In this module, we shall look at risk management in the context of murabha as a mode of financing and not just as a contract. Risks in murabha financing could be severed and there could be some risks which are before the sale of the asset and there could be some risks which happen after the sale of the asset. And there could be some risks which may arise before the purchase of the asset as well. However, we will not go into all these details. Now, I might sound a bit unreasonable by going into this conversation on risks in murabha financing before reminding you what is the structure of murabha financing. I assume that by now you have fairly good understanding of murabha as a contract and murabha as an Islamic mode of financing. I might be wrong in my expectation. Hence, I would like to refresh your memory by giving you the simple definition of murabha. We studied that murabha is a cost plus sale in which case the seller discloses its profit to the buyer. Mostly the price in the contemporary context is paid after a delay. So there is a credit facility attached to a murabha contract. Murabha as a mode of financing is bigger than that one. When this is used as a mode of financing, then there are quite a few other arrangements like purchase undertaking. There could be the use of collateral attached to murabha as a mode of financing. So I hope that my conversation after this would make sense to you. So there are some risks which are pre-sale. You know when the bank buys the asset and then sells it to the customer, we are talking about that point. There could be a withdrawal risk i.e. the customer may change his or her mind. The customer fills the application form and the bank accepted it and then the bank made arrangements for buying the asset. But when the bank calls the customer, the customer says, sorry, I have changed my mind or sorry, my circumstances have changed. So that is what we call as withdrawal of application risk. There could be some supply-related risk. Customer is ready but the supplier is late. So that could be one risk as well. Then there are some ownership-related risk. There is a short period of time when the asset to be sold to the customer could still be in the custody and ownership of the bank. And something happens. Because of that, there would be certain risks in that situation. And then there are certain post-sale risks which include quite a number of risks and we would look into them. Let us analyze a typical Muraabha financing deal in the context of risk management. This is the point I am referring to, sale at T naught. This is the point when the bank actually sells the asset to the customer. And of course, it's a parley wo karee chukha hoga. Karee chukha hoga is point where T minus is a carrier. Before the asset is sold to the customer as part of a Muraabha mode of financing, there is, as I said, a possibility of withdrawal risk, supply-related risk, ownership-related risk. So this is happening before the core activity of selling the asset to the customer. We call them presale risks. Then the bank has actually sold the asset to the customer. There could be credit risk. This is relevant. Then, okay, the customer will have to start paying monthly installments, delay in them, default. Customer says, I want to return it to you. So that credit risk is very relevant. Markup risk. Now, let me explain this Markup risk. In this context, in case of Muraabha mode of finance, the price is fixed. Once the price is fixed, whatever happens in the market, that cannot affect the price of this Muraabha item. And this cannot affect the rate of return on that asset. However, in case of banks, banks would always go to the money market. And they would get some more money if they are in need of money. And they would be paying whatever return is relevant on that particular day. Those rates actually, they determine the cost of capital for the bank. Islamic banks, they do not charge interest, they do not pay interest. However, the movements in interest rate would have an effect on the Markup rate as well. So if Markup cannot be changed, although the interest rate benchmark is changing, that would give rise to a risk which is called Markup risk. Commodity asset price risk, this is slightly relevant. It's relevant indirectly. Of course, the bank has sold the asset to the customer. Then the ownership right is actually with the customer. If its price goes up or goes down, principally customer is responsible for that. However, the bank has a stake in it because of this credit risk, because of this possibility of default, this asset may actually come back to the bank. And if at that time, the asset has come back to the bank in a very bad kind of shape and its price is very low, the bank may not be able to cover its price. So from that viewpoint, this commodity asset price is relevant. Now what are the measures, risk management measures taken by Islamic banks to mitigate murabha mode of financing risk? Very quickly, the supply side or supply-related risk, they can be mitigated by an Islamic bank by entering into agreements which would give cancellation rights to the bank if the customer has run away, the bank's customer. So that is one risk management measure. Now between the procurement of asset and sale of asset, we said withdrawal risk, ownership, related risk, operational risk. Operational risk is there all the time. For operational risk, the use of technology, training and audit, this is a good measure. For withdrawal risk, we even previously mentioned purchase undertaking for Hamish Jiddia, i.e. a deposit. For credit risk, default penalty, collateral, other provisions, they are used as risk mitigating tools or risk management tools. The nature of risk in murabha, I would like to exemplify by way of credit risk. Islamic banks face credit risk because the customer may delay or default compete. Now this credit risk faced by Islamic banks is different from conventional banks. In case of conventional banks, they will give penalty and say, that penalty in case of conventional banks would go into the income statement of the bank. In case of Islamic banks, they cannot put the default penalty money on their income statement, but rather this should go to a charity. So although conventional banks face credit risk and Islamic banks face credit risk, but the nature and severity of credit risk in case of Islamic banking, in the context of murabha as an Islamic mode of financing is quite high. Hence, we should keep in mind and sometimes we say, Islamic bank is facing credit risk, conventional bank is facing credit risk, what's the difference? The difference is in details. So if there is a full default, an Islamic bank may mitigate that risk by way of having the financed asset as a collateral or having a lien on it or it may ask for a better quality asset as a collateral or third party guarantee is quite possible as well. Now operational risk in murabha and its management. Now in case, I would quickly give example of operational risk in case of murabha as a mode of financing. Now if the bank has received this application from the bank, from the customer and the customer says, I need a red Honda Civic model so and so, year so and so. Now the employee of the bank writes a white letter instead of a red one. At the time of delivery, the driver comes, that could create a problem. That kind of mistakes and oversight, they can happen in any situation, but where some kind of trade is happening, the incidence of operational risk is quite high. Now how can it be mitigated? By way of monitoring, by way of training and of course by use of technology as well.