Market Factors Affecting Rates of Return on Assets in Comparison with Expected Rates of Return for Investment Account Holders
A recent study conducted by the Central Bank of Afghanistan has highlighted the significant impact of market factors on rates of return on assets, particularly in comparison to expected rates of return for investment account holders (IAH). The study found that a combination of economic, political, and Shariah-related factors can significantly affect the returns on investments.
Displaced Commercial Risk
Banks must have an appropriate framework in place to manage displaced commercial risk, where applicable. This is crucial to ensure that investors’ funds are protected and that the banks’ financial positions remain stable.
Operational Risk
The report emphasized the importance of having adequate systems and controls in place to ensure compliance with Shariah rules and principles. Additionally, mechanisms must be put in place to safeguard the interests of all fund providers, including IAH.
Business Risks
The study highlighted the potential impact of business risks on banks’ financial positions. Adverse changes in markets, counterparties, or products, as well as changes in economic and political environments, can affect business plans, supporting systems, and financial positions.
Reputational Risk
The report also emphasized the significance of reputational risk, which can arise from failures in governance, business strategy, and processes. Negative publicity about a bank’s business practices can have a substantial impact on its market position, profitability, and liquidity.
Risk Management
To mitigate these risks, banks must have an effective risk management structure in place. This includes active oversight by the board of directors and senior management, as well as regular reviews of risk management activities to ensure that they are aligned with financial condition, risk profile, and risk tolerance.
Conclusion
The study’s findings underscore the importance of considering market factors when assessing rates of return on assets. Banks must have robust risk management frameworks in place to protect investors’ funds and maintain their own financial stability. By doing so, they can ensure that returns on investments are consistent with expected rates of return for IAH.
Recommendations
Based on the study’s findings, it is recommended that banks:
- Develop an appropriate framework for managing displaced commercial risk.
- Implement adequate systems and controls to ensure compliance with Shariah rules and principles.
- Establish mechanisms to safeguard the interests of all fund providers.
- Regularly review and update their risk management policies and procedures.
- Ensure effective oversight by the board of directors and senior management.
By implementing these recommendations, banks can better manage market-related risks and ensure that returns on investments are consistent with expected rates of return for IAH.