GHL System Berhad Annual Report 2019

A N N U A L R E P O R T 2 0 1 9 17 4. KNOWN RISKS In the ordinary course of its operations, the Group is exposed the following risks a) Merchant Performance Risk – For the TPA business, the Group contracts directly with merchants for the provision of electronic payment services based on underlying, back-to-back agreements with the acquiring financial institution and non-financial institution. In the event a risk arises in that the merchant default in his obligations to the cardholder or e-wallet holders for any particular sale, then, that sale would be reversed (“or charged-back”) and the sale amount refunded to the cardholder or e-wallet holder. The acquiring institution would execute its rights to then recover the charged-back transaction from the Group which would then seek to recover it from the merchant. The Group could potentially incur a loss if the merchant was no longer in business or otherwise unable to reimburse the Group for the charge-back. The Group has, over the last five (5) years, invested significantly to develop and put in place risk management policies, systems, and risk managers with the requisite experience to monitor merchant performance risk. The Group also implemented specific rules and other forms of controls to the merchants to manage performance risks. These strict controls and SOPs have effectively mitigated merchant performance risk, and as of the date of this report, there was negligible exposure arising from this risk. The Group had zero losses attributable to merchant performance risk in 2019 and zero nett chargeback loss recorded for Malaysia, Thailand, and Philippines. b) Operational Risk – In the first half of 2019, the Group reported a total of 157 risks of which 151 risks (96%) were classified as minor risk. The remaining 4% were addressed with adequate and appropriate mitigation strategies to ensure that the residual risk is minimised. Operational risk management, which forms part of the Group’ Enterprise Risk Management Framework, is a continual process applied by the Group in a half yearly cycle that includes risk assessment, risk decision making, and implantation of risk controls, which result in acceptance, mitigation, or avoidance of risks. c) Liquidity Risk – As indicated in Section 2.6, the Group is in a net cash surplus position and therefore has no net gearing. Short term purchases for Telco prepaid top-ups are typically funded with internal cash or Bankers Acceptances and are liquidated when these are on-sold to merchants. Longer term EDC terminal purchases are funded with long term bank term loans. The Group plans to fund the planned expansion in the TPA business by commensurately increasing its bank term loans and internal generated cash. Given the Group’s strong cash flow and lack of net gearing, it is well positioned to do so. d) Foreign Currency Risk – EDC terminals are purchased in USD and therefore can expose the Group to foreign currency risk as the Group’s functional currency is in Ringgit Malaysia. The Group minimises exposure to foreign currency risk by purchasing USD spot at the time of recording the vendor liability. The Group does not hedge against foreign currency fluctuations in the net asset value of its overseas subsidiaries as these investments are of a long term nature. This would, however, be re-visited should a significant event occur that would cause a permanent diminution in the foreign currency denomination of its overseas subsidiaries MANAGEMENT DISCUSSION AND ANALYSIS CONT’D