INDONESIA - REGULATIONS - Sharia banks must calculate yield risk

JAKARTA: Sharia banks are obliged to identify and manage risk from yield and investment, as the central bank makes the regulation on risk management effective starting Nov 2.

According to the new regulation on risk management, sharia banks and sharia units must apply ten risk managements. Most of the risk managements are similar to those apply to conventional banks plus two new risks, namely yield risk and investment risk. (source)

Yield risk is the risk emerges from transfer of third party fund to other banks because of change in expected yield. Change in expected risk may result from internal factors such as declining asset value and external factors including higher yield offered by other banks.

In the meantime, investment risk emerges when a bank provides financing in a profit sharing system. The bank may not get back the principal it disburses because its debtors bankrupt.

The policy on risk management also includes: identification of risk relating to bank products and transactions, method of measurements and risk management information system, setting the limits and defining the tolerated risk.

Moreover, risk management obliges the composing of emergency plan in the worst condition and the implementation of internal control system.

The new regulation requires banks to submit risk profile report every three months and to reveal risk management in their annual report.

Especially for sharia units, they start applying the regulation when publishing June 2010 financial report. They also have to reveal risk management in 2012 annual report.

Actually, Sharia banks have been facing those two risks since they started operation, said PT Bank Negara Indonesia Director Imam T Saptono.

However, each sharia bank has different approach in facing those risks because there has been no clear standard.

“Each bank makes self assessment on risk calculation. But the central bank must give guidance on calculating the risks and mitigation,” he said.

In facing yield risk, some banks have been doing mitigation by offering attractive yield when the interest rate rises in the market, said Imam.

Furthermore, some banks offer prizes to attract funds from customers.

“Now it seems reactive. Banks give interesting yield and prizes when customers are about to leave. If banks have calculate it earlier, they can measure risk to avoid doing reactive mitigation,” he explained.  (20)(T04/msw)

Source : http://en.bisnis.com/articles/sharia-banks-must-calculate-yield-risk  - Nov 8, 2011