Risk Management for the Sharia Banking Industry

Bank Indonesia recently issued Regulation No. 13/23/PBI/2011 on Risk Management Practices for Sharia Commercial Banks and Sharia Business Units (“Regulation”) to establish risk management guidelines specifically for sharia commercial banks and sharia business units. Prior to this Regulation, Sharia banks and business units managed their risks in accordance with Regulation No.5/8/PBI/2003 on Risk Management Practices for Commercial Banks as amended by Regulation No. 11/25/PBI/2009.

Risk management under Article 1 (6) is defined as a set of methods and procedures to identify, measure, observe, and control risks that occur during bank business operations. Pursuant to Article 3,the Regulation addresses the following risks: credit risk; market risk; liquidity risk; operational risk; legal risk; reputation risk; strategic risk; compliance risk; rate of return risk; and equity investment risk. These risks are elaborated on in Article 1 (7) through (16).