All interest income
(excluding interest suspended and recoveries)
Less: Interest expense
Net[1] Non-Interest Income
Comprising:
Net commissions / fees receivable
(including outsourcing fees receivable, excluding outsourcing fees
paid)
Net income from trading book securities
(including unrealised gains / losses from fair value changes of trading
book securities)
Other operating income
Including intra-group income
Dividend income from investment in securities
Others
Excluding:
Dividend income from subsidiaries and associated companies
Realised or unrealised profits / losses from sales or impairment of
securities in banking book
Income from extra-ordinary or irregular item
Income from insurance recoveries
Total Gross Income from Islamic Banking Operations
Total Gross Income
A
XXX
(x)
B
XX
XX
XX
X
X
X
Z
A+B+Z
Gross Income Computation
Net income from financing activities
A
Net income from investment activities
B
Other income:
Realised / unrealised gains / losses from sales or fair value changes
of trading book securities
Net commission / fees receivables
Intra-group income
Dividend income from investment in securities
Income from non-Shariah compliant sources
Others
Excluding:
Dividend income from subsidiaries and associated companies
Realised or unrealised profits / losses from sales or impairment of
securities in banking book
Income from extra-ordinary or irregular item
Income from insurance recoveries
Bad debt recovered
C
Less:
Income attributable to investment account holders and other
depositors
D
Total Gross Income (Z)
Islamic Banking Operation
A+B+C-D
Thank You