Key Financial Risks 50 ways to lose your money Risk 2002 16-18 June 2002 : Dubai UAE 1 of 25 warren edwardes Key Financial Risks 50 ways to lose your

Key Financial Risks50 ways to lose your money

Risk 200216-18 June 2002 : Dubai UAE

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warren edwardes

Key Financial Risks 50 ways to lose your money

• 16 June 2002: Dubai, UAE

• Warren Edwardes,

• ceo, Delphi Risk Management Limited

• email: [email protected]

• web: dc3.co.uk



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some actions can protect - the same actions can destroyA film from Argentina (former world cup champions)



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from the book: Key Financial Instruments: understanding and innovating in the world of derivatives

• Appendix 1 (50 Risk types): dc3.co.uk/risks.htm

• Appendix 4 (Islamic banking) dc3.co.uk/islamicbanking.htm

• Chapter 14 (Less technoplilia – have faith in fools) dc3.co.uk/tehno.htm

• Chapter 4 (key financial risks) dc3.co.uk/keyrisks.htm



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Middle East Islamic banking risk

• Does Middle East / Islamic banking risk differ from Western / conventional banking risk?

• Not really different - just special cases

• Much the same as for a British bank branch in Singapore or an Irish Bank subsidiary in the US.

"Operational risk, in particular, is an area which can bring a bank down. While it is not entirely possible to eradicate instances such as what happened with Solo Industries, it is possible to mitigate the chances of these occurring.” Mark Markani, UAE Central Bank



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A check-list of 50 banking risk types

• if the bosses do not or cannot understand both the risks and rewards in their products,

• their firm should not be in the business. -

• William J. McDonough, President, FRB NY



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Middle East news items to illustrate risk

• “Malaysia to hold bond roadshow at DIFC on June 17“ Khaleej Times 13/6/2002 – country risk, religious risk, interest rate risk?

• “GIB issue $325mn FRN” Khaleej Times 13/6/2002 “Gulf states and Malaysia buy Lebanese Eurobond” Reuters 01/06/2002 – interest rate risk, liquidity, political

• “Pakistan Muslim Commercial Bank to buy 51pc stake in United Bank Ltd “ Gulf News 13/06/2000 “Union Bank Ltd buys Emirates Bank International branch network in Pakistan” Gulf News 09/06/2002 – acquisition risk, religious risk, communication risk

• “Legal Perspective: Different warranties in international finance” Gulf News 01/06/2002 – legal risk, competence risk, fraud (customer) risk



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• “HSBC launches Healthcare protected investment fund” Khaleej Times 13/6/2002 “Al Ahli launches controlled-risk investment funds” Gulf News 09/07/2001 – customer satisfaction risk, interest rate risk, communication risk

• “Gulf Finance House launches new company to invest in real estate in the UK” Gulf News 04/06/2002 – currency risk, property risk, concentration (assets) risk

• “meFortunes, the investment scheme from Emirates Bank Group gives customers the chance to win up to Dh100,000 every week.” Gulf News 13/06/2002 – regulatory risk, religious risk, tax risk



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• “Repatriation by Arabs evident” Gulf News 29/05/2002 – political risk, property risk

• “Banks in UAE have no exposure to Rastogi Group alleged metals scam” Gulf News 08/06/2002 “Mashreqbank Bank recovers 20pc of infamous Madhav Patel's dues” Gulf News 11/06/2002 – credit risk, customer (fraud) risk, commodity risk

• “Banks to implement risk management in phases” Gulf News 04/03/2002 – credit risk, interest rate risk, currency risk, operational risks, customer

(fraud) risk• “Banks becoming more conservative on credits” Gulf News

23/12/2001 – credit risk, zero risk



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banking risk types

1. Acquisition Risk (covered by Brian West? & Jim Stewart?)– Different cultures between banks in mergers– Diversion of management time

2. Careless Error Risk– Human error should be forgiven. But this is not covered by

law3. Competitive Risk

– LIBOR / EIBOR determine markups in Islamic banking4. Commodity Risk

– If you take delivery can the commodity price be managed?



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banking risk types

5. Communication Risk – Al Wadiah or Musharaka ? Definition problem being overcome by

AAOFI– Define terms clearly

6. Competence Risk – Are the latest guaranteed investor products really understood by the

banks’ senior management? By the customers? 7. Concentration (assets) Risk

– A problem for Islamic funds. No tobacco, banking and alcohol stocks can lead to heavy weighting in property and technology

8. Concentration (liabilities) Risk– Does your fund have enough investors or do you depend on one or two?



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banking risk types

9. Concentration (business) Risk (covered by Brian West?)– Financial supermarket or nimble niche player are both fine.

But can you reinvent yourself if markets change?

10. Convertibility Risk (covered by Mahendra Mehta)– Deliverability risk under exchange controls

11. Country Risk (covered by Faisal Ayoub & Leen Kumar)– much of Islamic banking is carried out in emerging markets.

Riskier?

12. Credit Risk (covered by Faisal Ayoub & Leen Kumar)– In Islamic banking risks are perhaps not loans. But

participations - so equity not loan risk



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banking risk types

13. Cultural Risk – Difference between Gulf and Malaysia in Islamic banking.

Four schools in Fiqh Islam

14. Currency (economic) Risk (covered by Mahendra Mehta)– GCC currencies are USD based. Will they become EUR

linked with an increase in trade?

15. Currency (transaction) Risk (covered by Mahendra Mehta)– if derivatives not permitted cannot hedge exchange rate for

purchases



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banking risk types

16. Currency (translation) Risk (covered by Mahendra Mehta)– Balance sheet value of dollar assets or liabilities fluctuates.

17. Customer Satisfaction Risk– If a bank pays no dividends despite making profits customers

will get annoyed on a profit/loss scheme.

18. Disaster Recovery Risk– If a disaster strikes can you cope? Remember Kuwait and

KIO’s overseas investments

19. Economic Activity Risk– Dubai is quite close to two of Bush’s “axis of evil” countries.

Tourists will stay away if trouble.



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banking risk types

20. Energy Price Risk (covered by Mahendra Mehta)– Most Islamic countries’ economies are linked to the oil price.

21. Environment Risk– Are environment unfriendly policies Haram? Does a

conventional bank have to look at the Hallalness of its policies?

22. Equity Market Risk (covered by Mahendra Mehta)– Islamic banking is ideally profit and loss sharing. This is

venture capital or equity investment. There appears to be a shift out of USD investments into EUR equities.

23. Fraud (banker) Risk (covered by Richard Stockdale)– Transparency is required. Avoid the risk of misinterpretation



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banking risk types

24. Fraud (customer) Risk (covered by Richard Stockdale)– If an investor loses money will he seek redress? Of course if he

wins he will not complain.

25. Fraud (staff) Risk (covered by Richard Stockdale)– BCCI was not a Middle East bank but fraud could occur here.

26. Image Risk (covered by Elmer Mendoza)– Something deemed Hallal could be deemed Haram. Sep 11

was bad PR. Seek a good PR advisor and be proactive.

27. Information Risk (covered by Elmer Mendoza?)– Lack of transparency in accounts? Differences in

interpretation? Enron fallout.



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banking risk types

28. Inflation Risk (covered by Mahendra Mehta?)– The securitised asset increases in value but not the repayment

amount which being a cash amount depreciates32. Interest rate Risk (covered by Mahendra Mehta)

– This is not a closed economy. If interest rates rise sharply deposits will flow out of Islamic banks and into conventional banks.

33. Interaction Risk (covered by Mahendra Mehta)– Same as correlation. Sep 11 had an effect and still does.

31. Language Risk – Same Arabic or English word can have different meanings in

the other language



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banking risk types

32. Legal Risk – UK law?

– Is the bank / customer permitted to carry out such business. Ultra Vires issue. Remember UK local authorities

33. Liquidity Risk (covered by Mahendra Mehta)

– Major problem for Islamic banking is the absence of a developed Islamic money market.

– Liquidity is about managing confidence and the liability side.

– About managing diversification of assets and liabilities.



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banking risk types

34. Morbidity Risk– No different from conventional banking. Make sure you can

cope if you staff fall ill during world cup matches.

35. Mortality Risk – Do you have offices in a tall building? Would you survive

major loss through fire?

36. Operational Risk (covered by Keith Blankley)

– Are strong procedural systems in place? Really everything other than market risks



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banking risk types

37. Performance Measurement Risk – Most measures of performance are crude and slavish

adherence to rules can lead to poor real performance

38. Political Risk (covered by Brian West?)– Seizure of assets post Sep 11; War, flight bans

39. Property (Real Estate) Risk – Would asset backing be sufficient in times of a property crash?

40. Rating Risk – A downgrading or even credit watch can impact on liquidity and the entire

business. Investment grade bonds do not default. They become Junk and then default.



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banking risk types

41. Regulatory Risk (covered by John Sandwick)– A firm operating globally will face different rules

42. Religious Risk – A Hallal product may later be deemed Haram. Zero coupon

bonds were Hallal. Non Islamic banks may have to become Islamic

43. Resignation Risk – Over dependence on one person’s skills and contacts? Don’t

think about Key man insurance.44. Settlement Risk (covered by Mahendra Mehta)

– Herstatt problem. If there is no escrow account there is settlement risk on Murabaha and BBA



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banking risk types

45. Systemic Risk (covered by Brian West?)

– Financial instability is contagious. Financial systems are closely inter-linked

46. Tax Risk

– Do the sale and repurchase transactions face purchase tax? Income tax or capital gains tax treatment? Is the same product treated differently in an Islamic and Conventional bank?

47. Technological Risk – Are your fax confirmations going to your customer or a competitor? Email

can take a long time – perhaps days.



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banking risk types

48. Transport Risk – traffic jams may have led to cancelled meetings which may never be

rearranged. Not perhaps a problem her but major issue in London, Kuala Lumpur or Bangkok

49. Weather Risk – Could you hedge against the weather? Kuwait’s burning oil

fields probably had an adverse impact on employees health and tourists.

– Weather derivatives are being traded but probably Haram. Weather Takaful?



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banking risk types – 50

50. Zero Risk – the most dangerous risk of them all

• It’s impossible to take an unnecessary risk.

• because you only find out whether a risk was unnecessary

• after you’ve taken it

• Giovanni Agnelli, President FIAT



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Particular Middle East banking risk issues

• Liquidity – undeveloped money market in Islamic banking

• Interest rate risk even in Islamic banking• Commodity risk – Murabaha, oil• Equity risk – fund management or banking?• Operational risk – are controls tight enough?• Religious – Hallal or Haram? – conversion to

Islamic?



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warren edwardes

Key Financial Risks 50 ways to lose your money

• 16 June 2002: Dubai, UAE

• Warren Edwardes,

• ceo, Delphi Risk Management Limited

• email: [email protected]

• web: dc3.co.uk

Documents

Key Financial Risks 50 ways to lose your money Risk 2002 16-18 June 2002 : Dubai UAE 1 of 25 warren edwardes Key Financial Risks 50 ways to lose your