Key%20Financial%20Risks%2050%20ways%20to%20lose%20your%20money

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Key Financial Risks 50 ways to lose your money

• 16 June 2002 Dubai, UAE
• Warren Edwardes,
• ceo, Delphi Risk Management Limited
• email we_at_dc3.co.uk
• web dc3.co.uk

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some actions can protect - the same actions can
destroy A 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/islamicbank
  ing.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
"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

• 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.

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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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Middle East news items to illustrate risk

• 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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Middle East news items to illustrate risk

• 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

• Acquisition Risk (covered by Brian West? Jim
  Stewart?)
• Different cultures between banks in mergers
• Diversion of management time
• Careless Error Risk
• Human error should be forgiven. But this is not
  covered by law
• Competitive Risk 
• LIBOR / EIBOR determine markups in Islamic
  banking
• Commodity Risk
• If you take delivery can the commodity price be
  managed? 

10
banking risk types

• Communication Risk 
• Al Wadiah or Musharaka ? Definition problem being
  overcome by AAOFI
• Define terms clearly
• Competence Risk 
• Are the latest guaranteed investor products
  really understood by the banks senior
  management? By the customers?
• Concentration (assets) Risk
• A problem for Islamic funds. No tobacco, banking
  and alcohol stocks can lead to heavy weighting in
  property and technology
• Concentration (liabilities) Risk
• Does your fund have enough investors or do you
  depend on one or two?

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banking risk types

• Concentration (business) Risk (covered by Brian
  West?)
• Financial supermarket or nimble niche player are
  both fine. But can you reinvent yourself if
  markets change?
• Convertibility Risk (covered by Mahendra Mehta)
• Deliverability risk under exchange controls
• Country Risk (covered by Faisal Ayoub Leen
  Kumar)
• much of Islamic banking is carried out in
  emerging markets. Riskier?
• 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

• Cultural Risk 
• Difference between Gulf and Malaysia in Islamic
  banking. Four schools in Fiqh Islam
• Currency (economic) Risk (covered by Mahendra
  Mehta)
• GCC currencies are USD based. Will they become
  EUR linked with an increase in trade?
• Currency (transaction) Risk (covered by Mahendra
  Mehta)
• if derivatives not permitted cannot hedge
  exchange rate for purchases

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banking risk types

• Currency (translation) Risk (covered by Mahendra
  Mehta)
• Balance sheet value of dollar assets or
  liabilities fluctuates.
• Customer Satisfaction Risk
• If a bank pays no dividends despite making
  profits customers will get annoyed on a
  profit/loss scheme.
• Disaster Recovery Risk
• If a disaster strikes can you cope? Remember
  Kuwait and KIOs overseas investments
• Economic Activity Risk
• Dubai is quite close to two of Bushs axis of
  evil countries. Tourists will stay away if
  trouble.

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banking risk types

• Energy Price Risk (covered by Mahendra Mehta)
• Most Islamic countries economies are linked to
  the oil price.
• Environment Risk
• Are environment unfriendly policies Haram? Does a
  conventional bank have to look at the Hallalness
  of its policies?
• 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.
• Fraud (banker) Risk (covered by Richard
  Stockdale)
• Transparency is required. Avoid the risk of
  misinterpretation

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banking risk types

• 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.
• Fraud (staff) Risk (covered by Richard Stockdale)
• BCCI was not a Middle East bank but fraud could
  occur here.
• 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.
• Information Risk (covered by Elmer Mendoza?)
• Lack of transparency in accounts? Differences in
  interpretation? Enron fallout.

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banking risk types

• Inflation Risk (covered by Mahendra Mehta?)
• The securitised asset increases in value but not
  the repayment amount which being a cash amount
  depreciates
• 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.
• Interaction Risk (covered by Mahendra Mehta)
• Same as correlation. Sep 11 had an effect and
  still does.
• Language Risk 
• Same Arabic or English word can have different
  meanings in the other language

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banking risk types

• Legal Risk 
• UK law?
• Is the bank / customer permitted to carry out
  such business. Ultra Vires issue. Remember UK
  local authorities
• 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

• Morbidity Risk
• No different from conventional banking. Make sure
  you can cope if you staff fall ill during world
  cup matches.
• Mortality Risk 
• Do you have offices in a tall building? Would you
  survive major loss through fire?
• 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

• Performance Measurement Risk 
• Most measures of performance are crude and
  slavish adherence to rules can lead to poor real
  performance
• Political Risk (covered by Brian West?)
• Seizure of assets post Sep 11 War, flight bans
• Property (Real Estate) Risk 
• Would asset backing be sufficient in times of a
  property crash?
• 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

• Regulatory Risk (covered by John Sandwick)
• A firm operating globally will face different
  rules
• Religious Risk 
• A Hallal product may later be deemed Haram. Zero
  coupon bonds were Hallal. Non Islamic banks may
  have to become Islamic
• Resignation Risk 
• Over dependence on one persons skills and
  contacts? Dont think about Key man insurance.
• 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

• Systemic Risk (covered by Brian West?)
• Financial instability is contagious. Financial
  systems are closely inter-linked
• 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?
• 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

• 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
• Weather Risk 
• Could you hedge against the weather? Kuwaits
  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

• Zero Risk the most dangerous risk of them all
• Its impossible to take an unnecessary risk.
• because you only find out whether a risk was
  unnecessary
• after youve 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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Key Financial Risks 50 ways to lose your money

• 16 June 2002 Dubai, UAE
• Warren Edwardes,
• ceo, Delphi Risk Management Limited
• email we_at_dc3.co.uk
• web dc3.co.uk