Presentation slide for Risk Management in Islamic Finance

1. RISK MANAGEMENT
IN
ISLAMIC FINANCE
Mahyuddin Khalid

2. Introduction To Risk
Content
Concept of Risk in Islam
Risk In The Al-Quran
Risk and Maqasid Shariah
What is Risk?
Component Of Risk
Classifications of Risk
Methods Of Handling Risk
Learning Outcome
• To study the meaning of risk and its
evidence in Al-Quran and Hadith
• Identify how Islam perceive the risk and
the risk management
• Explain the history of Islamic finance
related to the risk in the banking
sectors
2

3. What Is Risk?
Risk is uncertainty about the future outcome of an event.
Risk traditionally means possibility of harm, injury or loss.
For example; risk would be of being diagnosed with lung
cancer among smokers as there will always be uncertainty
as to whether a smoker will be suffer from cancer or
otherwise.
3

4. According to Oxford Dictionary of Economics, risk is
uncertainty about any action which the result outcome
might happen more than one.
Risks are uncertain future events that could influence the
achievement of financial institution ( i.e., Bank ) objectives
including strategic, operational, financial and compliance
objectives.
Risk is defined as uncertainty concerning the occurrence of
loss
 E.g the risk of being killed in an accident is present because
uncertainty is present.
4

5. What is Risk?
Risk in the financial world:
 “any event or possibility of an event which can impair corporate
earnings or cash flow over short/medium/long term horizon”
In the other words, the potential for future return to vary
from the expected returns is risk. If return could be
guarantee under al circumstances, there would be no risk.
However, such a guarantee is not possible in real world;
hence the need for risk management.
5

6. Concept of Risk from Western Perspectives
A Greek derivative of the world risqué was used in the 12th
century would appear to relate to chance of outcomes in
general and have either positive or negative implications.
The French word ‘risq’ has main negative but occasionally
positive connotations.
The English usage of the word since the 18th century has
very definite negative associations.
Risqum (Latin)
 Originally referred to the challenge that a barrier refer present to
a sailor and clearly has connotations of an equally fortuitous.
6

7. Risk In Islam
Risk or in Arabic, it is called mukhatir ( ‫)مخاطر‬ or mukhatarah
(‫ة‬ ‫)مخطر‬ atau khatr ‫خطر‬) ).
Khatr means exposure to damage and destruct or near to
the danger of the damage.
The scholars define khatr as gambling, uncertainty and
compensation
7

8. Ibn al-Qayyim defines mukhatarah as gambling in the
following text:
Meaning: “And risk can be in two forms…..second, in the
form of gambling which basically consuming property in
unjust manner.”
The word mukhatarah are explained by Imam Shafi’e in his
masterpiece, al-Umm:
 Meaning: “contract is void from two perspectives: firstly, the issue
of selling before the seller has actually owned the subject matter
of the sales. Secondly, when the sales is executed on the basis of
mukhatarah (uncertainty). In this context, Imam Shafie defines
mukhatarah as uncertainty
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9. Risk In The Al-Quran
Indeed, Allah [alone] has knowledge of the Hour and sends
down the rain and knows what is in the wombs. And no
soul perceives what it will earn tomorrow, and no soul
perceives in what land it will die. Indeed, Allah is Knowing
and Acquainted.
 (Surah Luqman – 31:34)
Tomorrow is not guaranteed, same goes to risk, no one can
ensure that the business will have profit
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10. Risk in the Quran
Surah Yusuf 12:67
ۡ‫ٱد‬ َ‫و‬ ٍ۬‫د‬ ِ‫ٲح‬ َ‫و‬ ٍ۬‫طب‬َ‫ب‬ ۢ‫ن‬ِ‫م‬ ْ‫ا‬‫و‬ُ‫ل‬ُ‫خ‬ۡ‫د‬َ‫ت‬ َ‫َل‬ َّ‫ى‬ِ‫ن‬َ‫ب‬ٰ‫ـ‬َ‫ي‬ َ‫ل‬‫ط‬َ‫ق‬ َ‫و‬ٍۖ۬‫ة‬َ‫ق‬ ِ َ‫ف‬َ‫ت‬ُّ‫م‬ ٍ۬‫ٲب‬ َ‫و‬ۡ‫ب‬َ‫أ‬ ۡ‫ن‬ِ‫م‬ ْ‫ا‬‫و‬ُ‫ل‬ُ‫خ‬ِ‫م‬ ‫م‬ُ‫ك‬‫ن‬َ‫ع‬ ‫ى‬ِ‫ن‬ۡ‫غ‬ُ‫أ‬ ٓ‫ط‬َ‫م‬ َ‫و‬َ‫ن‬
َ‫ت‬ ِ‫ه‬ۡ‫ي‬َ‫ل‬َ‫ع‬ ِۖ َّ ِ‫َّلل‬ َّ‫َل‬ِ‫إ‬ ُ‫م‬ۡ‫ك‬ُ‫ح‬ۡ‫ٱل‬ ِ‫ن‬ِ‫إ‬ ۖ‫ء‬ ۡ‫َى‬‫ش‬ ‫ن‬ِ‫م‬ ِ َّ‫ٱَّلل‬‫ٱ‬ ِ‫ل‬َّ‫ك‬ َ‫و‬َ‫ت‬َ‫ي‬ۡ‫ل‬ََ ِ‫ه‬ۡ‫ي‬َ‫ل‬َ‫ع‬ َ‫و‬ ُُۖۡ‫ل‬َّ‫ك‬ َ‫و‬َ‫ون‬ُ‫ل‬ ِ‫ڪ‬ َ‫و‬َ‫ت‬ُ‫م‬ۡ‫ل‬(٦٧(
Meaning: “O my children, do not enter the capital of Egypt
by one gate but go into it by different gates. However,
know it well that I cannot ward off you Allah’s will for none
other than He has nay authority whatsoever. In Him I have
put my trust and all who want to rely upon anyone should
put their trust in Him alone.”
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11. Risk In The Al-Quran
[Joseph] said, “You will plant for seven years consecutively;
and what you harvest leave in its spikes, except a little from
which you will eat. Then will come after that seven difficult
[years], which will consume what you saved for them,
except a little from which you will store. Then will come
after that a year in which the people will be given rain and
in which they will press [olives and grapes]”
 (Surah Yusuf 12: 47-49)
11

12.  Prophet Yusuf (p.b.u.h.) interpreted the dream of the king of
Egypt that Egyptian would face seven years of drought after
seven years of prosperity.
 Hence, he advised the king to develop an economic strategy in
order to overcome the upcoming catastrophe.
 Egyptians had to implement the proposition by actively
planting crops during the first seven years and store much of
the proceeds as a preparation to face seven years of drought,
as interpreted by prophet Yusuf.
 As recommendations implemented it resulted in the country
surviving the seven years of drought (Ibn Kathir, 1988).
12

13. Surah Al-Baqarah 2:282
‫ن‬ۡ‫ي‬َ‫د‬ِ‫ب‬ ‫م‬ُ‫ت‬‫ن‬َ‫ي‬‫ا‬َ‫د‬َ‫ت‬ ‫ا‬َ‫ذ‬ِ‫إ‬ ْ‫ا‬ ٓ‫و‬ُ‫ن‬َ‫م‬‫ا‬َ‫ء‬ َ‫ين‬ِ‫ذ‬َّ‫ٱل‬ ‫ط‬َ‫ه‬ُّ‫ي‬َ‫أ‬ٰٓ‫ـ‬َ‫ي‬َ‫و‬ ُۚ‫ه‬‫و‬ُ‫ب‬ُ‫ت‬ ۡ‫ٱڪ‬ََ ‫ى‬ ٍ۬‫م‬َ‫س‬ُّ‫م‬ ٍ۬‫ل‬َ‫ج‬َ‫أ‬ ٰٓ‫ى‬َ‫ل‬ِ‫إ‬ۡ‫م‬ُ‫ك‬َ‫ن‬ۡ‫َّي‬‫ب‬ ‫ب‬ُ‫ت‬ۡ‫ك‬َ‫ي‬ۡ‫ل‬ُۢ‫ب‬ِ‫ت‬‫ط‬َ‫ڪ‬
َّ‫ل‬َ‫ع‬ ‫ط‬َ‫م‬َ‫ڪ‬ َ‫ب‬ُ‫ت‬ۡ‫ك‬َ‫ي‬ ‫ن‬َ‫أ‬ ٌ‫ب‬ِ‫ت‬‫ط‬َ‫ك‬ َ‫ب‬ۡ‫أ‬َ‫ي‬ َ‫َل‬ َ‫و‬ ِۚ‫ل‬ۡ‫د‬َ‫ع‬ۡ‫ٱل‬ِ‫ب‬ِ‫ل‬ِ‫ل‬ ۡ‫م‬ُ‫ي‬ۡ‫ل‬ َ‫و‬ ۡ‫ب‬ُ‫ت‬ ۡ‫ڪ‬َ‫ي‬ۡ‫ل‬ََ ُۚ َّ‫ٱَّلل‬ ُ‫ه‬َ‫م‬ُّ‫ق‬َ‫ح‬ۡ‫ٱل‬ ِ‫ه‬ۡ‫ي‬َ‫ل‬َ‫ع‬ ‫ى‬ِ‫ذ‬َّ‫ٱل‬
ُ‫ه‬َّ‫ب‬ َ َ َّ‫ٱَّلل‬ ِ‫ق‬َّ‫ت‬َ‫ي‬ۡ‫ل‬ َ‫و‬ٍ۬‫ـ‬ۡ‫َي‬‫ش‬ ُ‫ه‬ۡ‫ن‬ِ‫م‬ ۡ‫َس‬‫خ‬ۡ‫ب‬َ‫ي‬ َ‫َل‬ َ‫و‬ ‫ۥ‬ۚ‫ط‬
Meaning: “O you, who have believed, when you contract a
debt for a specified term, write it down. And let a scribe
write (it) between you in justice. Let no scribe refuse to
write as Allah has taught him. So let him write and let the
one who has the obligation dictate. And let him fear Allah,
his Lord, and not leave anything out of it…”
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14. Risk In The Al-Quran
 Attestation by contracting parties in a financial transaction is
required to manage risk, particularly the credit risk
 Attestation is a basic requirement in Islamic commercial law,
whether it is an ordinary documentation at an individual level or
an official documentation at an entity level.
 The core objective of attestation is to mitigate the risk of any
party denying what was agreed upon, which may lead to a loss
of capital. In case the financial transaction that involves debt is
performed during a journey Qur’an allows the creditor to
receive collateral as the debt security.
 This is an example of risk management, i.e. mitigating credit
risk due to the failure of the debtor in fulfilling his financial
obligations.
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15. Risk In The Al-Quran
In financial matters and business dealings, there is always a
possibility of disputes and differences of opinion over the
mutually agreed conditions.
There is a need that such kind of transactions involving
money, land, rights, ownership, property and other articles
of value should be recorded in the form of contract and
signed by both parties in the presence of witnesses.
A well documented contract eliminates the risk of default
and ensures to secure the rights of all concerned.
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16. Risk in the Hadith
The well known hadith about tying a camel, narrated by
Anas bin Malik that an Arab Bedouin asked the Prophet in
Medina:
َ‫أ‬ َ‫و‬ ‫ط‬َ‫ه‬ُ‫ل‬ِ‫ق‬ْ‫ع‬َ‫أ‬ ِ َّ‫اَّلل‬ َ‫ل‬‫و‬ُ‫س‬ َ ‫ط‬َ‫ي‬ ٌ‫ل‬ُ‫ج‬َ َ‫ل‬‫ط‬َ‫ق‬ ‫مطلك‬ ‫بن‬ ‫أنس‬ ‫عن‬َ‫و‬َ‫ت‬َ‫أ‬ َ‫و‬ ‫ط‬َ‫ه‬ُ‫ق‬ِ‫ل‬ْ‫ر‬ُ‫أ‬ ْ‫و‬َ‫أ‬ ُ‫ل‬َّ‫ك‬ َ‫و‬َ‫ت‬‫ط‬َ‫ه‬ْ‫ل‬ِ‫ق‬ْ‫ع‬‫ا‬ َ‫ل‬‫ط‬َ‫ق‬ ُ‫ل‬َّ‫ك‬
ْ‫ل‬َّ‫ك‬ َ‫و‬َ‫ت‬ َ‫و‬
Meaning: “O the Messenger of Allah…should I leave my
camel untie and trust in Allah, or should I tie it?” The Holy
Prophet SAW replied: “Tie your camel and then trust in
Allah”
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17. Umar Al-Khattab said in a hadith:
ُ‫ة‬‫ط‬َ‫ك‬َّ‫الز‬ ‫ط‬َ‫ه‬ُ‫ل‬ُ‫ك‬ْ‫أ‬َ‫ت‬ َ‫َل‬ ‫ى‬َ‫م‬‫ط‬َ‫ت‬َ‫ي‬ْ‫ال‬ ِ‫ل‬‫ا‬ َ‫و‬ْ‫م‬َ‫أ‬ ‫ي‬َِ ‫وا‬ُ ِ‫ج‬َّ‫ت‬‫ا‬
Meaning: “Trade the money of the orphans, so it will not
be eaten (decreased) by zakah”
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18. Juristic Opinion On Risk
Ibn Taimiyyah
 No Shariah evidence to categorically prohibit all forms of risks.
 Allah and the Prophet Muhammad do not prohibit all types of
risks, or all activities which are doubtful in terms of whether it is
profitable or loss or safe (neither profitable nor loss
 The type of risk which is prohibited is consumption of property in
an unjustly or wrongful manner. The main reason for prohibition
from Shariah viewpoint is mainly concerned the unjust
consumption of property even without the element of risk. Risk
alone does not constitute prohibition
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19. Risk and Maqasid Shariah
 The broad perspective on risk and its management are
embodied in the overall goals of Islamic Law or maqasid shariah
 Chapra (2008) quotes al-Ghazali in defining maqasid as:
 The well being of people, which lies in safeguarding their faith (deen),
self (nafs) intellelect (a’qal), posterity (nasl) and wealth (mal)
 The principle of maqasid would imply taking all the precautions
to safeguard present and future wealth.
 As risk in Islamic economics represent the probable loss of
wealth, it is not desirable in itself from Islamic perspective.
 From Islamic perspective, economic activities are not judge by
inherent of risk but whether they add value and/or create
wealth.
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20. Risk from an Islamic Perspective
The broad perspectives on risk
and its management are
embodied in the overall goals
of Islamic law defines Maqasid
as promotion of “well-being
of the people, which lies in
safeguarding there:
Faith
Self
Intellect
Posterity
Wealth
20

21. Islamic Legal Maxim Relating to Risk
 Al-ghurm bil ghunm (‫م‬ ‫بطلغ‬ ‫)الغنم‬
 The detriment is as return for the benefit
 This maxims means “(entitlement to) profit is accompanied by responsibility (for
associated expenses and possible loss)
 Usually used to propose the preference for profit and loss sharing (PLS) financing
instrument
 The legal maxim is based from the hadith of Prophet SAW:
‫بطلضمطن‬ ‫اج‬ ‫الخ‬
 Meaning: “(entitlement to) profit is dependent on responsibility (for attendant
expenses and possible loss and defects)”
 The benefit of a thing is a return for the liability for loss from that thing
 The maxims assert that party enjoying the full benefit of an asset or object should
bear the risk of ownership
 The principles points out to the risk related to ownership associated with sale and
leasing transaction
 Eg. : Seller bear risk of the object of the sale/ Lessor bear risk for the asset leased out
21

22. Principle Of Risk Management In The Maxim Of Al-
ghunm Bi Al-ghurm
Al-ghunm bil ghurm is similar to the notion of risk-return
trade-off in conventional finance.
This maxim provides the rationale and the principle of
profit and loss sharing in sharikah contracts
A shariah maxim which bases the legitimization of earning
profit on the condition of risk-sharing and engaging in an
economic endeavour or enterprise which contributes to the
broader economy.
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23.  Another legal maxim that corresponds to this:
 Meaning: “the justification of profits can be based on effort, or through property
invested or liability assumed.”
 Jurists agreed to allow returns and profits which are equivalent by the added or
counter-values in any of the following :
 Utilize one’s property through investment or trading activities
 Effort in conducting a transaction
 Risk or liabilities assumed through ownership.
 E.g. in any sale contract, the seller must bear the risk of the goods, such as risk of
defects, loss or value depreciation and so on until the goods are sold and
delivered to the buyer. The risk of loss, defects or value depreciation only can be
transfer from the seller to the buyer after the buyer takes possession of the goods.
These responsibilities are the features of complete ownership (milkiyyah tammah).
The contract will be void if happen any conditions that does not follow this rule
23

24. Types of Risk from Islamic Perspectives
Hassan (2009) identifies
3 Types Of Risk From
The Islamic Perspectives
Essential risk
Prohibited risk
Permissible risk
24

25. Permissible Risk
Necessary and cannot be avoided in order to gain profit
E.g. operational risk, liquidity risk, etc these risks can either
be accepted or avoided.
25

26. Prohibited/ Non-Permissible Risk
 In the form excessive gharar.
 Ibn Taimiyyah explained in his words regarding consuming
other’s property in unjustly and wrongful manner. The principle
is taken from a verse of Quran:
َ‫ب‬ ‫م‬ُ‫ك‬َ‫ل‬‫ٲ‬ َ‫و‬ ۡ‫م‬َ‫أ‬ ْ‫ا‬ ٓ‫و‬ُ‫ل‬ُ‫ڪ‬ۡ‫أ‬َ‫ت‬ َ‫َل‬ ْ‫ا‬‫و‬ُ‫ن‬َ‫م‬‫ا‬َ‫ء‬ َ‫ِين‬‫ذ‬َّ‫ٱل‬ ‫ط‬َ‫ه‬ُّ‫ي‬َ‫أ‬ٰٓ‫ـ‬َ‫ي‬َ‫ج‬ِ‫ت‬ َ‫ون‬ُ‫ك‬َ‫ت‬ ‫ن‬َ‫أ‬ ٓ َّ‫َل‬ِ‫إ‬ ِ‫ل‬ِ‫ر‬ٰ‫ـ‬َ‫ب‬ۡ‫ٱل‬ِ‫ب‬ ‫ُم‬‫ڪ‬َ‫ن‬ۡ‫ي‬َ َ‫ت‬ ‫ن‬َ‫ع‬ ً‫ة‬ َ ٰ‫ـ‬ۚ ۡ‫م‬ُ‫ك‬‫ن‬ِ‫م‬ ٍ۬‫اض‬
ِ‫ح‬ َ ۡ‫م‬ُ‫ك‬ِ‫ب‬ َ‫طن‬َ‫ك‬ َ َّ‫ٱَّلل‬ َّ‫ن‬ِ‫إ‬ ۚ ۡ‫م‬ُ‫ك‬َ‫س‬ُ‫ف‬‫ن‬َ‫أ‬ ْ‫ا‬ ٓ‫و‬ُ‫ل‬ُ‫ت‬ۡ‫ق‬َ‫ت‬ َ‫َل‬ َ‫و‬‫ط‬ ًٍ۬‫م‬‫ي‬(٢٩(
 Meaning: “O you who believe! Squander not your wealth
among yourselves in vanity, except it be a trade by mutual
consent, and kill not one another. Surely, Allah is ever Merciful
unto you.
 Thus, sale can be void due to gharar, due to risks of existence
and taking possessions of the object of sale on one hand, and
uncertainty of the quantity, quality, price and time of payment
on the other.
26

27. Type Of Risk Which May Occur
 Uncertainty associated with the time of payment.
 E.g. sale for deferred payment when the date is not fixed
 Uncertainty associated with the existence of goods ‫الوجود‬ ‫َي‬ ‫.غ‬
 E.g. sale of non-existence goods like sale of fruits that not yet to exist.
 Uncertainty associated with the quality of goods ‫الصفة‬ ‫َي‬ ‫.غ‬
 E.g. ambiguity about the specifications or details of the goods
 Uncertainty associated with the quantity of goods ‫المقدا‬ ‫َي‬ ‫.غ‬
 E.g. selling something without the specification of price and quantity of
the goods
 Uncertainty associated with the possession of goods ‫َاي‬ ‫غا‬
‫.الحصول‬
 E.g. sale or trade of bird in the sky or fish in the sea is not valid
27

28. Other indicators which may affects any transactions and
cause them to be not permissible:
 Transaction involves riba
 Transaction involves deception and fraud
 Transaction involves element of exploitation and monopoly
 Transaction based on property which is taken without the owner’s
consent
 Transaction based on gambling and zero-sum game
 Transaction involves prohibited trading goods
28

29. Tolerable/ Essential Risk
Tolerable risk to be avoided does not fall under the above
2 categories of risk
3 Shariah parameters in managing this type of risk:
 The method used to manage risk must not contradict to the
principle al-ghunm bil-ghurm (‫م‬ ‫اااطلغ‬‫ا‬‫ب‬ ‫ااانم‬‫ا‬‫)الغ‬ (which means
(entitlement to) profit is accompanied by responsibility (for
associated expenses and possible loss).
 The method must not involve excessive ambiguity ‫جسيم‬ ‫غ‬ .
 e.g. cannot be used to manage a product which from the beginning
contains excessive ambiguity, such as future products, short selling and
options.
 The method used must comply with Shariah principles and only
used to avoid or manage risk that allowed by Shariah.
29

30. Component Of Risk
Uncertainty
Uncertainty exist due to
lack of knowledge on
what future will bring.
Degree of Risk
Not all risk have equal
tendencies. Some risk are
frequent and some are
rarely happen.
Cause of the
loss
Peril and Hazard
30

31. Risk And Uncertainty
Many consider the terms risk and uncertainty
interchangeable but have somewhat different meanings,
where risk refers to statistically predictable occurrences and
uncertainty to an unknown of generally unpredictable
variability.
Uncertainty is said to exist in situations where decision
makers lack complete knowledge, information or
understanding concerning the proposed decision and its
possible consequences.
31

32. Degree Of Risk
Not all risk have equal tendencies. Some risk are frequent
and some are rarely happen.
Loss Frequency
 Total amount of time that loss occurs in a particular time frame.
Loss Severity
 The amount of loss
 In term of financial, physical, emotion
32

33. Risk And Cause Of Loss
PERILS
• The cause of risk
• The main cause of
a loss
HAZARDS
• Acts or conditions
which increase the
chance of risks
33

34. Types Of Hazard
Physical hazard
• Refers to physical conditions which increase the chance of loss
• E.g. slippery road increases the chance of loss (accidents); defective wiring in a building
increases the chance of fire; defective lock on a door increases the chance of theft
Moral hazard
• Refers to the dishonesty or character defects in an individual which increase loss
• E.g. submitting a fraudulent claim, inflating amount of claim, murdering an insured to
collect the life insurance
Morale hazard
• Refers to the carelessness to a loss because of the existence of insurance
• E.g. leaving keys in an unlocked car, unlocked door, changing lanes suddenly
Legal hazard
• • Refers to the characteristics of the legal system which increase the frequency severity
of loss
• E.g. insurance clause which require insurers to include coverage for alcoholism
34

35. Classifications of Risk
Speculative and pure risk
Fundamental risk and particular risk
Financial and non financial risks
Static and dynamic risks
35

36. Categories Of Risk
Risk Description Example
Pure a. The possibilities that can result in only a loss
or breakeven.
b. The possible outcome can be adverse (loss) or
breakeven (no loss).
c. Pure risks can generally be covered.
a. Fire
b. Lightning
c. Flood
d. Storm
e. Premature death
f. Accident
g. Death
Speculative a. The possibilities that can result in loss, no loss
or profit (gain).
b. It is an uncertainty about an event that could
produce either a profit, neutral (no change in
value) or a loss.
c. Speculative risk cannot be covered.
a. Investment in the stock
market
b. Foreign currency
fluctuation
c. Venturing into new
business
36

37. Risk Description Example
Fundamental a. It affects the whole society or a large
number of people within the economy.
b. It is not within the control of an individual.
Damage to property due to
earthquake, war and etc.
Particular a. It affects only individuals and not entire
community.
b. It is within the control of an individual.
Damage to property from
accident, theft and robbery.
37

38. Financial risk and non financial
risk
Financial Risk
•Associated with loss that encounter based on money
Non Financial Risk
•Related to loss that can’t be measure by money but
related to emotional and feelings e.g. fear, sick
Static and dynamic risks
Dynamic risks
•Those resulting from changes in the economy (changes
in price levels, consumer’s tastes, and technology)
Static risk
•Involve those that would occur even if there no changes
in the economy (perils of nature, dishonesty of
individuals.
38

39. Risk Components
According to Allen (1995) risk in made out 3 essential
components namely :
 Probability of occurrence
 Severity of impact
 Susceptibility to change
39

40. Methods Of Handling Risk
Avoidance
 E.g avoid the risk of being sued for a defective product by not
producing it, avoid the risk of death in a plane crash by refuse to
fly
 BUT not all risk can be avoided
Loss control
 E.g reduce the number of heart attacks by weight control, healthy
diets and stop smoking; strict security measures to reduce acts of
terrorism; warning system to reduce number of victims of tsunami
etc
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41. Retention
 Retain the risk by involving in insurance; e.g know the risk of job
related accidents
Non-insurance transfers
 E.g risk of defective tv can be transferred to the retailer thru
warranty schemes; the risk of increasing rent can be transferred
to a long-term agreement; hedging – to transfer risk of
unfavorable price fluctuation by involving in futures contract
Insurance
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42. Mahyuddin Khalid
End of Chapter
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