41. FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Liquidity risk (continued) Overview (continued) The Group’s and the Bank’s liquidity management is primarily carried out in accordance with Bank Negara Malaysia’s requirements and the internal limits are approved by the ALCO and/or BRC. The Group and the Bank have adopted BNM’s liquidity standard on Liquidity Coverage Ratio (“LCR”) to ensure maintenance of adequate stock of unencumbered high-quality liquid assets (“HQLA”) to survive the liquidity needs for 30 calendar days under liquidity stress condition and Net Stable Funding Ratio (“NSFR”) that aims to strengthen the funding maturity profile to reduce funding risk over a longer time horizon. The limits vary to take account of the depth and liquidity of the local market in which the Group and the Bank operate. The Group and the Bank maintain a strong liquidity position and manage the liquidity profile of its assets, liabilities and commitments to ensure that cash flows are appropriately balanced and all obligations are met when due. The management of liquidity risk is principally carried out by using sets of policies and guidelines approved by ALCO and/or BRC, guided by the Board’s approved Risk Appetite Statement. The ALCO is responsible under the authority delegated by the BRC for managing liquidity risk at strategic level. Management of liquidity risk The day-to-day responsibility for all liquidity risk exposures are managed by Treasury, who has the necessary skills, tools, management and governance to manage such risks. Limits and other risk controls are set to meet the following objectives: • Maintaining sufficient liquidity surplus and reserves to sustain a sudden liquidity shock; • Ensuring cash flows are relatively diversified across all maturities; • Ensuring deposit base is diversified and not overly concentrated to a relatively small number of depositors; • Maintaining sufficient borrowing capacity in the Interbank market • Maintain sufficient highly liquid financial assets; • Not over-extending financing activities relative to the deposit base; and • Not over-relying on non-Ringgit liabilities to fund Ringgit assets. MRMD is also responsible for the implementation of liquidity risk management framework. It develops the Group’s and the Bank’s liquidity risk management guidelines, monitoring tools, behavioural assumptions and limit setting methodologies. Escalation procedures are documented and approved by the ALCO and/or BRC, with proper authorities to ratify or approve any excess. In addition, the liquidity risk exposures and limits are reported to the ALCO and the BRC. Stress testing and scenario analysis are important tools used by the Group and the Bank to manage the liquidity risk. Stress test results are produced regularly to determine the impact of a sudden liquidity shock. The stress testing provides the Management and the BRC with an assessment of the financial impact of identified extreme events on the liquidity and funding risk exposures of the Group and the Bank. Another key control feature of the Group’s and the Bank’s liquidity risk management is the liquidity contingency management plans. These plans identify the preemptive quantitative and qualitative indicators of stress conditions arising from systemic or other crises and provide guidance on the actions to be taken in order to minimise the adverse implications to the Group and the Bank. 382 Notes to the Financial Statements for the financial year ended 31 December 2023 Bank Islam Malaysia Berhad ◆ Integrated Annual Report 2023
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