THIS ASSIGNMENT IS A PARTIAL FULFILLMENT FOR

Risk Management in Islamic Financial Institution IB2002.

Chartered Islamic Finance Professional (CIFP)
INCEIF

September Semester 2012




Student Name: FASHOLA OLAYINKA NURUDEEN
Student ID: 1100275









Question 1.
Below is the balance sheet and income statement of RHB Islamic bank for the period of 3 years
2009 2011.
RHB Balance Sheet 2009 - 2011
2011 2010 2009
ASSETS RM'000 RM'000 RM'000
Cash and short term funds 5,614,932 1,076,905 2,562,465
Deposits and placements with banks and other
financial institutions 70,077 40,062 305,000
Financial assets held-for-trading 433,531 218,928 30,931
Financial investments available-for-sale 1,673,683 1,787,265 1,195,204
Financial investments held-to-maturity 1,398,138 1,073,159 1,042,352
Financing and advances 12,720,722 8,713,761 5,842,302
Other assets 87,194 42,830 74,619
Derivative assets 0 1,369 0
Statutory deposits with Bank Negara
Malaysia 606,455 105,140 69,240
Deferred tax assets 6,737 30,854 15,666
Tax recoverable 8,702 0 17,046
Property, plant and equipment 21,241 21,547 23,083
Intangible assets 0 0 27,601
TOTAL ASSETS 22,641,412 13,111,820 11,205,509

LIABILITIES AND EQUITY

Deposits from customers 17,050,096 9,946,582 8,127,782
Deposits and placements of banks and other
financial institutions 3,761,867 2,066,993 1,831,020
Bills and acceptance payable 13,773 12,124 25,228
Derivative liabilities 36,659 0 0
Other liabilities 446,781 101,286 326,017
Taxation 0 170 0
TOTAL LIABILITIES 21,309,176 12,127,155 10,310,047
Ordinary share capital 773,424 523,424 523,424
Reserves 558,812 461,241 372,038
TOTAL EQUITY 1,332,236 984,665 895,462
TOTAL LIABILITIES AND EQUITY 22,641,412 13,111,820 11,205,509
COMMITMENTS AND
CONTINGENCIES 7,283,588 3,519,220 2,740,629
CAPITAL ADEQUACY 35

Core capital ratio 12.65% 12.23% 12.50%
Risk-weighted capital ratio 13.95% 13.56% 13.78%

RHB Income Statement 2009 - 2011
2011 2010 2009
Details RM'000 RM'000 RM'000
Income derived from investment of depositors funds

772,437

493,365

434,323
Income derived from investment of shareholders
funds

17,705

55,381

49,418
Allowance for impairment on financing and advances

(57,808)

(67,379)

(83,028)
Impairment losses on intangible assets -

(24,945) -
Profit equalisation reserve

(2,725)

(201)

1,410
Total distributable income

729,609

456,221

402,123

Income attributable to depositors

(436,037)

(220,166)

(165,113)


293,572

236,055

237,010

Personnel expenses

(62,687)

(59,058)

(54,281)
Other overheads and expenditures

(93,095)

(86,372)

(96,135)
Profit before taxation

137,790

90,625

86,594

Taxation

(39,936)

(23,136)

(23,125)
Net profit for the financial year

97,854

67,489

63,469
Basic earnings per share (sen)

17.5

12.9

12.1





Analysis.
Base on the data extracted from the RBH financial reports for the period of 2011, 2010 and 2009;
the following financial ration can be calculated for the various periods towards determining the
profitability of the bank
Key Financial Ration Formulae 2011 2010 2009
Profitability
Net Financing Margin Net Finance Income/ Average Total
Assets (ATA)
2% 2% 2%
Cost to Income (Personnel & Other Operating
Expenses)/Gross Income
21% 32% 37%
Return on Assets (ROA) Pre-tax Profit (Loss)/ATA 0.8% 0.7% 0.8%
Return on Equity (ROE) Pre-tax Profit (Loss)/Average Total
Equity (ATE)
12% 10% 10%

The cost-to-income ratio is a key financial measure, particularly important in valuing banks. It
shows a company's costs in relation to its income. To get the ratio, divide the operating costs
(administrative and fixed costs, such as salaries and property expenses, but not bad debts that
have been written off) by operating income. The ratio gives investors a clear view of how
efficiently the firm is being run - the lower it is, the more profitable the bank will be. From the
calculation above the banks cost of Income in 2009 was 37% and by 2011 its 21% which shows
that the bank is becoming more profitable by the year and its an indication that the bank is
profitable.
The net profit of the bank is another measure or indices to determine the profitability is the net
profit. The net profit of the bank as at 2009 was RM86,594, in 2010 it increased by 6% and the
net profit stands at RM 67,489 and by 2011 it further increased by 31% and stood at RM 97,854.
This is depicted below:


Assets


The data in the above graph has been extracted from the RHBs balance sheet over a period of
three years and it illustrates the banks concentration on each activity, if we try to glance the data
we can see the Banks financing is the major portion of the banks assets as it holds over 50% of
the total assets in each of the year.
Regarding the period starting from 2009 the banks financing activity was a major activity
compare to other assets which got a small concentration such as investment in securities/held-to-
maturity which holds 9% of the total assets in that year, but eventually declined and reached 6%
in the year 2011.

On the other side assets that held as a form of cash has declined from a high of 23% in the year
2009 to a low of 8% in the next year, while that period the bank has shown interest on
investment in available for-sale investment as the assets held in the form of Securities available
for sale has risen from 11% in the year 2009 to a significant portion of 14% in the next year,
though the bank has reduced its involvement in securities slightly in the year 2010.








Liabilities

In analyzing the balance sheet, the liability side of the bank is composed two major elements
which bank obtains its deposits, therefore the graph indicates the deposits from customers is the
major source of input for the banks activity as it was 79% of the total deposits in the year 2009,
but in 2010 there was an increase to 82% and a slight drop to 80% in 2011.

In addition, another element in the liability side has remained steady from 18% in 2009 with a
slight drop in 2010 and returns to 18% in 2012.

Risk Implications.
The Bank is doing fine on all the major indices as discussed such at the overall profitability,
increase in asset and liability which is commensurate with the asset, the income received by the
bank all increased within the period over review. This point to the fact that the bank risk profile
is in good standing. However, the Return on Equity (ROE) and Return on Assets (ROA) dropped
in 2010 but picked up in the subsequent year 2011. Thus the bank needs to ensure that this trend
is sustained such that the overall risk profile and profitability of the bank remains in good
standing.

Question 2.
Like other Islamic banks finances and advances constitute the largest part of RHB Islamic Bank
asset side of the balance sheet. A total RM 5,842,302 was advanced in 2009, RM 8,713,761 in
2010 and RM 12,720,722 in 2011 which represent 52%, 66% and 56% for 2009, 2010 and 2011
respectively. This shows a balanced mix of the assets. The bank is not exposed to any credit risk
and the volume of bank deposit in relation to the financing advance is well balanced and the
bank has enough cash deposit to sustain the financing, the chart below shows the deposit
received in relation to the financing for the periods under review.


Furthermore, the Income derived from investment of depositors funds shows that there was a
steady increase in the period under review, RM 434,323 in 2009 to RM 493,365 in 2010 and RM
772,437 in 2011. This increment shows that the banks clients are meeting their obligations in
terms of the repayment of the facility advanced to them by the bank. Thus the bank is not facing
any potential credit risk that would have arisen from the default from the customers.


Question 3.
The asset rate to liability of the bank is in good standing. The asset is what the banks owns and
the liability is what the banks owns other, that is the asset is positive to the banks and liability is
what is negative that is what the bank will pay out. Thus in the event of the collapse of the bank
the asset is what the bank will fall on. Hence at every point in time to measure the good standing
of the bank and her ability to respond to her obligation the assets must be more than the
liabilities.

For the period under review the banks asset was more than the liabilities as depicted in the
graph below:



A bank is said to be liquid if it can honour all its obligations especially thus on short terms, thus
liquidity risk arises when a bank could not honour its obligations due to some reasons. RHB
Islamic Bank is highly liquid and that is maintained for the three years.
The bank has cash reserves increased consistently in the years under review from RM 372,038 in
2009 to RM 461,241 in 2010 and RM 558,812 in 2012. The chart below shows the increase
which means that the bank is better able to respond to any liquidity crunch in the system.





Question 4.
Operational Risk is defined as the risk of loss resulting from the inadequacy or failure of internal
processes, as related to people and systems, or from external risks. Operational risk also includes
the risk of failure of technology, systems, and analytical models. It is argued that operational risk
is likely to be significant in Islamic banks due to their specific contractual features and the
general legal environment.

In respect to that RHB has done significant steps to mitigate operational risk and established a
Group of risk Management which will report directly to the Group Risk Management Committee
(RMC). The GRM Group Risk Management function is responsible for the development of
bank-wide operational risk policies, frameworks and methodologies, and providing inputs to the
business units on operational risk areas. The respective business units are primarily responsible
for managing operational risk on a day-to-day basis.

The Bank uses an operational risk management system. This system has integrated applications
for supporting the entire operational risk management process for loss event data collection and
management, loss event analysis, assessment and monitoring of the quality of the internal control
system, risk scenario analysis and measurement, comprehensive reporting of operational risks
and internal control quality and tracking of risk mitigation and, control improvement actions.
This system facilitates the Banks capabilities for the Advanced Measurement Approach of the
Basel II Framework.

The Islamic Financial Services Board (IFSB) defines Shariah Compliance Risk (SCR) as one
arising when an Islamic Financial Institution (IFI) offering Islamic Financial Services fails to
comply with Shariah rules and principles determined by the Shariah Board of the IFI or the
relevant bodies in the jurisdiction complies with Shariah rules and principles with regards to its
formation, termination and elements possibly affecting contract performance such as fraud,
misrepresentation, duress or any other rights and obligations

RHB Bank has not faced a material Shariah Risk so far which is came as a result of the banks
strong concern on Shariah matters and for that reason accommodated a skilled and expert team
of Shariah Scholars. In addition, referring to the banks report on Shariah committees meeting
and there awareness of the ongoing banks activity is up to a level which is satisfying and up to
date.
Question 5.
With effect from 1 January 2008, the capital adequacy ratios of the Bank are computed in
accordance with Bank Negara Malaysia Capital Adequacy Framework for Islamic Banks
(CAFIB): Standardised Approach for Credit and Market Risk and Basic Indicator Approach for
Operational Risk (Basel II).

Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time
liabilities and other risks such as credit risk, operational risk etc. In the most simple formulation,
a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other
lenders. From the table below extracted from the banks annual reports 2009 -2011. It shows
that the bank is better prepared to meets its obligation as the Tier 1 capital increased year in year
out


2011 2010 2009

RM000 RM000 RM000
Tier I Capital

Paid-up ordinary share capital 773,424 523,424 523,424
Retained profits 271,298 222,371 167,172
Statutory reserve 280,411 231,484 197,739

1325133 977,279 888,335
Less : Deferred tax assets -9,105 -33,269 -17,046

Total Tier I capital 1,316,028 944,010 871,289

Tier II Capital

Collective impairment/ allowance for bad
and doubtful financing 135,113 103,037 88,984
Total Tier II capital 135,113 103,037 88,984
Less:

Other deduction -24 -102 -12
Total capital base 1,451,117 1,046,945 960,261
Core capital ratio (inclusive of market 12.65% 12.23% 12.50%
risk)
Risk-weighted capital ratio (inclusive of
market risk) 13.95% 13.56% 13.78%
The breakdown of risk-weighted assets in
the various categories of risk-weights are
as follows:

Credit risk-weighted assets 9,226,699 7,124,858 6,401,766
Market risk-weighted assets 565,103 30,513 9,114
Operational risk-weighted assets 608,028 566,538 558,743
Total risk-weighted assets 10,399,830 7,721,909 6,969,623

The Bank has applied paragraph 7.2 of the Concept Paper Risk Weighted Capital Adequacy
Framework (Basel II) and CAFIB Disclosure Requirement (Pillar 3) dated 5 December 2008,
where the Bank is exempted from disclosing comparative figures of the corresponding period in
previous financial year.



References.
Greuning V and Iqbal Z; (2007) Risk Analysis for Islamic Banks World Bank
RHB Islamic Bank Berhad Annual Report 2009
RHB Islamic Bank Berhad Annual Report 2010
RHB Islamic Bank Berhad Annual Report 2011