Discuss about the Challenges in Credit Risk Management within Corporate Banking.
The main discussion of this study will be done on the risks or challenges faced by the banks in United Arab Emirates in the credit risk management. For easy analysis and better understanding of the study, the case study of Doha bank has been used. Credit risk management is one of the most vital tasks performed by every bank in the world. This management activity came in lime light after the credit crunch in 2007-08 (Bis.org 2016). In case of the banks in United Arab Emirates, the risk of providing credit is high because the main concept of Islamic banking is based on the principle of participation rather than just intermediation (Ibrahim 2015). Therefore, managing the credit risk is very important for the Islamic banks like, Doha bank.
However, in current situation, the banks in UAE are facing a major issue in improving their financial performance. In different studies, it has been identified that the performance of UAE banking sector is having some negative signs (Shahari, Zakaria and Rahman 2015). This is a big issue because the future of an entity whether a bank or any other company, depends on the financial performance. Nowadays, the competition in UAE’s banking sector is very high but many companies are failing to meet their loans properly (Saeed 2015). In such a situation weak financial performance can hamper the sustainability of the banks to a large extent. Therefore, it becomes a big issue in the current situation.
However, in this particular study, it will be tried to identify the reasons behind the weak financial performance of the banks in UAE. As credit risk management is the essential factor behind the financial performance level of a bank, the study will especially focus on the indentifying whether there is any issue in credit risk management of the banks or not. At the same time, if the study identifies that there are issues in credit risk management then it will identify what are those issues and how those can be solved.
Therefore, with the help of this particular study, it will be possible to identify the ways to improve the financial position of the banks in UAE. If the financial position of the banking sector improves, then the overall economic growth of the country will also be possible. On the other hand, with the healthy financial performance of the banks will also increase the remuneration of the employees in banking sector, which will ultimately contribute to the improvement of the social lifestyle of the country.
Concept and importance of credit risk management
The term credit risk refers to the possibility of occurring loss to a credit provider due to the failure of credit borrower to clear the payment of the debt (Barrett 2016). The term credit risk is highly applicable to the banks or any other financial institutions. However, in order to minimize or control the risk of credit, the managements of the banks and other financial institutions implement some managerial techniques, which are known as the credit risk management systems. Ferhi and Chkoundali (2015) mentioned that the urgency of credit risk management system occurred after the global financial crisis took place. During the global financial crisis, the credit risk grabbed the regulatory attention for the first time (Zubairi and Ahson 2015). Due to this, the regulatory body in the international financial market asked for more transparency in the financial activities of the banks or other financial institution. Therefore, in order to fulfill the demand of the international financial regulatory body, the system of credit risks management came into spotlight.
Srairi (2015) stated that the credit risk management system is very important for every bank and financial institutions. Al-Tamimi et al. (2015) mentioned that providing credit and managing the risk of that credit is the main activity of banking. From the very beginning, the banks are operating their businesses to managing the risks of credit. However, Uwuigbe, Uwuigbe and Oyewo (2015) noted that the quality of the credit has declined than before and due to that the risks are becoming higher than before. At the same time, the complexities in the banking activities have increased than before.
In this context, Githaiga (2015) stated that a bank is considered as sound when it is clear about the risks associated with its operations and the ways to solve the risky situations. At the same time, Vazquez and Federico (2015) mentioned that people or customers always prefer to deposit their money in the banks that have sound financial health. Therefore, in order to attract more customers for depositing the money, credit risk management system is very important for the banks. On the other side, with the increased complexities in the banking activities and corporate world, it becomes tougher for the banks to identify the customers or borrowers, who have the capacity to payback the borrowed money on time (Businessperspectives.org 2016). Therefore, the banks need to set such a system that can automatically by monitoring, measuring and controlling the credit provided by them. Hence, it can be said that in the present context proper system for credit risk management is very important to maintain the level of efficiency and attract the customers.
Principles of credit risk management
In the above discussion, it has been identified that credit risk management is very important for better financial performance of the banks. However, Bessis and O’Kelly (2015) commented that the credit risk management system of a bank or financial institution can be effective only if it follows the principles of credit risk management properly. The principles of credit risk management are as follows:
Establishment of proper environment for handling credit risk – In order to maintain this principle, the board of directors of the banks must be responsible enough at the time of approving and reviewing the strategy of credit risk management. Bluhm, Overbeck and Wagner (2016) noted that, the board of directors of the banks must ensure that the credit risk strategy has been prepared by considering the risk tolerance level of the bank.
Operation under good credit granting process – The credit granting procedure of the banks must be sound enough so that no credit is granted to such a person or corporate, who has no ability to pay back the loan or credit amount. Sadgrove (2016) stated that this particular principle of credit risk management suggests considering the target market the bank and the capacity of the borrower. At the same time, the bank should also consider the credit structure and repayment source (Subrahmanyam, Tang and Wang 2016). Apart from that, the management of the bank must be strict about the credit limit and the process of approving the new credit or making the amendment.
Maintenance of proper procedure of measurement, monitoring and administration of credit – According to this particular principle of credit risk management, the banks must have a proper system for monitoring the individual credits (Chance and Brooks 2015). Along with that, the administration system for the portfolios of credit bearing must be sound enough. On the other side, the measurement of the credit risk should be done by using proper analytical tool.
Ensuring proper control over credit risk – The credit-gearing function of the bank must be done properly as per the standards set by the regulatory authority (Anthony and Othieno 2016). At the same time, the internal control system of the banks for the policies and limits of credit must be reported within the required time span.
Therefore, the above mentioned principles are very much helpful in minimizing the credit risk of the banks or financial institutions. Kumar (2016) argued that the principles of credit risk management were applied by the banks before the global financial crisis or credit crunch took place in 2007-08 but still the credit risks were much high due to which major economic and financial downturn happened in world economy. On the contrary, Iqbal and Molyneux (2016) mentioned that before the time of credit crunch, the credit risk management principles were applied by the banks but the principles were not executed properly by the higher authority of the banks. As a result global financial crisis took place. Therefore, it can be said that in order to manage the risk properly, credit risk management principles must be used adequately.
Credit risk management is very important task for a bank or financial institution. However, Olson and Zoubi (2016) argued that implementing a proper system of managing the credit risk is not easier. In support of this, Barrett (2016) mentioned that currently, the management at different banks in UAE and other countries are facing several challenges in their credit risk management systems. These credit risk management challenges are as follows:
Long credit repayment time: Zubairi and Ahson (2015) argued that the major challenge of credit risk management is long repayment time. At many banks in UAE the credit borrowers take long time to pay back the credit or borrowed amount. Due to this, the banks sometimes face problems in providing credit to the new customers or the financially strong customers. Githaiga (2015) believed that the main reason behind this particular challenge is that the higher authorities of the banks fail to measure or verify the capacity of the customers or borrowers to repay the borrowed amount.
Inefficiency in data management: Gizaw, Kebede and Selvaraj (2015) stated that many employees at different banks in UAE fail the properly manage the data available to them before and after providing the credit to the borrowers. Due to this problem, the higher authority of the banks cannot get proper data within the required timeframe (Ahmed and Malik 2015). This ultimately creates major issue in credit management system in the banks.
Lack of proper risk assessment and control tool: The banks in UAE cannot concentrate on the identification of credit portfolios due to the lack of proper tools for assessing and controlling the credit risk (Vazquez and Federico 2015). This creates major trouble in managing the credit risk.
High complexity in the corporate world: This is another big issue in credit risk management of the banks in UAE. The complexity in the corporate world has increased due to the increase in number of business transactions. The same thing is also applicable in case of the banks also. Due to this, the employees and the higher authority of the banks fail to properly concentrate on the credit risk management.
High competition in the market: The number of banks in UAE is increasing day-by-day and every bank is trying to expand its business by giving several facilities to its customers (Hilscher and Wilson 2015). Due to this, many times banks provide the credit to some people or organizations, which are have no such capacity to pay back the credit amount. Sometime, the banks provide the credit without proper securities. This creates big issues in credit risk management of the banks.
Analyzing how the credit risk management system affects the performance of the banks
Anthony and Othieno (2016) stated that credit risk is one of the major risk for a bank. This particular type of risk has high impact on the financial performance of the banks or other financial institutions. Salah and Souissi (2016) mentioned that the system of credit risk management has direct effects of the ROA (Return on Assets) and ROE (Return on Equity). Inefficient credit risk management strategies or system may reduce the profitability of the banks to a high extent because if the banks fail to collect the credit repay amount from the customers or corporate, then the income level of the banks decreases. Riaz (2016) mentioned that if a small number of customers or borrowers of the bank fail to repay the credit amount then that may cause huge loss to the bank. Therefore, the revenue as well as the profitability of the bank gets highly affected by small number of customers.
Subrahmanyam, Tang and Wang (2016) argued that credit risk occurs in the banking institutions when the credit quality of the bank starts to decline. Due to the declining in credit quality of the bank, the price of debt sold becomes lesser than the price of the debt bought by the bank (Bluhm Overbeck and Wagner 2016). This indicates that the financial health of a bank is highly dependent on the quality of the credit that it provides to its customers. Therefore, if the banks want to improve its financial performance, then it needs to develop a strong credit management strategy or system within the organization.
The questions based on which this study will be conducted are as follows:
The main purpose of this study will be to identify the current credit risk management system in the banking sector especially at Doha bank in UAE. At the same time, the study will also try to find out how the current financial performance of UAE banking sector is affected by the credit risks management system. After identifying these two matters, the study will try to provide some remedies to improve the current credit risk management system in the UAE banking sector. Therefore, it can be said that the major objectives of this study will be as under:
As stated above, the aim of this study will be improve the credit risk management system at the banking sector in UAE by identifying and solving the challenges or risks in the system. Therefore, it can be said that the study will investigate on the matter from the perspective of employer and industrial sector. On the other side, as the income of the employees in the banking sector depends on the financial performance of the banks and financial performance of the banks depends on the credit risk management system. Therefore, it can be again said that the study will investigate and analyze the matter from the point of view of the employees of the banks also.
The success of a research depends on the appropriate selection of methodology. This particular study will also follow a particular methodology including research philosophy, research approach and design of the research. The methodology that will be followed by this study is as follows:
Research strategy
The overall strategy of a research includes research philosophy, research approach and research design. Research philosophy is the belief according to which the data of a research is collected and analyzed (Silverman 2016). There are different philosophies of research and those are – positivism philosophy, realism philosophy and interpretivism philosophy. Positivism philosophy suggests conducting the research based on the facts. At the same time, the positivism philosophy also states that the data should be analyzed mathematically (Taylor, Bogdan and DeVault 2015). This indicates that this particular philosophy prefers quantifiable research. A research based on the positivism philosophy is influenced by the human interests and observations. There is a modified version of positivism philosophy, which is known as the post-positivism philosophy.
Apart from positivism, there is another research philosophy, which is known as realism. This philosophy is based on real idea of human mind. Panneerselvam (2014) stated that realism is depended on the assumptions and it is a scientific method that helps to develop knowledge. However, following the realism philosophy is tougher than positivism philosophy because it is bit critical and takes more time than the positivism philosophy. On the other hand, there is interpretivism philosophy, which is based on idealism. It is the philosophy which is just opposite to the positivism philosophy (Mackey and Gass 2015).
However, in this particular study, the positivism philosophy will be followed because in this philosophy, the research will be able to analyze the data by following the scientific and mathematical ways. At the same time, the positivism philosophy will help to generalize the data.
Apart from the research philosophy, the study will also follow a particular approach. There are two research approaches – deductive approach and inductive approach. Deductive approach is such a research approach that suggests starting a research work based on the hypotheses or research questions (Taylor, Bogdan and DeVault 2015). This particular approach helps analyzing the data based on the quantitative technique. On the other side, in inductive research approach, the data of the research needs to analyze based on the qualitative method of data analysis, which is much time consuming. This particular study will follow the deductive approach because this approach will help to analyze the research data with the help of the existing theories (Mackey and Gass 2015). Apart from that, the deductive approach will help to complete the study within comparatively shorter time span.
Along with research philosophy and approach, the study will also use a particular design of research. There are mainly three research designs – descriptive, explanatory and exploratory research designs. Descriptive research design helps to conduct the study by analyzing the data in detail based on the existing literature (Silverman 2016). Explanatory design conducts the study by explaining the relationship between the research variables. On the other side, in exploratory research design, the research problem is explored to find out the result. However, in this study, the descriptive research design will be followed because it helps to collect the data easily through survey method and at the same time, it also helps to analyze the data by quantitative technique of data analysis, which can be measure easily (Taylor, Bogdan and DeVault 2015).
Data collection methods
A research can be done based on two types of data – primary and secondary data. Primary data are the new data, which is not available in any books, journals, articles or websites. This data has to be collected through survey, interview, observations and focus group techniques (Panneerselvam 2014). In this particular study, the primary data will be collected through survey method. The survey will be done with employees, who work at the Doha bank in UAE. The survey method will be selected in this study because with the help of this particular method, it will be easier to collect the quantitative data, which could be measure mathematically and statistically. At the same time, following the survey method will be simpler. It will involve less time and cost (Silverman 2016). During this research project, the survey will be done online. The questionnaire has been sent to the research participants through social media like, Gmail and Facebook.
On the other side, the study will also include some secondary data. Secondary data are the existing or new data, which is easily available in books, journals, articles and different internet sources (Mackey and Gass 2015). The secondary data will provide the background knowledge about the topic of the study. In the other words, it can be said that the secondary data will provide the base of the study. In this study, secondary data will provide the theoretical knowledge over the subject.
Sampling strategy
As it has been mentioned above that the study will follow the survey method in order to collect the primary data, it is obvious that the study will select some samples to conduct the survey. The term sampling refers to the activity of selecting few individuals from a large population (Panneerselvam 2014). Sampling can be done by following different techniques. However, in this particular study, the sampling will be done by following the simple random sampling method under the probability sampling technique. In this particular technique, the sample will be selected randomly from a large population and will be considered that every individual in the population will have same quality to be selected in the sample (Taylor, Bogdan and DeVault 2015).
Therefore, the sample will be selected from the large number of employees work at Doha bank. The survey questionnaire has been sent to 110 people and it is expected that at least 50 people or employees will reply back. Therefore, the sample size of this study will be 50.
Data analysis techniques
A research can achieve its goal by proper analysis of the collected data. Therefore, data analysis is the most vital part of a research project. In order to analyze the data in a proper way, it is very important to select the appropriate methods for analyzing the data (Silverman 2016). There are mainly two types data analysis techniques are available – quantitative technique and qualitative technique of data analysis. Quantitative technique is the scientific technique that helps to analyze the in the mathematical terms. At the same time, the quantitative technique of data analysis helps to measure the data accurately and as it provides the results in numerical terms, it becomes easier to understand and analyze the data.
On the other side, qualitative technique of data analysis helps to analyze the data in the theoretical manner (Mackey and Gass 2015). This particular data analysis technique helps to conduct in depth data analysis. This technique of data analysis does not provide any numerical results but it provides the results in very simple way, which is also very easy to understand. However, in this study, only the quantitative technique of data analysis will be followed. The survey data will be analyzed with the help of quantitative data analysis technique, so that accurate results will be obtained in numerical terms.
During this research work, it will be always kept in mind that the data and methods that will be used in the study will reliable and valid. In order to maintain that, the data will be collected from reliable sources like authorized websites, journals and book. At the same time, no pressure will be created on the participants to take part in the research. At the same time, proper methods of data collection, sampling and analysis will be selected so that no question ethical issue takes place regarding the validity of the methods.
As stated above, during this study, the data will be collected by surveying the employees at Doha bank, UAE. In order to survey the employees at Doha bank, some procedures will be followed. At first, telephonic conversation will be done with the manager of Doha bank to make the manager clear about the purpose of the study. At the time of telephonic conversation, not only the purpose of the study will be clear out but also the procedure of the study will be stated. After that, permission for survey will be taken from the manager. Before conducting the survey, it will be clear out that the personal data of the survey participants will be confidential and at the same time, the purpose of the study will also be informed to the survey participants. At last, after taking the permission from the participants, the survey questionnaire will be sent to the participants.
Every research needs follow a particular timeframe. This research will also followed a proper schedule of work, which is mentioned below:
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Activities |
Week 1 |
week 2 |
week 3 |
week 4 |
week 5 |
week 6 |
week 7 |
week 8 |
week 9 |
week 10 |
week 11 |
week 12 |
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Review the existing literature |
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Identifying the gap in the existing study |
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Selecting the topic |
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Setting the aim, objectives and questions of the research |
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Selecting the proper methodology for the research |
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Collecting the secondary data |
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Collecting the primary data through survey |
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Analyzing the primary data |
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Identifying the results |
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Conclusion and recommendations |
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Preparing the final draft |
Table 1: Gantt chart
(Source: Created by author)
Reference list and bibliography
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