Credit risk management in banks dissertation

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Types of risks in banking - Risk Management in Banking sector - Types of risks in banking sector

The first chapter of this thesis. According to Dan Borge, in The Book of Risk, risk means being exposed to the possibility of a bad outcome, and risk management means taking deliberate. Probability Severity. Physical Description: 98 S graph.

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Credit Risk Management in Zimbabwe

The credit risk is like as follows: the borrower or the business counterparties are unable to fulfill the duty of their contracts out of the deterioration and other factors from the entrepreneurs such as entanglement between firms ; therefore this causes the risk of agreement violation and the loss of money. Generally, from different objects and behaviors, the credit risk could be further divided into two types: 1 lending risk, also called, issuer risk. This type of risk is duo to the violation of agreement when borrowers or bond issuers do not repay their debts or their credits get deteriorated, causing the money loss.

Settlement risk is the risk that counterparties do not fulfill their contract duties in the due settlement time and cause the loss of the equality principal to the bank. Pre-settlement risk is the risk that counterparties violate the agreement before the final settlement day and cause the risk of contract violation to the bank.

The bank credit risk management organizations and functions may appear in different forms. However, the bank should ensure the official positions and related authorities work independently and attributably, not just focusing on the superficial independency, to reach the goal of credit risk management and supervision, such as Aebi et al. Credit verification functions should be independent from credit granting functions to make sure the credit result report objective and just. The unit responsible for designing, establishing, or executing the credit risk measurement system should be independent from the credit granting functions to keep this unit free of other interruptions.

The office worker in charge of verifying the credit risk measurement system should be different from the office worker responsible for designing or choosing the credit risk measurement system to lower the possibility of making errors from the credit risk measurement system. The authorities should obey the regulations to restrict the interested parties in the bank. Re-check the credit granting workers of interest in the bank, such as the credit granting of the general manager and the high-ranked officer. Regularly at least per year check the strategies and related policies of the bank credit risk management to confirm that the high-ranked managers carry out the regulations successfully and to make sure the credit granting in accordance with those strategies and related policies.

This is then to make the high-ranked managers ultimately responsible for establishing and maintaining the appropriate and effective credit risk management mechanism. Make regular inspection on the bank management information and reflect on the correct credit risk strategies to guarantee the suitability and sufficiency of the bank capital. Influenced by the debt crisis at s, banks mostly began to focus on the preventative measures and management against the credit risk.

Since s some major banks acknowledged the fact that the credit risk was still the key factor in financial risks and they began to concern about the problems of the credit risk measurement, trying to establish the internal method and model for measuring the credit risk.

Morgan obtained the widest attention. After the outbreak of Asia financial crisis in , some new phenomenon appeared in the global financial risk. The loss was not necessarily caused by single risk but by the mixture of the credit risk and the market risk etc. Financial crisis motivated people in the banking industry to value the mixture model of the market risk with the credit risk and to focus on the quantification problems of the operation risk.

Nevertheless, the modern development of banking makes those methods obsolete and inaccurate. With the advance of modern science and technology and with the enhancement of the management of the market risks plus other risks, modern credit risk management has also been lifted to the certain level. These models measuring the credit risk still arouse disputes over their effectiveness and reliability. Hence, in all respects, it is still lacking an effective calculating measure to assess the credit risk Jiang and Lo ; Nuno and Manuela ; Swami The construction of an effective credit assessment model requires that credit staff possess sufficient professional knowledge and practical experience.

Previous credit assessment studies have mostly analyzed the opinion of a group of credit staff by using a single precise value, which cannot fully describe the actual distribution of credit staff opinions and tends to diminish minority and peculiar opinions. Therefore, precise values are inapplicable in actual decision environments and constructed credit assessment models do not possess the features of anti-catastrophism and sensitivity, which are the criteria of a superior assessment system Hsieh Srinivasan and Kim stated that credit assessment can be conducted using theory-based scientific and objective methods.

The experience of credit decision managers and senior credit staff responsible for credit assessment can be applied to credit assessment models for determining credit categorization and rating weights Chiou and Shen ; Lee et al. When a bank assesses corporate customers, the relationship and degree of influence among the assessment elements are problems common to bank managers.

In other words, when a bank manager intends to improve numerous decision-making elements, the optimal approach is to search for the most critical element that influences all other elements. Problems were thoroughly understood, and elements were determined and defined in a complex system through in-depth interviews, a literature review, brainstorming, or the collection of expert opinions. Based on the relationship among elements, a scale of influence degree was developed for pair-wise comparisons.

In the assessment scale, 0, 1, 2, 3, and 4 denoted no influence , low influence , moderate influence , high influence , and excessively high influence among the aspects elements , respectively. The number of elements was denoted as n.

Expert opinions were collected by conducting a questionnaire survey. Elements were compared in pairs based on their relationship and degree of influence. Through the calculation of Eqs. Therefore, the substochastic matrix was computed using the normalized direct-relation matrix N. When normalized direct-relation matrix N met the requirement of Eq. The indirect relation matrix H , also called the total-indirect-relation matrix, was obtained using Eq.

The sum of rows and that of columns of T were calculated using Eqs. The sum of row i was denoted as D i , signifying that the assessment element i was the factor that influenced other assessment elements; R j represented the sum of column j , indicating that the assessment element i was the result influenced by other assessment elements. The mean value and 0.

The questionnaire survey was administered to bank managers in Taiwan. The details are described as follows. The measurement scale was a 5-point scale, with 4 representing maximal influence and 0 representing no influence. The scores between these two values were sequential ratings based on value. The author visited each expert in person, explained the content of the questionnaire, and requested each expert to complete the questionnaire.

Overall, 18 questionnaires were distributed and returned. This study used Matlab software to calculate. Next, the normalized direct-relation matrix was calculated using column vectors and maximums as benchmarks for normalization.

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  • Using Eqs. In addition, the five dimensions were drawn into a figure with prominence as the horizontal axis and relation as the vertical axis, as shown in Fig. These two dimensions were properties in the cause category and were core influences on the other dimensions. This indicates that these were driving factors and critical problem-solving factors. These two dimensions were in the effect category and were influenced by the other properties.

    Although B, C were a property that required improvement, it could not be directly improved because it was in the effect class. Therefore, B, C was relatively irrelevant. This dimension was influenced by other properties.

    Essays on risk management - - Invent Media

    However, the influences were small. This dimension that these properties were relatively independent. Thus we suggest the bank corporations pay huge efforts to improve the credit risk assessment and censorship of these two facets, to upgrade the results of the credit risk assessment immediately.

    With the liberalization and globalization of financial development, innovative financial activities flourishing, and the banking business more and more complicated, the financial system risks also gradually increase with time. To effectively adjust to the rapid change of the financial environment, main countries in the world all devote to carrying out financial reforms. For resolving the insufficiency of the former studies, this study is developed with DEMATEL Model, to increase the reliability and usefulness of the bank credit risk.

    We suggest the follow-up studies could adopt DEMATEL model and study the cases from other different countries and areas, to discuss the bank credit risk assessment problems and make a comparative study over miscellaneous areas. Other research methods are also recommended to develop other evaluation index system and to make comparisons. Credit creation is considered one of the oldest and most sensitive functions of the commercial banks [4].

    Thus, Credit Management by commercial banks is of great importance to the general economic growth and development of any country as it allows funds to be available through the credit creation to areas such as mining, agriculture, industries, manufacturing, etc. This will have positive impact on the level of employment, development and economic growth and per-capita income [6] [7] [8]. The Rokel Commercial Bank Ltd. In Sierra Leone, banks and banking services were foreign based until the establishment of the Central Bank of Sierra Leone in the year Banks are financial institutions that are established for lending, borrowing, issuing, exchanging, taking deposits, safeguarding or handling money under the laws and guidelines of a respective country [11] [12].

    Among their activities, credit provision is the main product which banks provide to potential business entrepreneurs as a main source of generating income. The importance of strong credit management for building quality loan portfolio is of paramount importance to robust performance of commercial banks as well as the overall economy [13]. While providing credit as a main source of generating income, banks take into account many considerations as a factor of credit management, which helps them to minimize the risk of default that results in financial distress and bankruptcy.

    This is due to the reason that while banks provide credit they are exposed to risk of default risk of interest and principal repayment which need to be managed effectively to acquire the required level of loan growth and performance [13].


    The types and degree of risks to which banks are exposed depends upon a number of factors such as its size, complexity of the business activities, volume etc. Hence, the success of most commercial banks lies on the achievements in credit management mitigating risk to the acceptable level. Credit risk management has always been in the vicinity of concern throughout the world. Credit Management is one of the core functions of every Commercial Bank. As banks heavily rely on this activity for revenue generation, efficient credit management is therefore vital to the profitability of every commercial bank.

    Hence, conducting a research in this area has brought out a number of issues that probably have served as hindrance to increase profit maximization in a number of financial institutions.

    Risk management in Indian banks

    Credit management its creation and control is therefore the process of controlling and collecting payments from customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial risk. Credit management in commercial banks in Sierra Leone is being regulated to a certain extent by the Central Bank of Sierra Leone which sets the requirements the bank needs to fulfill before being granted a license to start operations.

    These requirements include the following: a business plan, information on the proposed license institution and minimum paid-up capital among others [14] [15]. Table 1 below shows the capital requirement that any institution should maintain in order to operate as a bank in Sierra Leone. This minimum capital requirement is what comes from the shareholders as capital contribution, out of which, and savings from people with surplus funds is the business of credit management. Typically, each. Table 1. Minimum paid up capital.

    Source: Revised commercial banks license requirement; Banking supervision department, Bank of Sierra Leone. This is historical and analytical research based on a case study approach. A cross sectional study design was used where both the quantitative and qualitative data were collected from Years to inclusive , to ascertain the relationship between efficient credit management and profitability. The Quantitative method enabled me to summarise several information and facilitate comparisons across different years using ratios, statistical charts and tables for further analysis.

    Also, qualitative data was obtained using questionnaires and interview conducted within the various departments of the bank. The justification of this methodology stems from the need to establish and implement an effective credit management policy, a set of controls which were then applied to evaluate the extent to which best practice can be adopted. The motivation for doing qualitative research, as well as quantitative research, comes from the observation that, if there is one thing which distinguishes one bank from another, it is the ability of such bank to create credit and manage such credits effectively.

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    The population of the Rokel Commercial Bank Ltd total to three hundred and thirty-six employees spread into various branches and departments. This target population was used to carry out the investigation. Given the quest for a proportional representation, a stratified random sampling was assumed to provide more efficient sample.

    Special consideration is given to the knowledge and skills of the respondents in relation to the variables under study. This exercise was set out to achieve the objectives of the research by deriving a set of established criteria which outline the requirement of an effective credit management function. The instrumentation looked at the methods used in collecting data, and for this purpose is categorized into two: quantitative and qualitative data [16]. The methods use are Questionnaires, Interview, Desk Research for secondary data , and personal interface with management.

    The data collected is analysed using ratios like profitability, liquidity, solvency and turnover. Analytical notes and graphs are used for presentation of findings. For the purpose of this study, both primary and secondary data were used.

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    • Interviews were conducted and questionnaires administered to collect primary data. This helped to address the research questions more specifically or to concentrate more on the topic itself. Secondary data was collected by desk research using financial statements, text books, journals, files, reports, directives, manuals and bulletins of the bank. The Internet was another major source of secondary data.

      The collected data was edited, sorted and codded in readiness for analysis. Table 2. The Rokel Bank our case study is the primary bank in Sierra Leone bent on providing loans for business activities in the retail sector, particularly the import on which the local economy currently depends. The bank has implemented cutting edge technology and is constantly launching new products and services.

      Above all, the bank partners with the international finance corporation, the Africa Development Bank and other international funders to provide extended credit line and long-term lending. From the analysis and interpretations of the data obtained in this research for the period under review i. On 17 th September , Barclays Bank Plc.

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