Risk Management in
Islamic Financial Instruments
114
5.6 RISK MONITORING
IFIs must ensure the presence of an appropriate risk monitoring environment. IFIs have to
continuously monitor the collateral taken against different modes of financing. Risk ratings
should be analysed regularly. IFIs must have a system in place that enables them to monitor
the rates of commodities, currencies, and the returns offered by other banks. One of the typical
items that can be used to monitor the business risk of clients is to have a detailed idea of the
type of businesses in which its clients are involved. Consequently, quarterly or monthly
performance data can be collected from clients and can be adjusted with the market
performance in order to further analyse upcoming challenges. A number of components are
involved in this decision. Table 5.5 offers a description of the set of prerequisites. Around 50
percent of the banks do not reappraise the collateral unless it is required. One third of these
banks do not regularly check the status of the guarantor. Half of the sample banks have never
conducted a country risk rating. Major emphasis is given on analysing the business
performance of the borrower, which is the most traditional of all pre-requisites.
Table 5.6: The Prerequisites to Risk Monitoring
Issues Never (%) Occasionally (%) Regularly (%)
Appraisal of the collateral 16.7 27.8 55.6
Confirming guarantor's intention 11.1 22.2 66.7
Review country ratings 50.0 11.1 38.9
Review borrower's business performance 11.1 5.6 83.3
Figure 5.5: Use of Accounting Reporting System
The use of an accounting system affects the style of financial reporting. Different countries use
different reporting and accounting systems. The most popular among these systems is the one
provided by AAOIFI. This Bahrain-based organization provides standards for accounting-
International
22%
AAOIFI
45%
Others
33%