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The aim of this research is to comprehend the size of financial risk of investment on Islamic bank, using Value at Risk (VaR) and Risk Adjusted Return on Capital (RAROC)
approaches. VaR is employed to measure the net return of mudharabah deposit, meanwhile RAROC is used for measuring the net bank profitability. This research is expected to give information for investors about financial and capital risk of their investment on Islamic banking industry, in term of deposits, share or Islamic bond. The
object of this research is the financial reports of Bank Syariah Mandiri (BSM) for three years, 2004 to 2006. VaR analysis shows that return on Mudharabah deposit at the BSM is stable enough for the period of observation. It means that the loss potential is low. In 2006, The relationship between VaR (zero) and gross expected return on Mudharabah deposit for three months is prospective if it is compared by 2004 and 2005 years. On the other hand, RAROC analysis shows that the profit potential of BSM has been declined during three years, 2004 to 2006. The
low level and fluctuation of the level of non-performing financing (NPF) already brought BSM to the lower capital risk.
Keywords: Investment, Value at Risk, Risk Adjusted Return on Capital, mudharabah deposits, potential loss, Bank Syariah Mandiri