ISLAMIC UNIVERSITY COLLEGE OF PERLIS (KUIPS)

BIB 4013 THEORY AND PRACTICES OF ISLAMIC FINANCE AND BANKING

TITLE CASE STUDY :

RISK MANAGEMENT IN ISLAMIC BANK

PREPARED BY:
NO. NAME MATRIC NO. COURSE
1. NORSARINA BINTI SIRI 0201112109 BACHELOR IN ISLAMIC
BANKING AND
FINANCE

PREPARED TO:
SIR MUHAMMAD ARIF FADILAH BIN ISHAK
Title: Risk Management In Islamic Bank
1. You need to outline the risks that occur in the bank and justify the solution have been
use by the bank.
Bank Islam found itself in the spotlight for the wrong reasons after more than two decades of
fulfilling Malaysians' financial requirements. The bank had lost billion money due to poor
credit management and had to wiped out all of its shareholders' funds. After suffering financial
losses in 2005 and 2006, the bank was forced to pay back the money. These massive losses
were attributed to a lack of credit control rather than embezzlement. With the bank struggling
under a mound of non-performing loans, a management shake-up was unavoidable if the firm
was to stop bleeding and turn its fortunes around. However, Bank islam manage to make an
impressive recovery to chart strong growth and return to profit.

From the early days and background the establishment of Bank Islam was recommendation by
Muslim in Malaysia for an alternative form of banking and finance that based on the principles
of Shariah law. Despite the achievement that Islamic banking received they also faced a risks
that occur in the bank for their first development. Because of the success of these Islamic
windows, the Ministry of Finance decided to expand the scheme to all financial institutions.
With the advent of Islamic windows and the liberalisation of the banking system, which
permitted international banks to operate Islamic banking units, Islamic banking was no longer
limited to Bank Islam. On a variety of fronts, the bank was under increasing competitive
pressure.

The bank's next danger will be recognised. Between 2004 and 2006, Islam experienced
significant losses, with a specific figure mentioned because to a large provision for bad
financing. As a result, the bank's financial deficit for the fiscal year came to an end, effectively
putting it out of business. According to a statement, financings have been provided out freely
over the years without appropriate comprehension of both the country and project threats
involved. Its consumer financing division, particularly its auto hire-purchase programme, took
a hit. One out of every three autos financed by the bank was later discovered to be stolen. The
country's first Islamic bank's large losses were a major cause of public concern, with the
potential to destroy public confidence in the country's Islamic banking sector. At the moment,
the Prime Minister urged for quick measures to ensure that Islam Bank could be restored. A
severe reorganisation and management shakeup were unavoidable in order to get the bank out
of the crisis. Zukri Samat was an obvious option, because he involve in reorganise a debt-
ridden companies during the 1997 Asian financial crisis.
From the beginning, Zukri samat has faced challenges in developing better Islamic banking in
Malaysia. After only two weeks in charge of the Islam Banking Institution, he realised that
there were significant problems in the department itself. The first risk he discovers is that the
bank is on the verge of a financial meltdown, which might result in a domino effect if not
addressed soon. As a result, his first order of business after entering office was to devise turn
around strategy to stop the bleeding and get the bank back on track for growth. By assembling
all of his top management, he may assemble a formidable team to face the difficulties that lie
ahead. He insisted that the employee act fast and concentrate on running the bank like a
commercial enterprise. To keep any employee who did not agree with this agreement from
working for the company. He prepared a voluntary severence scheme package for individuals
who did not feel they were up to the task. He also brought in a new management team
(including those from Danaharta) to redesign the struggling bank and restore its financial
health.

Next, the transformation process began with the discovery of several reasons that contributed
to the massive losses that nearly bankrupted Bank Islam. An in-depth examination of the bank's
strengths and shortcomings was promptly ordered. The answer to this problem comes from the
plan's backbone, which is based on two strategic goals: return to profitability and position the
bank for long-term growth. In terms of the turnaround plan, a large-scale reorganisation and
overhaul of the bank's processes have been implemented, with a focus on five major
components: recapitalization and balance sheet restructuring, IT infrastructure overhaul,
organisational transformation programme, cost rationalisation exercise, and human capital
development. The bank's capital should be strengthened, and its growth expansion plan should
be supported.

The bank's non-performing financing concern is next on Risk's agenda. A separate asset-
management unit was established and is being led by a team of people who previously worked
for Danaharta. The high price products and quick wins were their main focus at the time. The
bank's balance sheet was further reinforced by vigorous recovery attempts and the liquidation
of non-yielding assets. Other Risk The bank's existing IT system and procedures were
antiquated and unable to meet its expansion objectives. As a result, strengthening service
delivery touch points, upgrading and fine-tuning technology, and increasing customer service
and network design can all help to improve security for information flow. The consumer
financing segment also faced a risk, as we were forced to cease our hire purchase programme
due to an increase in infected portfolios. To tighten controls and processes, regional centres
were reorganised from twelve to five operational regions. The treasury and cash management
divisions were also beefed up at the same time.

Despite introducing Islamic banking to Malaysia, Zukri has rebranded the bank to reflect its
new character and culture. Zukri wants people to know that Islam Bank is not only for Muslims,
but also for everyone, and that it is based on Shariah law. The solution is to make redesigning
the logo an important part of the brand building activity, which was spurred by the results of
the brand perception survey. Ensure that the logo was unappealing, as it created the idea that
Bank Islam was exclusive for Muslims. The essence of Bank Islam is that Islamic banking is
for everyone, regardless of religion or nationality. Another issue was that Bank Islam's
corporate image was deteriorating, with bank branches discovered to be outdated, dilapidated,
and in in need of a makeover. In order to improve consumer brand experience, become more
customer-centric, and attract a new generation of customers, all bank branches were
refurbished to seem more upscale. Branches are supposed to serve as a focal point for retail
income generation, rather than simply as service shops, as was the case under the previous
business model. Another aspect of the efficiency drive was branch rationalisation.

They were tasked with dealing with the growing quantity of legacy financing that had become
non-performing, risking adopting a "Bad Bank" strategy. To boost capabilities within the bank,
solutions, specialists, and new talent had to be brought in, particularly in areas where the bank
was currently lacking, such as risk management, product creation, and credit recovery. A risk-
based target market was also created, as well as performance incentives. The formation of a
corporate investment banking division and a corporate finance department was the solution for
business line diversification. The Sales and Marketing department was re-established in
accordance with the customer-centric strategy, and it played an important role in product
development.

Risk management, which had previously taken a back seat, had a significant role in the massive
losses accrued. When a risk management expert was brought in, the bank's risk management
took on new meaning. The bank had a lot of risk problems. Employees were able to report the
bank balance in near real time thanks to the solution. The risk evaluation scorecards that were
being utilised to approve fresh finance applications were discovered to be unreliable. Then, to
assess consumer creditworthiness, make full use of the Central Bank's Central Credit Reference
Information System. Next, the bank's expansion was being stifled by enormous gaps in
technical capabilities caused by the lack of structured training programmes. A performance-
based reward system for all workers was implemented as a solution to promote a high-
performance culture throughout the organisation, allowing the bank to tie remuneration and
other awards directly to performance.

Change of branches alone is not enough to increase corporate growth, which is a risk that also
occurs. To enable a paradigm shift from merely providing and delivering services to ensuring
user happiness, an incentive structure was implemented to kickstart actual transformation. A
previously non-existent sales incentive plan was developed with the goal of providing
additional motivation to the sales force. A study of employee compensation was conducted, as
well as the requirement to compare the bank's total remuneration package to that of the banking
industry. Turning resistance into commitment can lead to risk, which is the fundamental issue
in the Bank Islam culture's employee perspective. The bank's management style and business
processes were quite rigid. Breaking the established attitude and existing mental framework of
bank personnel is the solution to this problem. Individual performance had no bearing on
remuneration and bonuses. Instead, the bank will pay all employees fixed incentives ranging
from two to three months' income, similar to what government employees get.

The next step was for Risk management to communicate its transformation vision to each and
every employee of the company. To achieve cultural change, the concept of change must flow
directly to the lowest levels of the organisation, persuading employees to gladly accept change.
As a result, a well-thought-out communication strategy was implemented. To ensure that there
was two-way communication, bank employees were urged to send Zukri SMS or emails with
their thoughts and concerns. Also, ensure that our stakeholders' confidence is maintained by
telling them that the issue is under control and that we have a viable plan in place to turn the
bank around and return it to profitability. However, finding the proper partner remains a
difficulty. We need to feel at ease with the people with whom we are doing business. Creating
value for our stockholders is also crucial. Due to the lack of an Islamic banking framework and
legislation in the country, Islamic banks find it difficult to compete on an equal footing with
conventional banks.

The solution is Bank Islam realised that the only way to gain a competitive advantage is via
innovation and high-quality customer service programmes. Bank Islam aimed to increase
customer loyalty by implementing programmes that improve the client banking experience.
Bank Islam focuses on five business values to help and guide its staff in providing exceptional
customer service. The bank's strategy and operations are guided by these values. Specific
initiatives were taken to reinforce the risk awareness culture after that. Educational
programmes, ranging from an induction course for new employees to regular training by risk
management, legal, compliance, and internal audit staff, as well as the installation of risk-based
key performance indicators and remuneration systems, were part of the solution.

2. Do you think the CEO had successfully bring back the bank in the right track?

From my opinion , the CEO which is Zukri Samat manage to bring back bank in the right place
and also He make many improvement from previous Bank Islam by changing and rebranding
bank itself. Zukri samat make change about misconception that citizen Malaysia think about
Bank Islam only for Muslim to Bank Islam is universal open to other ethnic or religion. Other
than that Zukri Samat manage to discover the reason why bank Islam faced many challenges
is because the management in the bank itself. He take immediate task by called senior
management to help strengthen back Bank Islam institution. From this enforcement that Zukri
Samat appointed manage to less the burden that bank faced.

Futhermore, the biggest challenges that Zukri Samat had to faced were changing the mindset
and work culture of the staff. By breaking the traditional mindset and existing mental
framework of the bank employee. Zukri Samat exist new idea to ensure employee can
communicate with him available, employee were encouraged to share their views and concern
with Ceo himself via SMS or emails. Also Zukri Samat make sure that stakeholder were well
informed about the bank plan for moving forward. He need to keep the confidence level of
stakeholder still intact by assuring them that situation was under control and workable plan
turn around the bank back to profitability.

Bank Islam has come a long way since the dire condition it found itself in in 2005, overcoming
numerous hurdles set by the ever-changing banking landscape. The days of double-digit NPF
ratios, sloppy finance approvals, and strict communication are long gone. Customer service
remains Bank Islam's top strategic focus as the bank strives for excellence. Customer
sophistication has increased the complexity of customer service and elevated customer
expectations for individualised offerings. Changing market dynamics are also placing pressure
on Islamic banks to improve their strategic posture and streamline their operations. Many
organisations, both domestically and globally, have looked to the bank for guidance on its path
to excellence. Bank Islam wants to advance its Shariah competencies and become a centre of
reference for Islamic banking under Zukri Samat's leadership. We aspire to become the
"Shariah Centre of Excellence" for applied Islamic finance in the future, according to Zukri.