Zahid Ali Channar

8/17/2019 Zahid Ali Channar

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Research Risk Management: A Tool for Enhancing . . .Research

RISK MANAGEMENT: A TOOL FOR

ENHANCING ORGANIZATIONAL

PERFORMANCE

(A Comparative Study et!een Conventional

and "slamic #anks$

Zahid Ali Channar1, Piribhat Abbasi

! Manisha "ai Mah#sh$ari

%

Abstra&t

The purpose of this comparative study is to examine therisk management system of banks and its impact on their

performance. For this study, the primary data was collected using

closed - ended questionnaire and analyzed through independent

sample T- Test and correlation. The secondary data was collected

from financial statements of the banks and analyzed through

financial ratios. The finding of research showed that onventional

!anks have more effective risk management process as compared

to the "slamic !anks. The findings also showed that risk

management has a negative non significant relation with

operational performance where as it has positive relation with

financial performance.

K#'$(rds: Risk Management% &erformance% Conventional

#anks% "slamic #anks

)EL Classi*i&ati(n: ' )*

+,-ept of Management Sciences% "sra niversity% /yderaad% &akistan ),

-ept of Management Sciences% "sra niversity% /yderaad% &akistan ,-ept

of Management Sciences% "sra niversity% /yderaad% &akistan

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Risk Management: A Tool for Enhancing . . . Research

Intr(d+&ti(n

Risk is inevitale and inorn in each and every economic

activity. According to #rain ()**+$ risk occurs !hen outcome is

uncertain. Risk e0ists as a part of an environment in !hich various

organi1ations operate (Shafi2 and 3asr% )*+*$ so each and every

usiness has to face risk. 4ithout taking risk% gro!th of usiness is like

a nightmare (Asim et al.% )*+)$. #anks like all usinesses face various

types of risk !hich arise due to the nature of their activities. The ma5or

aim of anks is to ma0imi1e profit y managing risk and y providing

various financial services (Alimshan% )*++$. "n &ractice !e have t!o

anking systems. 6ne !hich follo!s normal interest ased practices

called conventional anking and second !hich follo!s "slamic la! and

perform interest free activities !hich is kno!n as "slamic anking

(7hattak et al.% )*+$. #oth these anking systems are distinguished as

conventional anks follo! the S6&s prepared y their higher authority8

their income is interest !hich is earned y lending money and they

transfer the entire risk to others. 4hile "slamic anks follo! policies

made y Sharia9h that prohiits interest that9s !hy "slamic anks do not

deal in interest and are trade,oriented anks% their income is profit

!hich is earned y trading. They share risk !ith oth lenders and

orro!ers (Ashfa2% )**$.

Risks faced y oth "slamic and Conventional anks can e

separated in t!o categories: financial risks and non,financial risks.

;inancial risk is further divided into credit risk% li2uidity risk and market

risk !here as non,financial risks are divided into legal risk% operational risk

and regulatory risk ('leason% )***$. 6ther specific risks faced y "slamic

anks include lack of ria free risk,hedging instruments% profit,loss sharing

ased government securities are under developed% "slamic anks have

limited access to lender,of,last resort facilities provided y central ank

due to lack of Sharia9h compatile lender,of,last resort facilities% value of

funds and return rate are not certain% asymmetric information increase the

possiilities of moral ha1ard (Mounira and Anas% )**


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Research Risk Management: A Tool for Enhancing . . .

re2uisite due to these risks faced y anks. 6ne of key task of ank is to

discover and manage risks.(;atemi and ;ooladi% )**=$. "t is necessary for

anks either conventional or "slamic% to make risk management an integral

part of their usiness practices as constantly they have to deal !ith risky

transactions either !illingly or un!illingly.

Risk management is an essential component of strategic

management of an organi1ation. "t is an ongoing process of risk

assessment through different tools and methods !hich identify all

possile risks% determine !hich risks are critical to solve as soon as

possile and then e0ecute strategies to deal !ith these risks

(Tari2ullah and /ai% )**+$. Current risk management system

ased on the #asel "" aims to promote financial staility (#C#S%

)**=$. The #asel Accord has conse2uently appeared as an attempt

to protect anking system all around the !orld from the affects of

financial crises and structures it y using a set of rules !hich allo!

for systematic risk management (Mak!iramiti% )**$ conducted research on 6perational

Risk Management in Corporate and #anking Sector of &akistan. This

research aims to find the reasons for the implementation or lack of

adoption of integrated operational risk management approach. The

paper revealed that risk management can improve organi1ational

performance ut in &akistan% companies do not have appropriate

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infrastructure and proper kno!ledge of risk management. Research

sho!ed that in anking sector of &akistan the concept of operational

risk management can e seen up to some e0tent.

#arati et al. ()*+$ have carried out an empirical study of Risk

Management in "ranian #anks. The intention of this research !as to

study the factors !hich e0tensively influence the risk management

practices and to study relationship et!een some anking ratios like

cash to asset ratio% capital ade2uacy% si1e of ank and det to e2uity

!ith li2uidity% credit and operational risks. This study concluded that all

risks have positive relationship !ith capital ade2uacy and det. 6n one

hand% capital ade2uacy had a positive relationship !ith li2uidity risk

!here as the si1es of anks% cash to asset and det to e2uity ratios had

an inverse relationship !ith li2uidity risk. "n case of credit risk% capitalade2uacy had an inverse relationship !ith it !here as det to e2uity

ratio and credit risk are positively related and there !eren9t any relation

et!een credit risk and other variales. 6n the other hand% the cash to

asset ratio% si1es of anks and capital ade2uacy had an inverse

relationship !ith operational risk. ;inally the results of this study also

sho!ed that there !eren9t any relation et!een the dets to e2uity ratio

and operational risk.

Emira et al ()*+$ have conducted research on Comparative

Analysis of Risk Management in Conventional and "slamic #anks (The

Case of #osnia and /er1egovina$. This research paper tried todetermine the reliance of anks9 financial performance on the risk

management. The results of this research reveal that still practices of

risk management are developing !orld!ide. Currently all the anks

understand the value of risk management ut still they do not have

sufficient !ays for risk management. E0posure of "slamic anks as

compared to conventional anks to risk is much more ut its dynamic

risk management system allo!ed it to constantly compete !ith

conventional anks and get good returns. ?astly% anks !hich have

effective risk management system have etter financial performance.

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Ali Said ()*+$ has researched on Risks and Efficiency in the

"slamic #anking Systems (the Case of Selected "slamic #anks in

ME3A Region$. The o5ective of this study !as to investigate ho! in

"slamic anks% risks and efficiency are correlated !ith each other. This

research concluded that credit risk has negative relationship !ith

efficiency% !hile operational risk has found to e negatively correlated

to efficiency too. The li2uidity risk sho!ed insignificant correlation to

efficiency in "slamic anks in ME3A area.

3aveed et al ()*+$ conducted research on Risk management

practices and attitude of &akistani "slamic anking system employees.

This study !as intended to e0plore the Risk Management &ractices in

"slamic #anks and to study the impact of independent variales on

dependent variales. The independent variale of the study !ereunderstanding risk and risk management% risk assessment and analysis%

risk identification% risk monitoring% credit risk analysis and the

dependent variale !as risk management practices. The result sho!ed

that four out of five independent variales have positive and

significant impact on dependent variale.

Selma et al ()*+$ conducted research empirically on Risk

Management Tools &racticed in Tunisian Commercial #anks. The

purpose of the researchers !as to investigate risk management

practices and procedures follo!ed y anks. The results revealed

that anks in Tunisia kno! the importance of efficient risk

management in enhancing ank performance and cost reduction.Moreover anks have active risk management structures in Tunisia.

;urther researchers concluded that risk management must e an

ongoing process !hich systematically addresses all risks faced y

organi1ation in past% present and future.

6mar et al. ()*++$ conducted research on Risk management

and the implementation of the #asel Accord in emerging countries (An

application to &akistan$. The aim of this research !as to e0amine

attitudes of &akistani anks to!ards #asel Accord implementation

plans and thus to determine !hich factors create hindrances in the

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#asel Accord implementation in these anks. Results of this

research sho!ed that managers9 vie! regarding #asel Accord is

positive though operational risk appears as a ma5or ostacle for

#asel Accord implementation in &akistan. &rivate anks than pulic

anks are technically more capale and favoraly inclined to!ards

#asel Accord implementation.

Salman and ain ()*++$ conducted research that !hether

effective risk management affect organi1ational performance. Their ma5or

purpose !as to e0amine the current practices of risk management and

impact of these practices on performance of an organi1ation and to identify

the likelihood of improvements in soft!are development sector of &akistan.

The finding sho!ed that most of the organi1ations are not using properly

risk management practices esides that most of the organi1ations do not

have documented risk management policy accurately. "t also concluded that

the organi1ations !hich are using risk management practices have high

performance compare to those organi1ation !hich are not using risk

management practices.

3aveed et al ()*++$ conducted research on Risk Management

&ractices and "slamic #anks: An Empirical "nvestigation from &akistan.

Their purpose of study !as to e0amine the firm9s level factors that have

considerale impact on the risk management. The findings of study

sho!ed that ank9s si1e and financial risks (credit and li2uidity risk$

are positively and significantly related !ith each other !hile ank9s

si1e has negative and statistically insignificant relation !ith operational

risk. The det to e2uity and 3&?s ratios are negatively and

significantly related to operational as !ell as li2uidity risk !hile they

are positively related to credit risk. The capital ade2uacy has positive

significant relation !ith li2uidity !here as it is negatively and

significantly related to operational and credit risk.

Afsheen et al. ()*+*$ have researched on Risk Management

&ractices ;ollo!ed y the Commercial #anks in &akistan. This

research paper aims to e0amine the a!areness aout risk management

!ithin the anking sector of &akistan. #oth &rimary and secondary data

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collection sources !ere used. &rimary data !as gathered from +@

commercial ank9s risk management departments The secondary

data !as collected from performance revie! of the anking system

report of the period of years from )*** to )**


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Pr(bl#- Stat#-#nt

The failure of ?ehman #rothers% one of the 4orld9s leading

investment anks in the nited States on +@ Septemer% )**


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performance sho!s the profitaility of an organi1ation. nder the

light of this 5ustification !e design our /) and / hypotheses thatare:

/): Risk management increases operational performance of the anks.

/: Risk management increases financial performance of the anks.

R#s#ar&h S&(/#

Risk management !as assessed in the "slamic and Conventional anks

of /yderaad district. Mee1an #ank% #ank "slami% Soneri "slamic and

-uai "slamic #ank !ere taken as "slamic anks and /#?% #?% MC#

and Soneri #ank !ere taken as conventional anks.

R#s#ar&h M#th(d(l('

P(/+lati(n

The population of this study !as finite in nature and the

Dcontent of population !as all employees and customers of oth

"slamic and Conventional anks% the DE0tent of population !as

/yderaad -istrict and DTime !as -ecemer )*+.

Sa-/lin T#&hni2+#

&roaility ased Sampling techni2ues !as used for this

research. ;rom proaility ased sampling techni2ues% Stratifiedand random sampling method !ere used for collecting data.

Stratified method !as used for collecting data from employees and

simple random sampling method !as used for customers.

Sa-/l# Si3#

Total sample si1e for our study !as +@*. A sample si1e for

"slamic anks !as B@ and for conventional anks it !as also B@.

6ut of !hich +* samples !ere collected from top management% )*

from middle level management% )* from lo!er level management

and )@ !ere customers.


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0ata C(ll#&ti(n

;or this study a 2uestionnaire !as used for primary data

collection and it !as consisted of close,ended 2uestions !hich !ere

further divided into categorical and continuous variales.&rimary

data ac2uired from 2uestionnaires !as then analy1ed through

S&SS4;urther secondary data !as collected from financial

statements of all "slamic anks and conventional anks over

three years period from )*+* to )*+) (sho!n in tale B.>$.

Instr+-#nt

Standard instruments for this study !ere used to measure the

variales that !ere Employee satisfaction% Customer Satisfaction

and Risk management.

FEmployee Satisfaction !as measured through eight 2uestions taken

from scale (alphaG*.


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(!hich is less than *.*@$. These results help us to accept alternative

hypothesis and re5ect null hypothesis.

H5: Conventional anks do not act more upon risk management as

compared to "slamic anks.

H1: Conventional anks act more upon risk management as

compared to "slamic anks.

Second /ypothesis% Risk management increases

operational performance of the anks% !as tested through

correlation. "n this hypothesis operational performance !as

operationali1ed through employee satisfaction and customer

satisfaction. Therefore co relation of risk management !as found

!ith employee satisfaction and customer satisfaction separately.

;or the first part of the hypothesis% t!o continuous

variales used !ere Risk Management and Employee Satisfaction.

And for the second part of the hypothesis% t!o continuous variales

used !ere Risk Management and Customer Satisfaction.

Results sho!n in tale


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!here as ;inancial performance is measured y follo!ing financial

ratios:

Pr(*itabilit' Rati(s

+.

Return on asset (R6A$ G &rofit after ta0H total asset

).

Return of e2uity (R6E$ G &rofit after ta0H e2uity capital

.

&rofit e0pense ratio (&ER$ G profitHtotal e0pense.

Ris6 and S(l#n&' Rati(s

+. -et to e2uity ratio (-ER$ G -etH total e2uity

). -et to total asset ratio (-AR$ G -etHtotal asset

Adans t( 0#bt Rati(s

14 Advances to deposits ratio (A-R$ G AdvancesH deposits

R#t+rn (n Ass#ts 7ROA8

The higher R6A ratio sho!s higher performance and ank9s aility

to transfer asset into income. "n ;igure


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means that MC# earns ).B rupees on each invested rupee !here as

Mee1an ank earns +.)< rupee on each rupee invested in sales.

R#t+rn (n E2+it' 7ROE8

The higher R6E ratio sho!s higher managerial performance.

This ratio increase or decrease due to increase or decrease in paid

up capital and net income. "n ;igure


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-ER sho!s that ank capital can asor financial shocks and a

lo!er -ER ratio is preferale !here as higher or increasing ratio is

the result of aggressive det financing y the anks for sake of

gro!th. "n ;igure


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"slamic anks. These results help us to accept alternative hypothesis

and re5ect null hypothesis.

H5: Risk management is not increases financial performance of the

anks.

H1: Risk management increases financial performance of the anks.

C(n&l+si(n

Study aims to e0amine the impact of risk management on the

financial and operational performance of anks. Results reveal that

Conventional anks have systematic risk management processes to deal

!ith risks and it has een oserved that they have the enefit of high

financial performance and market leadership. E0posure of "slamic

anks to risk is more than conventional ank and risk management

practices are still not practiced !idely in the "slamic anking industry

of &akistan. Results also sho! that there !as non,significant negative

correlation et!een risk management and operational performance.

Results also prove that anks !hich have effective risk management

system% have high financial performance in contrast to those anks

!hich are not have effective risk management system. Study conducted

y Emira 7o1areviJ et al ()*+$ also reveal that higher the

Risk management% the higher !ill e the financial performance.

R#&(--#ndati(ns

As the lack of risk management practices in "slamic anks

is oserved in the study so it is suggested that they should develop

a systematic process for risk management. They should provide

trainings to their staff in risk management according to their needs.

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R#*#r#ns

Adelghani% E.% Ra5hi% M.T. and Selma% M.R.#. ()*+$. Risk management tools practiced in Tunisian commercial anks.

#tudies in !usiness and $conomics% pp. @@,BB.

Adullah% A.% 7han% A.K. and 3a1ir% 3. ()*+)$.A comparative study

of credit risk management: a Case study of domestic and

foreign anks in &akistan. %cademic &esearch "nternational %

Lol. % pp. B+,BB.

Ahmad% A. ()**$. % comparative study of "slamic banking in

'akistan( proposing and testing a model . &h- -issertation%

;oundation niversity% "slamaad% &akistan% pp. + >).

7han% T. and Ahmed% /. ()**+$. Risk management: an analysis of

issues in "slamic financial industry. 6ccasional &aper 3o. @%"slamic -evelopment #ank% Neddah% Saudi Araia% pp. )*.

Anas% E. and Mounira% #.A. ()**


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application to &akistan. *unich 'ersonal &e'$c %rchive% &aper

3o. >+=% pp.+,)*.

'leason% N. T. ()***$. &isk( The new management imperative in

finance. #loomerg &ress% &rinceton% SA.

/ai% S.% Masood% /.% /assan% S.T.% Muin% M. and #aig% .

()*+>$. 6perational Risk Management in Corporate and

#anking Sector of &akistan. "nformation and nowledge

*anagement, Lol. >% pp. +,+*.

7hattak% 3.A.% 7hashif,ur,Rehman% Ma5eedullah and 4asimullah

()*+$.Risk management practices and attitude of &akistani

"slamic anking system employees. %frican )ournal of !usiness

*anagement % Lol. B($% pp. )*),)+*.

7o1areviJ% E.% 3uhanoviJ% S. and 3urikiJ% M.#. ()*+$.Comparative

analysis of risk management in Conventional and "slamic

#anks: the case of #osnia and /er1egovina. "nternational

!usiness &esearch, Lol. =% pp. +*)Hfeature,performance,risk management,

risk,re!ardH.

Said% A. ()*+$.Risks and efficiency in the "slamic anking systems:

the case of selected "slamic anks in Mena region. "nternational

)ournal of $conomics and Financial "ssues% Lol. % pp. ==,B+.

Saleem% S. and ain,ul,Aideen ()*++$.-o effective risk

management affect organi1ational performance. $uropean

)ournal of !usiness and *anagement % Lol.% pp. )@


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;+#sti(nnair#

Instr+&ti(ns

&lease read the 2uestions carefully and on a scale of +,@ (!here +

indicates DStrongly -isagree and @ indicates DStrongly Agree$ please

rank the e0tent to !hich you agree !ith given statements. The

2uestionnaire is designed to kno! your opinion in general. &lease note

it is not to test policies of your anks. There is no right or !rong

ans!er. The data is eing collected for purely academic purpose.

Part: 1

Pa rt Accountaility of risk management is clearly set out and !ell understood across the ank

@ The management of risk makes an important contriution to the success of the ank

= The management of risk makes an important contriution to the financial staility of the ank in

the current financial climate.

B Risk management helps to reduce costs and e0pected losses at the ank

< "t is important to continuously revie! and update risk management techni2ues

Oour ank takes significant steps to keep up to date !ith current risk management trends

+* Oour ank understands the risk management systems used y other anks and their costs and

enefits

++ Oour ank finds it difficult to identify and prioriti1e its main risks

+) Oour ank finds it difficult to manage its main risks

+ Oour ank effectively assesses the likelihood of different risks occurring

+> Oour ank uses numerical methods to assess risks

+@ Oour ank is ale to accurately evaluate the costs and enefits of taking risks

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+= Oour ank is ale to accurately evaluate and prioriti1e different risk treatments even !hen there

are constraints on risk treatment implementation

+B Oour ank9s level of risk control is appropriate for the risks that it faces

+< Oour ank9s reporting and communication processes support the effective management of risk

+ Oour ank develops action plans for implementing decisions and management plans for identified

risks

)* Oour ank9s response to risk includes an assessment of the costs and enefits of

addressing risks management

)+ Oour ank9s risk management processes are !ell documented and provide guidance to

staff aout the management of risk

)) Oour ank9s training policies encourage formal training in risk management

) Oour ank specifically looks to recruit highly trained and 2ualified people in risk

management

)> "t is dangerous to concentrate ank funds in one sector of the economy

)@ #ank capital is ade2uate if the ratio of capital to risk !eighted assets is


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Part:

G#n#ral In*(r-ati(n R#s/(ns#

Ti&6 th# G#nd#r P Male P ;emale

Ti&6 th# A# P G )* year P )+,* year P + ,>* year P > +,>@year G @* year

Ti&6 th# Martial Stat+s P Single P Married

Ti&6 th# Ed+&ati(n P #achelor P Master P M& /"? P &h .-.

Ti&6 th# Orani3ati(nal P "slamic #ank P Conventional #ank

Stat+s


2015

)*

Documents

Zahid Ali Channar