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Table of Contents Title Abstract Risk Management Intro Venture Capital Bank Managing Risk at VCBank VCBank and Industry Ratios Analysis Conclusion References Capital Adequacy Ratio Return on Equity Return on Investments Page 3 4 5 6 9 10 11 12 13 14 15 2 .
This report is divided into 2 main parts: a personal interview with a risk executive at a bank and analyzing that bank’s risk management performance on the basis of various financial ratios. but especially when it comes to financial intermediaries. they must face high risk – in other words. The aim is to understand how efficient any risk team is in implementing their risk management plan to be easily portrayed in their financial results.” Because of this. But why is it so important? In order for any firm to gain high returns. 3 . no gain. The theoretical information was gathered through various secondary resources including business websites and risk management books. banks must establish and execute an effective risk management plan to ensure optimal performance. “no pain.Abstract Risk management is an important part of any company. while the financial information on the banks was obtained through BankScope.
The first step is to define the risk. RM plays an essential role in the financial system as a whole. and avoid another chaotic event. assessing and prioritizing varieties of risks associated. the results obtained from this activity has a great impact on society. there are several risk management standards to be applied. and then the risk manager will set up a plan in order to diminish or eliminate the potential results of the negative event.Risk Management Risk management is a practice of identifying. and the chosen strategy depends on the nature of the business. which was a result of loose credit risk management of financial institutions. Applying it on a broader view. There are varieties of risks that may be associated. such as the International Organization for Standardization (ISO). The role of the business management is set to dispose of risk that may pose a threat to the business. 4 . An example of an inadequate risk management is the recession that occurred in the 2008. In order to assure a sound system. The risk management is a vital component in the business planning.
high potential and undervalued small to medium enterprises(SMEs) substantially. The bank is segregated into 4 areas. Venture Capital’s vision is to continue growing. In October 2005. and have interviewed the Risk Management Executive. which are venture capital and business development. CFP) is an executive director at Venture Capital Bank. private equity. Mr. VCBank was established in the kingdom of Bahrain. helping to drive business growth. Head of Risk Management Tat Thong Tan (FRM.Venture Capital Bank Venture Capital Bank is the oldest Islamic investment bank in the GCC. 5 . and “to be the leading regional Islamic venture capital based investment bank. “ Venture Capital has been the chosen bank to conduct our assignment on. His job as a risk manager is attempting to manage the bank’s risk. after spending 17 years in Malaysia. rules and principles are all Shari’ah compliance. Singapore and Hong Kong. and supporting the social and economic development of the MENA region. activities. What had interested him to join the bank was the fact that it was a venture capital. VCBanks offers exclusive services and distinctive opportunities to its clients across the GCC and MENA Markets. The bank ensures that all their performance. He came to the region in 2007. with the license of Islamic investment banking from the Central Bank of Bahrain. is still in its infancy. Malaysian by nationality. and in order to lead this emerging venture capital industry. which in this region. who lack the necessities for growth and expansion. and use the Shari’ah as a guide for their behavior and profession. Middle East and North Africa that specializes in venture capital investments opportunities and offers risk adjusted returns on investments.Tan grew up in Singapore and England. to address certain information we seek. Venture Capital Bank has been distinctively set in order to support the fundamentally strong. financial advisory and real estate.
They are also performing asset management business that functions on a much smaller scale. Quantify (measure) 3. others. In terms of their risk profile. In order to manage credit risks. they face risks when they are unable to find investors for their assets – these assets for which they themselves are sponsors and they inject their cash. operational. Mitigate The identifying part of risk management starts out with a clear understanding of the various risks the banks will be faced with. review the bank’s policy and the entire set up.Managing Risk at VCBank The bank became operational in late 2005 with the aim of being a top Islamic investment bank focusing on venture capital/private equity. interest rate. single exposure limits (where the carried value exceeds 10%). 6 . they have implemented the “originate to distribute” model where an asset is sourced for which they must find investors. Identify 2. It is then the manager’s job to get involved with his employees. liquidity. VC has assigned certain limits such as concentration risk (need to know geographic and sectorial spread of assets). and capital risk. There are 2 types of liquidity risks: the bank’s cash position and fluctuations in asset prices. Venture Capital’s main concerns are credit and liquidity risk. The various risks faced by the bank derive the acronym CMOLOGIC which stands for credit. It was established with a paid up capital of 66 million dinars which increased to 150 million over a year. Despite of the different kinds of risks. The financial statements of the bank are studied for any of the bank’s risks. market. Venture Capital’s risk management process is set up of three broad functions: 1. As an Islamic bank. governance.
The risk manager strongly believes that Venture Capital has incorporated Basel II fully. VC also carries out risk governance where the board of directors delegates the risk committee overseeing the risk management framework. they are using the following formula: Single exposure limit those investments whose value exceeds 10% of capital. on an administrative basis. Self assessment and loss registering are applied to measuring operational risks (basic indicator approach). The risk weighted assets is divided into credit. and market risks. If the bank faces any risk problems. and interbank limits. Mr. their risk option is to share – not transfer – risk. among others. operational. reports to the CEO. For credit risk. As a part of mitigating risks. The risk manager. though they are facing challenges (ICAAP – Internal Capital Adequacy Assessment Plan). In the case of market risk they use value at risk (VAR) and the risk matrix system. reports to (and gets instructions from) the risk committee functionally and. In order to calculate their Capital Adequacy Ratio.connected counter parties (whether investments have been extended to a subsidiary/shareholder). VC bank has implemented different methods to measuring each type of risk. Being a venture capitalist. hence if capital is 100 and investments is $20 then the investment is a large exposure of 20%. they provide a certain level of capital for their other types of risks. This is because of the fact that typically systems are associated with market risks and to give an overview or macro view of their bank’s risk position. Quantifying risk involves applying numeric figures to each of the bank’s risks. The bank carries out scenario analyses and sensitivity analyses to test how they would react to various situations. Liquidity risks are managed by the bank’s own cash injections and. 7 . they are not using any tools (web-based or software) in their risk management process. at the same time.Tan. they are following one of Basel II’s prescriptions of 3 approaches: the standardized rating approach. the manager keeps an eye on controls via limits and then makes reports.
8 . while art requires creative thinking. it is found to be ineffective for an investment bank even though it is a good framework to monitor risks. but the company has kept this value in the region of high 30s . “risk management is both an art and a science. The risk manager finds this level of ratio as ideal and even wishes to strengthen it further. The central bank requires banks to keep their capital at 12%. but need to be reassessed in terms of investment banks.” The science involves implementing the correct systems.indicating they are a fairly well capitalized bank.Regardless of the application of Basel II. and risk management is a science and an art. know the process. Both Basel II and Basel III frameworks are efficient when applied to commercial banks. irrespective of whether they are conventional or Islamic. Essential for risk management: know the types of risk. According to the risk executive.
9 . The following table gives a brief description on the position of the three banks: Venture Capital Bank Total Assets* Net Income* 199 mil USD -59 mil USD Arcapita 3718 mil USD 50 mil USD Investcorp 2859 mil USD 140 mil USD Country Ranking World Ranking *latest figures available 28 10007 9 2323 10 2644 As can be seen. both country. The banks chosen along with VCBank were Arcapita. and Investcorp Bank BSC. Despite its size. in comparison to many banks in the sector.and worldwide.VCBank and Industry Ratios To obtain a macro view of the bank’s performance. This analysis studies how VCBank is able to control the risks it is subject to and stop it from affecting its performance. including those which were chosen to conduct the analysis. Venture Capital is a relatively small bank. if not at the same level. the bank should be able to perform on positive results. a conventional investment bank. Even with its narrow performance (dealing mostly with SMEs). the bank has been incurring a loss in the past year. several financial figures were gathered and compared to that of the industry. another Islamic bank that also deals in venture capital along with many other activities. VCBank possesses a weak position in the industry.
15.70 – projecting the banks sound position.04 46. -7.24 10 .10 Investcorp 3. with a CAR ratio of over 50% in 2009.51 2. less than half that amount is made available for investment and continuation of other business activities.70 22. on the other hand. has had its CAR ratio increase over the years and is currently at 25.80 25.70 10.25 6. It is approximately double that of Investcorp and almost tripling over Arcapita. A CAR ratio at 12% is essential while one that is only slightly higher is considered favorable by most banks.87 -1.44 -17.67 2.70 45. Though maintaining a CAR above the requirement is acceptable.10 20.59 18.44 12. this level may be a side effect to VCBank. Venture Capital is the only bank to go beyond the necessary percentage.a. and.16 Arcapita 0.52 18.a.Capital Adequacy Ratio (CAR) Total Capital Ratio Total Capital Ratio Total Capital Ratio VC Arcapita Investcorp n. at times. This means that a large amount of the money belonging to the bank is tied up in provisions/risk management and therefore. preferable.79 -7. Investcorp.82 1. Arcapita is the only bank that has maintained its ratio at and around the required percentage (fluctuating without a clear pattern). Risk Weighted Assets 2011 2010 2009 2008 Venture Capital Bank n.37 Banks throughout Bahrain are required to keep a minimum capital adequacy ratio of 12% as per enforced by the Central Bank of Bahrain.90 50. Comparing the three banks.74 17.
3 banks All investors would like to gain the highest possible return without dealing with any of the risks involved. It encourages banks to select risky. Although. Overall. While. high returns as compared to industry norms may be a sign of future problems. banks like Arcapita and Investcorp are striving to increase their return on equity. high leverage investments in order to increase its performance. It could possibly mean the business is unaware of its risk.Return on Equity (ROE) Peer group: Comparison: Return on Average Equity (ROAE) 2011/2010/2009 . Hence. the better. taking too much risk. rare a case exists where high-return banks have failed. this ratio has its drawbacks. VCBank’s ROE ratio faces a drop. Despite this. there is generally no reason why banks ROE stays high for an extended time period because of high competition. A high equity ratio is good for the economy as it protects banks against future crises. 11 . It may also be argued that in the finance industry. or barely meeting regulations. the higher a bank’s ROE in comparison to the rest of the industry.
assets). As a result. It must be remembered that banks are constantly highly leveraged when calculating this ratio and therefore. when the return on equity for VCBank dropped in 2010-2011. By a look at the chart. 12 . This value is again inconsistent with those that are a norm in the industry at the current period.Return on Investments (ROI) Comparison: Return on Average Assets (ROAA) 2011/2010/2009 . The issue with this ratio is that it can be manipulated in favor of the bank’s purposes.3 banks Peer group: Return on investments seeks to measure the profitability on an investment and can be modified to accommodate the type of investments made (in this case. so did the other. a percentage as small as 1 indicates large profits. return on the assets of the bank plummeted to an even greater degree. it seems that there is some correlation between a bank’s ROE and ROI – as one ratio increased or decreased.
regardless of whether it is a conventional or an Islamic bank. it shows that investment activities have little to do with Basel. ROI has been falling in the same manner as ROE. The latter may be true as the bank deals largely with SMEs. the bank is either too wary of the risks of activities or it is heavily investing in risky businesses. when they are barely taking any risks in the first place.Analysis Just by looking at the financial performance of Venture Capital Bank. despite the fact that VCBank has exceeded financial regulations and working hard to mitigate risks. it is understandable as to why a bank may wish to simply maintain its current positive ratio.Tan may be right about the fact that the Basel Accord is ineffective when dealing with investment banks. But in comparison to two highly ranked banks that function within the same industry. which is a vivid statement of the bank’s negative income and poor performance. should be showing positive results much higher than those of its rivals. so the bank is clearly making the wrong investments that are bringing losses. Though. 13 . Experts say that a minimum of 10% is required for future growth. where the bank is unaware of its risk. or barely meeting regulations. Mr. ROE and ROI. Based on the CAR ratio results. but then the remaining two ratios. In relation to the argument against high ROE. the bank has been showing increasingly dropping return on equity. Finally. taking too much risk. This is another factor that indicates the company is actually not taking enough risks. VCBank is spending too much capital to protect against risks.
for the money to remain idle or be invested without a gaining purpose. then there is no reason for Basel to not be effective when applied to investment banks. 14 .Tan states it to be. VCBank must reestablish their risk management plan in such a way that will allow them to take the risks that will grant them a profitable position.Conclusion The bank is following a highly conservative approach and there is definitely poor management performance. It is logical as to why the bank would want to maintain a high CAR ratio. but it also unacceptable. especially when Islamic banks are not allowed to take excessive risks. They may not be up to proper risk management standards as Mr. If other banks can perform profitably while following CBB standards. Strong adherence to the financial regulations is useless if the bank is not willing to take the necessary risks to become successful. in finance and in Islam.
vc-bank.References: http://www.asp#ixzz1wqdE6D7y http://www.net/ 15 .html http://www.com/vision.investopedia.whatisriskmanagement.com/terms/r/riskmanagement.
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