41. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk Overview Credit risk is the risk of a customer or counterparty failing to perform its obligations. It arises from all transactions that could lead to actual, contingent or potential claims against any party, customer or obligor. The types of credit risks that the Group and the Bank considers to be material include: Default Risk, Counterparty Risk, Credit Concentration Risk, Residual/ Credit Mitigation Risk, and Migration Risk. Credit risk governance The management of credit risk is principally carried out by using sets of policies and guidelines approved by the MRCC and/or BRC, guided by the Board of Directors’ approved Group Risk Appetite Statement. The Group and the Bank have instituted two (2) levels of Financing Committees, which assess and approve credits at their specified authority levels. The MRCC is responsible under the authority delegated by the BRC for managing credit risk at strategic level. The MRCC reviews the Group’s and the Bank’s credit risk policies and guidelines, aligns credit risk management with business strategies and planning, reviews credit profile of the credit portfolios and recommends necessary actions to ensure that the credit risk remains within established risk tolerance levels. The Group’s and the Bank’s credit risk management governance includes the establishment of detailed credit risk policies, guidelines and procedures which document the Group’s and the Bank’s financing standards, discretionary powers for financing approval, credit risk ratings methodologies and models, acceptable collaterals and valuation, and the review, rehabilitation and restructuring of problematic and delinquent financing. Management of credit risk The management of credit risk is being performed by Group Credit Management Division (“GCMD”) and Group Risk Management Division (“GRMD”), and two other units outside of the GCMD and GRMD domain, namely, Credit Administration Department and Recovery & Rehabilitation Division. The combined objectives are, amongst others: • To build a high quality credit portfolio in line with the Group’s and the Bank’s overall strategy and risk appetite; • To ensure that the Group and the Bank is compensated for the risk taken, balancing/optimising the risk/return relationship; • To develop an increasing ability to recognise, measure and avoid or mitigate potential credit risk problem areas; and • To conform with statutory, regulatory and internal credit requirements. The Group and the Bank monitors its credit exposures either on a portfolio or individual basis through annual reviews. Credit risk is proactively monitored through a set of early warning signals that could trigger immediate reviews of (certain parts of) the portfolio. The affected portfolio or financing is placed on a watchlist to enforce close monitoring and prevent financing from turning impaired and to increase chances of full recovery. 353 1 2 3 4 5 6 7 8 9 www.bankislam.com FINANCIAL STATEMENTS
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