Asset-backed financing is one of the most important characteristics of Sharia-compliant  banks, making effective risk management a vital part of their operation. Krishnan Hariharan, Head of Risk, alizzislamic bank, talks to Muhammed Nafie about the challenges of risk management and the various risk mitigation measures introduced by the bank
Can you elaborate on your business strategy and risk management process?
Our objective is to deliver exceptional and sustainable results to our stakeholders by providing superior sharia-compliant financial solutions. We aim to serve both corporate and retail customers through transparent processes, innovative Islamic products teamed with exceptional and responsive customer service. alizzislamic bank will grow stronger and more resilient in Oman by proving itself competitive and focused on quality and innovation.
The risk management process in the bank is well laid down, with systematic application of risk management policies, procedures and practices for establishing the context and identifying, analysing, assessing, treating, monitoring and communicating risks. It is an iterative process that, with each cycle, can contribute progressively to organisational improvement by providing management with a greater insight into risks and their impact. Risk management is applied at all levels of the organisation, in both strategic and operational contexts, to specific transactions, decisions and recognised risk areas.
As an emergent Islamic bank, what are the main challenges for alizz in terms of credit, liquidity, market and operational risks? And how do you manage to minimise their impact on your financial performance?
Effective risk management in Islamic banks deserves special attention. However, it has many complex issues that need to be better understood. Islamic banks are constrained by the fact that financing needs to be asset backed. Furthermore, there are more documentation requirements. Ongoing customer awareness programmes are held especially for the corporate customers wherein they are informed about the several modes of financing, and the related documentation. Documentation requirements have been comprehensively reviewed and simplified without compromising legal and Sharia risks. In line with enhancing the risk monitoring systems in the bank, we have implemented the Moody’s credit risk rating application which enables us to rate the corporate obligor and facility.
The liquidity risk in the books of the bank is managed by regular discussion thereof at the monthly meetings of the asset-liability committee (ALCO); the same is managed with a combination of stock and cash flow approaches. In order to further enhance the monitoring of the liquidity risk and market risk, the bank has implemented a state-of-the-art application by Wolters Kluwer. The application enables the bank to generate the regulatory reports on the maturity and the sensitivity of assets and liabilities. The application supports simulation of future business scenarios and also studies the impact of shift in profit rates on the net income and the economic value of the bank.
From an operational risk perspective, there are more operational requirements for Islamic financing, compared with conventional banks; and they require adequate system enhancements and documentation which result in additional costs and increase in turnaround time.
The bank has successfully mitigated the above concerns by having the systems successfully configured to address the operational requirements. Ongoing customer awareness programmes are held especially for the corporate customers wherein they are informed about the several modes of financing, and the related documentation. Documentation requirements have been comprehensively reviewed and simplified without compromising legal and Sharia risks.
How effective is your liquidity management?
A robust framework for management of liquidity risk is in place in the bank. Asset and liability management committee has been set up to effectively monitor the liquidity in the bank through stock and cash flow approaches. Policies on liquidity risk management and liquidity contingency policy guides the management in managing the liquidity needs of the bank in an ideal scenario and a crisis scenario. A state of art application is licensed from Wolters Kluver, the same has been implemented. The application enables the bank to generate the regulatory reports on maturity of assets and liabilities and sensitivity of assets and liabilities. The application supports simulation of future business scenarios.
The government of Oman has recently announced the Sultanate’s first sovereign Sukuk issue. According to you, how will the debut sovereign Sukuk issue contribute to the growth of Oman’s Islamic finance industry?
The Sukuk will not only provide Islamic banks/ windows and takaful companies operating in Oman with an investment avenue but also create a benchmark for the nation’s potential borrowers to access this new pool of liquidity for managing their liquidity requirements.
What are the measures taken by the bank in line with Basel III guidelines?
The bank has implemented the guidelines of the Central Bank of Oman (CBO) on Basel III framework, namely the revised capital adequacy ratio, the liquidity coverage ratio and the net stable funding ratio. The bank is in compliance with the threshold ratios prescribed by CBO. The bank is ready to comply with the road map for implementation of the provisions of the Basel III framework as mandated by the CBO.
Can you elaborate on the ALM Risk System used by alizzislamic bank?
The bank has implemented a state-of-the-art ALM risk system licensed from Wolters Kluver. The application enables the bank to generate regulatory reports on the maturity and the sensitivity of assets and liabilities. The application supports simulation of future business scenarios and provides results on the assumed impact of shift in profit rates on the net income and the economic value of the bank.