Page 369 - Bank-Muamalat-Annual-Report-2021

ANNUAL REPORT 2021 367
SUSTAINABILITY STATEMENT OUR GOVERNANCE OUR NUMBERS OTHER INFORMATION

4.0 creDIT rIsK (generAl DIsclosure)

Credit risk is defined as the potential financial loss caused by a retail customer or a wholesale counterparty failing to meet
their obligations to the Bank as they become due. This covers all credit exposures, including guarantees and irrevocable
undrawn facilities.

Risk arising from changes in credit quality is a central feature of the Bank’s business, where uncertainty over the recoverability
of financing and other amounts due from counterparties are inherent across most of the Bank’s activities.

Adverse changes in the credit quality of a customer/counterparty or a general deterioration in the economic condition could
affect the value of the Bank’s assets and its overall financial performance. To a lesser degree, the Bank is also exposed to
other forms of credit risk, such as settlement and pre-settlement risks, arising mainly from activities involving foreign
exchange, investment securities, equities, commodities and derivatives transactions.
The BRMC and ERMC are the key board and management-level oversight committees responsible for the overall credit risk
management activities. These include approving and review of risk strategies and policies, resolving any policy-related issues,
and monitoring of the Bank’s asset portfolios and risk profile.
Credit risk is managed under an established framework of policies, processes and procedures, which forms part of the overall
risk governance framework. The risk management processes include assessing, measuring, mitigating and managing credit
risk and maintaining it within the Bank’s risk appetite.

Key components of the framework are the Credit Risk Policy (“CRP”) and Guidelines to Credit Risk Policies (“GCRP”),
which contain credit-related policies and procedures for the management of credit risk. These policies and procedures
cover risk policies, controls and prudential limits; risk rating methodologies and application; financing underwriting
standards and pricing; delegated credit approving authority; credit review and management of distressed assets;
and rehabilitation, restructuring and provisioning for impaired financing. The policies are periodically reviewed and updated
to ensure its efficacy and continued relevance.

An important element of credit risk management involves the allocation of the Bank’s financing exposures into risk rating
categories. This approach provides for sufficient level of granularity and detail of the financing assets to facilitate the
identification, monitoring and management of the overall credit risk profile on a regular basis. These rating categories are
also linked credit pricing and defined in relation to profit spread.

Credit approvals are performed under a formal delegated approving structure comprising a hierarchy of approving authorities
with clearly defined scope and limits. The Credit Committee (“CC”) is the main management-level committee involved in
the approval of credit proposals (for amounts exceeding that of the lower individual authority limits) and the monitoring and
management of distressed financing assets.
The Bank conducts regular review of its credit exposures based on portfolio segments and concentrations to ensure that
these exposures are kept within the Board-approved risk appetite and risk tolerance levels. These review and analysis reports
also provide the basis for ongoing risk management strategy and policy formulation.