Nearly 80% of Islamic firms created a risk department in the past five years

The number of Islamic financial institutions employing dedicated risk managers has increased greatly since 2007, according to Deloitte Middle East's first Islamic Finance Risk Intelligence report.

The report is based on a survey and case studies developed during the second half of 2011, on 20 Islamic Financial institutions from the Middle East and south east Asia with aggregate assets of more than $50bn.

It identifies three closely linked issues: risk governance, regulatory pressures and accountability. It also outlines the challenges faced by institutions offering Islamic financial services in developing effective risk intelligence functions.

"Greater pressure has been placed on financial institutions offering Islamic financial services to galvanise risk exposure and governance capabilities," commented Hatim El Tahir, director of the Deloitte Middle East Islamic Finance Knowledge Center.

"Along with the Central Bank of Bahrain, the Bahrain Association of Banks supports all efforts to develop and strengthen Islamic banking and finance in Bahrain.

"We continue to promote it at regional and international conferences and in the pages of The Bahrain Banker, as well as in the BAB publication Handbook of Islamic Banking and Finance, said Robert Ainey, CEO of the BAB.

The Deloitte report found that, although the practice of enterprise risk management is relatively new in the Islamic finance sector, 79% of the institutions that took part in the survey have established a risk department in the past five years. However, only 5% of the IIFS' risk departments were set up more than 10 years ago.

The Deloitte survey indicated that 83% of the Islamic financial institutions surveyed have a formal risk management function that manages the risk activities, and a risk committee that oversees all risks.

Moreover, 87% of the Islamic financial institutions surveyed have ‘management members' on their risk committees.

In terms of accountability for the enterprise risk management programme, 32% of the surveyed institutions have indicated that the CEO is accountable for risk, while 27% hold the chief risk officer accountable and 13% the head of risk management.

Thus, the report suggests that IIFS management and decision-makers should support the risk governance process with subject matter experts for in-depth analysis and adequate selection of risk solutions and strategies.

The study found that 63% of respondents believe that strong commitment is required from all of financial institutions boards, Sharia'a supervisory boards and management to improve ERM in Islamic finance.

Only 59% of the Islamic financial institutions surveyed said they had implemented the Islamic Finance Services Bboard's risk management standard.

Only 56% of the groups had risk management software, 44% of them lagging behind in automation of risk information management.