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MARKET RISK AND FINANCING RISK
ARIZONA STATE UNIVERSITY
IEE 454 - RISK MANAGEMENT
WEEK 6
3.1 Definition of Risk Market:
According to Ali (2006), market risk is the risk of loss suffered by the bank, as
reflected in the on and off balance sheet positions (balance sheet and administrative
accounts). The loss arises as a result of changes in the market price of the bank's assets
and liabilities. These price changes are a result of changes in market factors. Market
factors include bank interest rates, currency exchange rates, stock market prices, and
securities and commodities.
According to Irham Fahmi (2016) market risk is a condition experienced by a
company caused by changes in market conditions and situations outside of the
company's control. Market risk is often referred to as comprehensive risk, because of
its comprehensive nature and is experienced by all companies.
3.1.1 Forms of Risk Market:
According to Irham Fahmi (2016) there are 2 (two) forms of market risk,
namely:
a. General Market Risk
Market risk in general is experienced by all companies caused by a policy
carried out by related institutions where the policy is able to influence all
business sectors. For example, when a country's central bank conducts a tight
money policy with various instruments such as increasing the BI rate.
b. Specific Market Risk.
Specific market risk is a form of risk that is only experienced specifically in a
sector or part of the business without being comprehensive. For example:
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•
An announcement issued by an appraisal agency where the appraisal
agency has a good reputation and is recognized by the public.
•
One of the companies where the management or commissioners of the
company were involved in extraordinary criminal acts and exposed by
various media.
•
The products sold by these companies are considered to contain harmful
or haram ingredients. For example, products that contain lard.
3.1.2 Risk Category Market:
According to Irham Fahmi (2016) there are several categories of market risk, namely:
a. Foreign Exchange Risk
In general, in financial science, two forms of markets are known, namely
the capital market and the money market. In Indonesia, the capital market is under
the supervision of the Minister of Finance in this case through BAPEPAM-LK
(Capital Market and Financial Institutions Supervisory Agency), while the money
market is under the supervision of the Governor of Bank Indonesia (BI). The
definition of a financial market is a place where various financial activities are
carried out both in the form of selling securities carried out by the capital market
and also selling currencies as carried out in the money market. The early history of
foreign exchange began with the implementation of the floating exchange rate
system in the 1970s. So that since then the currency conditions in the world have
been integrated in one form of market where in particular it can be seen that the
application of the system allows many parties to be involved in playing in forex
(foreign exchange). In this forex market, currencies can be combined in two
categories, namely:
•
Hard currencies
Hard currencies include currencies that come from countries that have a
high level of monetary stability or usually come from developed countries
and often various parties make the country's currency as a measure in
converting with their country's currency. Examples include the US dollar
and the Japanese yen, the US dollar and the Euro, etc.
•
Soft currencies
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Soft currencies are a type of currency that is issued by a country but is
rarely used as a reference standard in international business market
transactions, for the reason that it is considered not yet feasible.
b. Interest Rate Risk
Interest rate risk is the risk experienced as a result of changes in interest rates that
occur in the market that can affect the company's income.
c. Commodity Position Risk
Commodity position risk is a situation and condition where there is a loss due to
changes in the price of commodity goods in the market caused by certain factors,
where this condition will be even worse when the commodity goods have been
contracted in a commodity contract and the information has reached the market.
d. Equity Position Risk
Equity position risk (wealth change risk) is a condition where the company's wealth
(stock and shares) changes from usual so that these changes have an impact on the
company's profits and losses.
e. Political Risk
Political stability is very important for a country. Political stability promises
sustainable development, but if the leaders and related parties in a country are not able
to create a conducive climate in the political field, it means that all leaders and officials
in the country do not have the spirit of leadership. And if this continues to happen, then
a leadership crisis will occur which will result in the search for leadership outside
official institutions.
3.2 Risk Financing:
According to Herman Darmawi (2006), risk financing is the procurement of funds
by the company to recover company losses. Risk financing is usually related to the
ways of procuring funds to recover losses. This method consists of:
1. Risk financing transfer (transferring risk along with financing).
2. Risk retention (risk is handled by the company itself).
3.2.1 Risk Financing Transfer:
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Risk transfer can be classified in two ways, namely risk control and risk financing.
Risk transfer through risk control does not require the mobilization of funds because it
is carried out by:
1. Transferring the assets or activities concerned to another party.
2. Transferring liability to the transferor with the intention of eliminating or
reducing the transferor's liability for the loss in question.
3. Assuming the loss is borne by the other party.
Risk financing transfer can be done by:
1. Risk transfer to insurance companies (insurance transfer)
Insurance Transfer is the transfer of risk to an insurance company. Insurance is
one way of dealing with risk, by transferring risk to an insurance company, by paying
a premium that is much smaller or minimal when compared to the risk of financial
loss in the event of a disaster. Insurance is one of the main pillars in planning future
finances. There are three schools of thought regarding insurance. The first school
views insurance as a relationship between the insured and the insurer as a means of
transferring risk. The second school ignores this relationship and views insurance as a
technique or mechanism for coverage. The third school combines the two previous
schools.
Insurance evens out the burden of loss by using funds contributed by group
members for payment. Thus, insurance can be said to be a loss equalization tool. To
reduce the economic burden on group members, insurers also participate in loss
prevention activities. However, the main purpose of insurance is not the equalization or
prevention of losses, but rather reducing uncertainty (uncertainty) caused by the
awareness of the possibility of loss.
The risks that can be insured must meet the following conditions:
•
Potential losses are considerable, but the probability is low
A substantial risk of loss is a requirement for the economic viability of
insurance. The possible loss must be large enough for the insured, while the
cost of insurance is low relative to the possible loss. If the probability of loss
is not great enough for the insured, they will not be interested in transferring
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their risk to the insurance company. Many risks are sufficiently handled by the
company itself, because the probability of loss is so small. For example, if a
company employee has a minor illness, it is sufficient for the company to
handle it itself.
•
Probability can be calculated
Insurance premiums are based on predictions about the future, while those
predictions are based on estimated probabilities. The probability itself is
usually based on past experience.
•
Bulk and homogeneous
The main requirement for a company to be insurable is mass. That is, there
must be a large number of units open to the same risk. In the case of car
insurance, there must be a large number of cars. In life insurance, there must
be a large number of people. To obtain accurate probability estimates, it is
necessary to observe a large number of events.
•
Losses incurred are incidental
The insured must have no control or influence over the event to be insured. In
reality, this situation only applies to accidental events, such as earthquakes or
weather.
•
Certain disadvantages
Generally, insurance companies promise to pay for losses if they occur during
a certain time and in a certain place. For example, an agreement to cover fire
losses at a certain location, the validity of this contract must be known when
and where the loss occurred.
2. Risk transfer to other companies that are not insurance companies (noninsurance
transfer).
Noninsurance transfers are mostly made to non-insurers through ordinary
business contracts, and through specialized risk transfer contracts. Many of these
contracts concern the transfer of financial responsibility:
1. Assets, according to Dra. Lanita Nianta (1994), assets are wealth or
economic resources owned by a company which can be in the form of
money, goods, and also rights that arise due to transactions that occurred in
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the past and provide benefits for the future.
2. Loss of net income, in general, loss of net income such as temporary
cessation of activities caused by a loss where the workspace cannot be
occupied.
3. Personnel losses, according to Agung Nugroho (2013) personnel losses are
losses due to personnel who befall personnel or people who are members of
the company's employees (including their families).
4. Liabilities to third parties, in general, liabilities to third parties are
obligations under the policy that the insured must fulfill towards third
parties, if the risks guaranteed by the policy cause the third party to suffer
losses.
Non-insurance transfers have some limitations that risk managers should be
aware of:
First: the contract may only transfer part of the risk that the manager thinks has
been transferred to the outsider. The manager should therefore study the contents of the
contract carefully.
Secondly: the language written in it is "legal" language which is very difficult to
understand, so it can be misunderstood.
Third: the contract can be canceled by the court, if its contents are contrary to laws or
government regulations or government policies or are unreasonable for the transferee.
An example of a non-insurance transfer is:
1. Through a leasing agreement, the lessor can transfer to the lessee the financial
responsibility for property damage or bodily injury to third parties. Prior to the
signing of the agreement, such liability was with the lessor.
2. Through a leasing agreement, it can also shift its potential losses to the lessor,
depending on how the agreement is worded. By leasing, it means that the lessee is
free from the risk of falling prices of the leased goods, or economic obsolescence,
or logical technological obsolescence, compared to if the goods were his own.
3. Risk transfer also occurs in contracts for the delivery of goods, contracts for the
storage of goods, contracts for the construction of a building and so on, where the
contract includes the payment of a risk premium.
4. Surety bond
In a surety bond contract, 3 parties are involved, namely, the surety (guarantor),
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the obligee (guaranteed), and the principal (contractor). Suppose someone binds an
agreement with a principal, in which it is stated that the principal will prepare the
work in accordance with the contract and the obligee will pay in full when the
work is completed, and each party agrees to bind the agreement with a surety. If it
turns out that the principal does not fulfill his obligations, then the surety pays the
loss of the obligee, and the surety will collect the amount from the principal, and
vice versa.
5. Neutralization
It is the process of balancing the chance of loss against the chance of gain. The
most popular example in the world of trading is "hedging". This hedging is carried
out if, for example, at the same time as making a sales contract, the seller enters
into a purchase contract with another trader for the same type of goods, thereby
covering the risk of price increases, the risk of inventory disconnection and so on.
3.2.2 Risk Retention:
The most common method of handling risk is self-insurance by the company
concerned. The source of funds is sought by the company concerned. This self-
insurance can be passive or unplanned (unplanned retention) or active or planned
(planned retention). It is said to be passive or unplanned, if the risk manager does not
pay attention to the existence of exposure and therefore does not make any effort to
handle it. Very few companies have identified all exposures to property, liability and
personnel losses. As a result, unplanned risk coverage is common and even inevitable.
In other circumstances, risk managers are aware of exposures, but continually delay
making decisions on how to deal with them.
Retention is active when managers consider other methods of dealing with risk
and then make a conscious decision not to transfer the potential loss. Sometimes it is
found that a risk that many people think should not be borne, but is in fact borne by the
company concerned. Conversely, it is also found that a risk that should be borne alone
is insured.
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Company reasons for retention
The reasons why companies engage in retention can fall into one of the following
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categories:
1. Necessity, because no other alternative is available
The necessity to bear the risk oneself is due to the impossibility of transferring
the risk. For example, liability for criminal acts, and extraordinary obsolescence
of property. So with a behavior that under normal circumstances can be insured,
but in circumstances where the probability of loss is very high. Furthermore, the
need to carry out retention is because no insurance company is willing to bear
such risks.
2. Cost
If a company transfers risk to an insurance company, it must pay a premium
that can be divided into two parts:
•
Loss allowance, which is the insurer's estimate of the insured's losses.
•
Loading which includes the cost of profit margin, and estimated
unexpected expenses. This loading can be as high as 30-40% of the
premium. If the company intends to bear the risk itself, it should
consider whether it will be cheaper, as it saves on premium payments.
3. Loss of hope
If the company believes that its expected loss is lower than the insurer's
estimate, it can save money in the long run by the difference between the two
calculations. Even if its expected losses are the same as the insurer's, the
company will still choose retentior. In addition, the estimated spread of
expected losses must also be considered. If the company faces a loss that may
be greater than it can bear in the following year, it will want to pay more than
the expected loss for insurance, in order to eliminate uncertainty in the short
term. The extra amount it wants to pay depends on the severity of the potential
loss and its ability to bear the loss. For example, if the goal of risk management
is peace of mind and stability of income, then the company is very concerned
about the variety of losses. On the other hand, if the company's goal is survival
only, it will not care about the variation of losses.
4. Opportunity cost
Opportunity cost concerns the timing of premium payments compared to
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expenditure on losses. For example, suppose the premium would be equal to or
less than the alternative loss and expense. The company may prefer to bear the
risk itself, if the time gap between the premium payment and the alternative
expenditure loss payment will provide a greater return on investment of the
reserve fund for the loss payment.
5. Quality of service
Some employers believe that the services provided by the insurer can be
performed better by the company or by a service bureau. The insurer doubts that
the company can provide coverage services better than what the insurer
provides, because the company lacks experience and professionals.
❖
Overview of factors that drive and inhibit retention
Overview of factors that encourage the use of retention and those that
hinder it. Things that drive retention equipment usage
•
If the cost is lower than the cost charged by the insurance company.
•
If expected losses are lower than the insurer's estimate.
•
If there are many exposure units, the risk will be lower because the company
will be able to estimate the probability of loss accurately.
•
Risk management objectives that accept large variations in annual losses
•
Expense payments and losses are inflated over a long period of time, resulting
in large opportunity costs.
•
Strong opportunities for investment, resulting in large opportunity costs
•
The advantages of in-house or non-insurer
servicing. Retention is made less attractive by the
following factors:
•
Costs that are greater than the costs charged by the insurance company.
•
Expected losses are greater than what the insurance company expects.
•
Exposure units are few in number, which means that the risk will be high and
the company will not be able to forecast its losses with satisfactory accuracy.
•
Financial inability to sustain maximum possible losses or maximum probable
losses in the short run.
•
Risk management objectives emphasize "peace of mind" and small annual
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variations in profit.
•
Loss and expense payments are inflated over a short period of time, thus
reducing opportunity costs.
•
Limited investment opportunities and low returns.
•
More favorable to the services of insurance companies.
•
Tax regulations may also make retention less attractive.
❖
How the Fund is Provided
According to Herman Darmawi (2006), providing funds for retention programs
can be done in one of the following ways:
•
No prior provision
This method is used if the risk is borne at a time that causes a loss, then this
loss is covered with funds that happen to be available or charged to the income
of the year concerned. In these circumstances the company gets cash in an
expensive way, for example with credit with high interest, or sells certain
assets at a low price.
•
Establish funds and reserves
This method is used for funds to cover the risk can be from reserves that are
annually credited with profits set aside for it. The amount of funds set aside is
the amount of expected loss per year. This method has weaknesses, among
others:
1. Reserves are book-entry accounts. So every day there is not necessarily as
much cash available as recorded in the reserve account concerned.
Therefore the company may have difficulty obtaining cash to cover risks.
2. Estimation of expected loss is rarely correct
3. It remains to be seen whether the creation of such a fund would be
permitted by the government, from a tax perspective.
•
Self-insurance
The company establishes a section within the company organization called the
self-insurer. The company periodically deposits funds into this self-insurer,
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just as the company deposits insurance premiums. This section is an
autonomous unit, therefore it is given the right to invest and it is while the
funds are idle, provided that at any time it can provide cash for the purposes of
covering risks, if suddenly a disaster occurs. Keep in mind, cell-insurance is
not an insurance company.
•
Captive insurer
The company organizes an insurance company, all (most) of whose customers
are the company itself, called a "captive insurer". The advantage is that the
captive insurer can buy protection from reinsurance companies, the difference
with a self-insurer is that the self-insurer cannot obtain protection from
reinsurance. Reinsurance protection is more flexible and less restrictive.
Therefore, the company through its captive insurer can buy protection for
risks that ordinary insurance companies cannot afford to cover.
Forms of Risk in Various Business Sectors
4.1 Definition Risk:
The definition of risk according to experts, among others:
⮚
According to Ricky W. Griffin and Ronald J. Ebert, risk is Uncertainty about
future events.
⮚
According to Joel G. Siegel and Jae K. Shim, define risk in three ways, namely:
▪
The first is a state that leads to a specific set of results, where the results
can be obtained by possibility which already known by decision-making.
▪
The second is variations in profits, sales or other financial variables.
▪
The third is the possibility of a financial problem affecting the performance
of the operation. Operations company or position financial position, such as
risks economy, political uncertainty, and industrial problems.
So, the definition of risk in general is a form of uncertainty about a situation
that will occur later (future) with decisions taken based on various considerations at
this time.
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4.2 How to Identify Risk :
Risk identification is the process of analyzing to find systematically and
continuously the risks (potential losses) that oppose the company.
For that it is necessary:
First : A checklist of all potential losses that could possibly occur in general
in any company.
Second : Using the checklist requires a systematic approach to determine
which of the potential losses listed in the checklist are faced by the
company being analyzed.
4.3 Barriers that occur in the business sector and solutions:
For those who will open a business, it is necessary to create a risk map that may
be experienced in various business sectors. The risk map can be made by applying two
general foundations, namely, having maximum reference and experience.
a. Reference.
Having a maximum reference (reference) means that a businessman has a
theoretical concept and a good understanding of thinking that is summarized in
the form of a company master plan.
For example: A company will open a branch of its business in an area, the
company has made a plan about its business concept from several references to
previous companies and developed it so that the concept is stronger.
b. Experience.
Experience is the ownership obtained by a businessman as a result of his long-
term forging so that he is finally able to determine and decide firmly what form
of work or business is very feasible to do and for him it is very much in
accordance with his talents and he loves the work / business he is doing now.
Where to be clearer in understanding the various forms of risk and their
solutions, we can see in detail below.
1. Agriculture and Fisheries Business Sector
▪
Agricultural products such as rice, secondary crops (beans, tubers, corn, etc.),
horticulture.
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▪
Fishery products such as inland fisheries, marine fisheries, fish breeding,
crabbing, shrimp farming, seaweed development, sea shells, pearl shells, sea
cage development, and others.
The forms of risk that will be experienced in this business sector are as follows:
a. Requires countermeasures in the field of providing pesticides for plant species
if attacked by pests.
⮚
The solution that can be given is that the company must always have a
sufficient amount of pesticides available, because sometimes when needed
it turns out that it is not
available in the market or the price is rising.
b. The agricultural sector has a strong relationship with weather conditions and
situations. If the rainy season does not fall as scheduled or is delayed, this will
affect the harvest season. For example, in the rice sector, if the rainy season is
delayed, the rice planting season in the dry season will also be delayed. This
condition results in the delay of the rice planting season until the dry season
period.
⮚
The solution that can be provided, the company and the surrounding
community ask for
Strong support from the government to be willing to provide and build a
modern agribusiness concept with the provision of maximum supporting
infrastructure, such as water storage reservoirs that can be used for
irrigation in the dry season, as well as the existence of modern irrigation.
Then it is expected that the situation and conditions of the dry season will
no longer be a barrier.
c. Products are prone to spoilage or expire quickly.
⮚
Solutions that can be provided include:
- Sell those products in a timely manner.
- The amount harvested is appropriately adjusted to consumer purchasing
power parity so that no goods are left over.
- Products that are expected to be difficult to sell and before they spoil
should be preserved, such as fish, shellfish and shrimp.
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d. It must have a safe, clean and convenient storage area to keep the product fresh.
⮚
Solutions that can be provided include:
- It has a refrigerator.
- Keeping the product temperature stable and fresh.
e. It requires intensive maintenance to keep agricultural and fishery products in
good condition.
⮚
Solutions that can be provided include:
- Create a time schedule so that maintenance and product handling can be
done more systematically and conceptually.
In general, the government needs to create business concepts in agriculture,
fisheries, forestry and plantations that are integrated with each other.
2. Livestock Business Sector:
▪
Livestock products such as the raising and breeding of poultry, cattle, pigs,
goats and so on.
The forms of risk that will be experienced in this business sector include:
a. Products produced are prone to disease, such as poultry farms affected by
bird flu, cattle farms affected by mad cow disease, pig farms affected by the
swine flu disease. This can have an effect on the decline in sales which results in the
sale of the farm.
⮚
Solutions that can be provided include:
- The company must always have the availability of the drugs needed
so that it does not always have to go to the market, because
sometimes when going to the market it could be that the drugs
needed have run out on the market or experience scarcity.
b. The quality and quality of livestock seedlings affect the future development
of livestock and their selling price in the market.
⮚
Solutions that can be provided include:
- The company must always monitor and directly see the quality of the
seedlings, because if it is not monitored directly and seen seriously,
there could be a loss (forgotten) and this could result in greater
losses.
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3. Oil and Gas Business Sector
Products in this business sector include oil and gas of all kinds. At present,
oil and gas dependence is still sourced from natural resources (natural resources),
namely those that come from within the earth. Various countries are trying to
develop oil and gas sources that come from above the earth, which are derived from
plants such as castor oil and other types, but until now, it has not yet been
developed is considered effective. This condition causes oil and gas producing or
exporting countries to continue to earn high foreign exchange.
The forms of risk that will be experienced in this business sector include:
a. The ups and downs of oil and gas prices in the international market greatly
affect the sales conditions and profits to be received.
⮚
Solutions that can be provided include:
- The company must have reserves and hedging with the aim that
fluctuating oil and gas conditions in the market do not affect the
company's performance both in the short and long term.
b. It takes a long time because when an oil and gas well is discovered, it does not
necessarily have sufficient oil and gas content or is suitable for exploration.
⮚
Solutions that can be provided include:
- Carry out the work of checking the quality of oil and gas wells
thoroughly, including the analysis tools and formulas used have a strong
and deep level of accuracy, because often the formula used in one place
is not necessarily suitable or suitable for use in other places / areas.
4. Construction Business Sector:
The product form of the construction business sector is engaged in
development which includes the construction of buildings, schools, hospitals, roads,
bridges, railroads, terminals, etc. buses, construction of drinking water pipelines,
construction of electricity from urban to rural areas and so on.
The forms of risk that will be experienced in this business sector include:
a. The rising and falling prices of construction goods have an effect on the
ongoing project work.
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⮚
Solutions that can be provided include:
- It is recommended that the company has a warehouse that stores some
of the necessary raw materials, and that can be used at any time if
needed when the market price increases or fluctuates.
b. The need for experts in the field of quality construction and salary (salary) that
must be provided must be with expertise, and usually those who have expertise
(skill) are very smart in negotiating the desired salary in the sense that they
have a strong bargaining position (bargaining power).
⮚
Solutions that can be provided include:
- We recommend that the company management make clear and firm
provisions regarding salaries in relation to the skills possessed, so that
everything becomes clear.
5. Food and Beverage Business Sector:
The food and beverage business is currently growing very rapidly, both on a
small, medium and large scale. One of the factors driving the development of this
business is the high demand of consumers, of course this is due to lifestyle factors
and the increase in people's income.
The forms of risk that will be experienced in this business sector include:
a. Manufactured products have an expiration date.
b. The products produced are highly dependent on natural products such as
agricultural products, so if there is a crop failure, such as flooding, pests, etc., it
will disrupt production and the price of raw materials will increase.
⮚
Solutions that can be provided include:
-Have sufficient reserves.
6. Tobacco Business Sector:
The forms of risk that will be experienced in this business sector include:
a. The passage of laws or regulations and other decisions that do not allow
smoking in certain places, thus limiting the sale of smoking.
b. Sales and campaigns from various parties both government and NGOs (Non-
Governmental Organizations) about the dangers of smoking for health, such as
smoking is not good for pregnant women, not good for the heart, not good for
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children, can cause cancer and so on.
⮚
Solutions can be provided for all forms of risk described above,
among others:
- Seeking new market share where laws or regulations on smoking ban
have not been strongly campaigned.
- Cigarette companies should cooperate with various parties and
implement a win-win solution policy, in the sense that they should
not force excessive campaigns that give the impression of being too
flashy because they want to pursue sales targets.
- Participate in setting aside a portion of the profits for the benefit of
the community and the nation in particular as a form of concern.
7. Insurance and Banking Business Sector:
Insurance and banking products are intangible assets, intangible asset
products are closely related to overall economic conditions such as the rise and fall
of inflation, economic growth, central bank interest rates and international
economic and monetary conditions.
Insurance Business Sector
The forms of risk that will be experienced in this insurance business sector
include:
a. Problems when insurance claims occur and for the insurance company must
provide funds in accordance with what was agreed by both parties in the
agreement such as fire, death, accidents, and so on.
⮚
Solutions that can be provided include:
- Must provide funds as agreed by both parties.
The forms of risk that will be experienced in this business sector include:
a. Conditions and situations of domestic and foreign banking competition are
getting sharper. Currently, the presence of foreign banks in the country is
increasing in number. They have greater capital adequacy and better
management quality. This condition causes various problems. The penetration
of foreign-owned banks into the regions creates friction and unbalanced
competition with rural banks (BPR).
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⮚
Solutions that can be provided include:
- The creation of a fair environment is to regulate and reaffirm the
principle of ownership over the principle of benefit. For example, it is
necessary to limit foreign ownership and create regulations on whether
foreign banks can enter all markets.
- Strict restrictions for foreign banks not to enter the micro market sector
(small), such as microfinance, especially if the place is already
operating Rural Banks (BPR). Especially if the government also has an
interest in developing the microfinance business as one of the
strengthening of the people's economy.
- The government should think about the space for banking activities
based on the type and category, not on a general basis. That "Banks
also need to be classified based on specialized markets, such as housing
banks, infrastructure banks, or agricultural banks".
8. Real Estate Business Sector:
The growth and development of the real estate business is influenced by
various factors such as the rise and fall of bank lending rates and foreign exchange
rates as well as various other forms of factors. The current condition of this
business is very growing in Indonesia, not only in big cities but even in all
provinces in Indonesia has the potential to be developed.
One of the government's policies in overcoming this problem is to require
developers of luxury apartments to contribute to building flats at affordable prices for
the middle and lower classes, this concept is a form of corporate concern for their
social environment. And this is further a form of applying the concept of CSR
(Corporate Social Responsibility).
The forms of risk that will be experienced in this business sector include:
a. The quality of real estate design results greatly affects consumer interest.
Therefore, companies need experts who have high references and experience,
and that usually has to be paid with high salaries.
⮚
Solutions that can be provided include:
- Recruiting potential young workers for further training and schooling, and
requiring them to sign a contract stipulating that they can be removed
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from the workplace and must reimburse twice the cost of training and
education if they suddenly act indiscriminately or default. The
employment agreement will serve as authentic evidence to be taken to
court if necessary.
9. Hospitality Business Sector:
The forms of risk that will be experienced in this business sector include:
a. Intense competition due to the number of new hotels, uncertain number of
visits, declining purchasing power of the public towards the tourism industry,
menus that are not enjoyed, or unstable economic conditions.
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Possible solutions include:
- By doing new innovations to make our hotel special compared to its
competitors. For example by making promos in certain seasons, for
example during the new year. And also we can create events regular
every week to attract the interest of the public and visitors who have
stayed at our hotel.
10. Travel Business Sector:
The forms of risk that will be experienced in this business sector include:
a. Concerns about the possibility of a global crisis causing a decrease in the desire
of tourists to vacation or go to a region or a country.
⮚
Possible solutions include:
- Lower ticket prices following global financial conditions.
- Provide tour packages. So tourists can get a cheaper price but still get
complete and adequate facilities.
11. Land, Sea and Air Force Business Sector:
The current force business is growing, this development occurs because the
public as users of transportation facilities want the availability of effective and
efficient facilities and infrastructure, this condition is felt especially by those in big
cities, because the concept in big cities is "Time is money". Thus causing many
parties to pay great attention to investment in this sector.
The forms of risk that will be experienced in this business sector include:
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a. The city streets are getting narrower and narrower, leading to traffic jams,
affecting the company's losses.
⮚
Solutions that can be provided include:
- The management of the company understands well the traffic routes
that have the potential to be prone to traffic jams and not traffic jams, as
well as anticipation in the event of congestion. For example, if the level
of congestion is too high and does not move, then the car engine should
be turned off but the air conditioner is still functioning so that
passengers still feel comfortable.
- Suggested that ORGANDA will criticize the relevant parties to resolve
this issue as soon as possible.
4.4 How to Control and Avoid Risk
Risk control is carried out using the following methods:
1. Risk aversion
2. Controlling losses
3. Separation.
4. Combination or pooling.
5. Risk transfer.
How to avoid risk:
One way to control a pure risk is to avoid exposing property, people, or
activities to risk by :
1. Refuse to have, accept or carry out the activity even if only temporarily.
2. Give back risks that have already been accepted, or stop the activity as soon as
it is discovered that there is a risk. So avoiding risk also means eliminating it.
Some characteristics of risk aversion should be noted, namely:
First: there may be no possibility of avoiding the risk, the more extensive the risk,
the greater the impossibility of avoiding it. For example, if you want to avoid all
liability risks, then all activities need to be stopped.
Second: the potential profit that would be received from owning an asset,
employing a particular employee, or being responsible for an activity would be lost
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if risk aversion is implemented.
Third: the narrower the risk, the more likely it is that new risks will be created. For
example, avoiding the risk of transportation by ship and exchanging it for land
transportation, there will be risks associated with land transportation.
Advertising and its Ethical Dimensions
5.1 Advertising and its Ethical Dimensions :
In this case, we will discuss another topic of business ethics that has received a
lot of attention until now, namely advertising. It is commonly known that our century is
the century of information. In this information age, advertising plays a very important
role to convey information about a product to the public. Thus, whether we like it or
not, advertising has a huge influence on human life both positively and negatively.
This image is intensified in a free market system that recognizes intense
competition among many companies selling similar merchandise.
More than that, in modern society advertising plays a major role in creating the
culture of modern society. The culture of modern society is mass culture, instant
culture, imitation culture, finally polished culture if not fake full of deception as
advertising is full of deceptive eyes and words. Advertising itself is essentially one of
the marketing strategies that intends to bring the goods to be sold closer to consumers
and producers. The ultimate goal of all business activities is that the goods that have
been produced can be sold to consumers.
To look at personalized advertising in terms of business ethics, we would like to
highlight four important points, namely the function of advertising, some ethical
personalities with respect to advertising, the ethical meaning of deceptive advertising,
and consumer freedom.
In this case, what is meant by advertising is an activity or tool in maintaining
and continuing what has been attempted by producers in introducing products that have
been presented to consumers, namely through various media that support to attract
consumer interest, including newspapers, radios, banners, events and so on. So that
consumers will become convinced of the products that have been offered by producers.
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Definition of Advertising according to experts:
a. Suhandang (2010:13)
Suhandang defines advertising as a mass communication process involving
a particular sponsor, namely the advertiser, who pays a mass media service
for broadcasting its advertisements, for example, through television
broadcast programs.
b. According to Ralph S in Morrisan, M.A (2010: 17), advertising is any form
of nonpersonal communication about an organization, product, service, or
idea paid for by a particular sponsor.
c. According to Sandra Moriarty, Nancy Mitchell, and William Wells (2011:
6) advertising is a type of marketing communication which is a general term
that refers to all forms of communication techniques used by marketers to
reach and convey messages to their consumers.
According to Article 28F of the 1945 Constitution, everyone has the right to
communicate and obtain information to develop their personal and social environment
and has the right to seek, obtain, own, store, process and convey information using all
available channels.
It means that everyone has the right to get information about anything from the
available media, so this makes advertising should look at its ethical dimensions so that
it can be enjoyed by various groups.
1. Advertising Function
a) Advertising as an information provider
Arens in Junaedi (2013: 109) reveals that "Advertising is the structure and
composition of information communication that is non-personal, generally carried out
for a fee which is characterized by persuasiveness, containing products (goods,
services, and ideas) identified as sponsors through various media.
In relation to advertising as a provider of correct information to consumers,
there are three parties involved and morally responsible for the information conveyed
by an advertisement.
1. First, the manufacturer who owns the product.
2. Second, advertising agencies that package advertisements in all their
dimensions: ethical, aesthetic, informative, and so on.
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3. Third, advertising stars. In this case, the moral responsibility for correct
information about a product is first borne by the producer.
b) Advertising as a shaper of public opinion:
Unlike the function of advertising as an information provider, in its other form
advertising is seen as a way to influence the public's general opinion about a product.
In other words, the function of advertising is to attract the masses of consumers
to buy the product. Ethically, manipulative advertising is clearly prohibited because
such advertising actually manipulates people, and all aspects of life, as tools for certain
purposes outside of human beings.
A persuasion is considered rational to the extent that its persuasive power lies in
the content of the argument and not in the way the argument is presented or delivered.
In other words, the persuasion is based on facts that can be accounted for. In contrast to
rational persuasion, non-rational persuasion generally only utilizes aspects
(weaknesses) of human psychology to make consumers able to be fascinated,
interested, and encouraged to buy the desired product.
Some of these issues that intersect with ethics include the following:
•
Ads shown are not educational
Some advertisements do not provide educational value to the public. A lot of
advertisements are illogical. There are also many ads that emphasize sexuality and
violence. Actually, these advertisements are not suitable to be shown.
Example:
An advertisement for one of the instant noodle products, in the advertisement
depicts a teacher who is teaching his students but suddenly there is a chicken that lands
right on his head. this is really outrageous, advertising service providers should make
more advertisements by not humiliating someone's profession. this is very easy to
imitate for teenagers who may have thoughts that will imitate the scene in the ad.
sorting some advertisements is really very necessary.
•
Advertisements shown attacking other products
Many advertising products try to bring down other products, usually similar
products. Of course, this action is very unethical and should not be done because such
actions will harm other parties.
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Example:
advertisement of provider X(blue) and advertisement of provider Y(red), in the
picture, one of the advertisements of operator Y(red) depicts a male object pointing to
operator X(blue).
By writing "Next Door Neighbor.....", the advertisement was alluding to the 0.1 second
call rate. It is clear that the two operators are attacking each other about the call rates.
In advertising, healthy competition is needed to attract consumers. Do not deceive
consumers or service users.
2. There are several ethical issues raised by advertising:
•
First, advertising undermines human autonomy and freedom, making people no
longer respected for their freedom to make choices about certain products.
•
Secondly, in this regard, manipulative and persuasive non-rational advertising
creates human needs with the result that modern humans become consumptive.
•
Third, what is also a serious ethical issue is that manipulative and persuasive
non-rational advertising even shapes and determines the identity or self-image
of modern humans.
•
Fourth, for societies with a very high level of economic and social differences,
advertisements undermine the sense of social justice of the community.
Advertisements that display luxury are very ironic with the social reality where
many members of the community are still struggling to just live.
We would like to outline some of the principles that need to be considered in
advertisement.
•
Advertisements must not convey false information with the intention of
deceiving consumers. An example is the advertisement for Le mineral,
with the tagline "Rich in sweetness" when in fact the water has the same
taste as water in general.
•
Advertisements are obliged to convey about certain products, especially
concerning human security and safety. For example, cigarette products,
the advertisement still conveys the dangers of smoking.
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•
Advertising should not lead to coercion, especially in a crude and overt
manner.
•
Advertisements should not lead to actions that go against morality
5.2 Ethical meaning of deception in advertisements:
The most relevant principle of business ethics here is the principle of honesty,
telling the truth and not deceiving. according to the large Indonesian dictionary, the
word deceit means dishonest actions or words (Lies, fakes, etc.) with the intention of
misleading, outsmarting or making a profit. in other words, deceiving is using
deception, outsmarting, deceiving, or also fraudulent acts carried out with planned
intentions.
Thus, since consumers are entitled to know the truth about a product,
advertisements that make statements that cause them to draw wrong conclusions about
the product are considered deceptive and morally condemned even if there is no
intention to deceive. In other words, based on the principle of truthfulness, morally
acceptable advertisements are those that provide statements or information that are true
as they are.
5.3 Consumer Freedom:
More concretely, advertising also determines the supply and demand relationship
between producers and buyers, which in turn also determines the price of goods sold in
the market. wants or needs are no longer something independent, but depend entirely
on production and advertising. Thus, in such a mechanism it is impossible for
consumers to decide or choose freely what their needs are. needs created by producers
and advertising. Therefore, although in certain situations it is said that "Production
creates needs", production does not automatically determine our needs as consumers.
5.4 The Meaning of Ethics and Aesthetics in Advertising :
The function of advertising ultimately shapes the image of a product and
company in the eyes of the public. This image is formed by the conformity between the
reality of a product that is The most relevant ethical principle in business in this case is
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the value of honesty in delivering advertisements. Thus, advertisements that make false
or untrue statements with the intention of deceiving consumers are merely deceptive.
The characteristics of a good advertisement:
I. Ethical, which is related to the appropriateness of displaying an advertisement
to the public.
II. Aesthetics, which is related to feasibility such as, the target market, the target
audience, when should it be aired?
III. Artistic, which is of artistic value so that it invites the attraction of the audience
who sees the advertisement.
Example of Application of Ethics in Advertising :
•
Cigarette advertising, by not explicitly showing people smoking.
•
An advertisement for sanitary napkins, which does not show realistically by
showing the woman's private parts.
•
Soap commercials, i.e. by not showing people taking a full bath. Ethics in
general:
•
Honest, i.e. not posting content that does not match the condition of the
advertised product.
•
Does not trigger conflict and SARA.
•
Does not contain pornography in it
•
Does not contradict the prevailing norms.
•
Not violating business ethics, e.g. dropping certain products on each other and
so on.
•
No plagiarism or copying of other product advertisements.
5.5 Advertising Laws and Legislation at Indonesia:
a. GCPL
UUPK is a law that regulates advertising in Indonesia. The objectives of consumer
protection are as follows:
•
Increase consumer awareness, ability and independence to protect
themselves.
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•
Raising the dignity of consumers by preventing them from negative
excesses in the use of goods and/or services.
•
Increase consumer empowerment in choosing to determine and claim their
rights as consumers.
•
creating a consumer protection system that contains elements of legal
certainty and information disclosure and access to information.
•
Raising the awareness of business actors about the importance of
consumer protection so that an honest and responsible attitude in business
grows.
•
Improve the quality of goods and/or services that ensure the continuity of
the business of producing goods and/or services, health, comfort, security
and safety of consumers.
b. Law Number 40 Year 1999 on Press
The press based on Article 1 point 1 of Law Number 40 of 1999 concerning the
Press (hereinafter referred to as the Press Law) is a social institution and a vehicle for
mass communication that carries out journalistic activities including seeking,
obtaining, owning, storing, processing and conveying information both in the form of
writing, sound, images, sound and images as well as data and graphics or in other
forms using print media, electronic media and all types of channels available.
In this case, the role of the press to fulfill the knowledge of consumer needs is through
advertising. However, these advertisements must be given to consumers precisely,
accurately and correctly.
Advertising companies are prohibited by the Press Law from :
•
Containing advertisements that can demean the dignity of a religion and/or the
harmony of life between religious communities and contrary to the sense of
public decency.
•
Advertising liquor, narcotics, psychotropic substances and other additives is not
in accordance with applicable laws and regulations.
•
Advertising with a demonstration of smoking and/or the use of cigarettes.
c. Law No. 24 of 1997 on Broadcasting
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Advertising can be done through broadcasting, which is organized in a
broadcasting institution. Broadcasting according to Article 1 point 1 of Law Number
24 Year 1997 about Broadcasting (for hereinafter hereinafter referred to as
LAW Broadcasting Law) is broadcasting activities through transmitting
means and/or transmission means on land, at sea or in space using electromagnetic
waves, cables, optical fibers and/or other media to be received by the public with radio
broadcast receivers and/or television broadcast receivers or other electronic devices
with or without assistive devices. Meanwhile, the definition of broadcast according to
Article 1 point 2 of the Broadcasting Law is a message or series of messages in the
form of sound, image or sound and image or in the form of graphics and other
characters that can be received through radio broadcast receivers, television or other
electronic devices, whether interactive or not, with or without assistive devices.Law
No. 24 of 1997 on Broadcasting Advertising can be done through broadcasting, which
is organized in a broadcasting institution. Broadcasting according to Article 1 point 1
of Law No. 24/1997 on Broadcasting (hereinafter referred to as Broadcasting Law) is
an activity of broadcasting through transmitting facilities and/or transmission facilities
on land, at sea or in space using electromagnetic waves, cables, optical fibers and/or
other media to be received by the public with radio broadcast receivers and/or
television broadcast receivers or other electronic devices with or without assistive
devices.
Meanwhile, the definition of broadcast according to Article 1 point 2 of the
Broadcasting Law is a message or series of messages in the form of sound, image or
sound and image or in the form of graphics and other characters that can be received
through radio, television or other electronic broadcast receivers, whether interactive or
not, with or without assistive devices.
The most exciting cellular provider war at the moment is between XL and
Telkomsel. Time and time again we can see advertisements for XL cards and
as/simpati cards (Telkomsel) knocking each other down by lowering their own tariffs.
Now the war between these two well-known cards is getting even more intense tapered
off and immediately unabashedly satirized each other in a vulgar manner. The star of
the controversial ad was SULE, a comedian who is now on the rise. Initially, Sule was
the star of the XL ad. In XL, Sule played one frame with child stars Baim and Putri
Titian. There, Baim was told by om sule to talk,
"Om Sule is handsome", but with innocence and honesty (which of course has been
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engineered by the director) the baim said, "om sule is ugly..".
After that, Sule then persuaded Baim to say again, "Om Sule is handsome" but this
time Baim was given ice cream by Sule. But still the baim said, "om sule ugly". XL
made a slogan,
"as honest as Baim, as honest as XL".
TELKOMSEL responded to this ad by launching an AS card ad. Initially, the star of
the ad was not Sule, but in the ad he had replied to the XL ad with words that read
more or less like this,
"That's why you don't want to be bullied by a child!!!"
Not quite there, the US card launched a new ad with the star Sule. In the ad, Sule told
the press that he had repented. Sule now uses kartu AS which he said was cheap from
the start, honestly. Sule also said that he was tired of being bought by small children
while laughing in a mocking tone. The ad war between operators has actually been
going on for a long time. However, this ad war is quite severe. Usually, no ad star
moves to a competitor's product for a period of less than 6 months. But in this case,
while the XL ad was still playing on television, there was already another ad that
"dropped" another ad using the same ad star.
Analysis:
In this case, the problem is not with the advertising star (Sule) who is the main actor in
the AS card and XL card advertisements that satirize each other, because a person's
right to carry out his obligations and humans should not be sacrificed for other
purposes besides their human rights. Where what is meant is Sule who has his rights as
a human being. As far as is known, Sule did not violate the Indonesian advertising
ethics code (EPI) but the advertising material that insinuated and demonized each
other. In one of the ethical principles stipulated in the EPI, there is a principle that
"Advertising should not denigrate competitors' products directly or indirectly".
In Indonesian advertising ethics, it is also given about the involvement of
minors, but these two providers still use children as advertising stars, not only that but
the advertisements displayed must also not teach children about things that are
misleading and inappropriate for children, such as what XL and AS providers do which
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teach their advertising stars to denigrate competitors in their business. What these two
competitors have done certainly violates the principles of EPI and should have been
realized by these two competitors, and should immediately stop this unfair competition.
Both competitors violate the principles and rules of the code of ethics and morals to
achieve their goal of gaining more profit and control over the market in a society that is
given wide freedom to carry out activities and develop themselves in economic
development and has been given the opportunity for certain businesses to unreasonably
control market share. This situation is supported by a business orientation that is not
only on products, promotions and consumers but emphasizes more on competition so
that business ethics are no longer considered and have finally become monopolistic
practices. Even though a law has been made that regulates business competition,
namely Law No.5 of 1999 concerning Prohibition of Monopolistic Practices and Unfair
Business Competition, these two competitors ignore the laws that have been made.
Unethical behavior in the business activities of these two provider competitors often
also occurs because of the opportunities provided by laws and regulations which are
then passed and misused in their implementation and then used as a basis for
committing acts that violate business ethics in running their business.
