Assignment: Risk Management Focusing On Credit Risk And Liqu ✓ Solved

Assignment: Risk Management focusing on credit risk and liqu

Assignment: Risk Management focusing on credit risk and liquidity risk in banks, contextualized to Oman. Three tasks.

Task 1: Scenario Samiha owns SWEET BIG BITES Cakes and Pastry Shop in Al Ghobra. She has approached your bank for (1) a Term Loan to replace the equipment and furnishings of her shop and (2) an increase in the working capital limit. You are part of the team responsible for assessing Samiha’s request.

a) Explain the procedure involved in determining whether it is possible to approve the request.

b) Give a list of documents you will require from Samiha to assess the proposal.

Word limit: 600 words.

Task 2: Regulators both national and international keep a tight watch on the credit risk exposure of banks. Explain this statement with reference to: a) Reasons for managing credit risk exposure; b) Credit risk management framework; c) Credit risk culture; d) Credit risk mitigants.

You may refer to CBO Circular BM 955 and BM 977.

Word limit: 1200 words.

Task 3: “Throughout the global financial crisis which began in mid-2007, many banks struggled to maintain adequate liquidity. Unprecedented levels of liquidity support were required from central banks to sustain the financial system and even with such extensive support several banks failed, were forced into mergers or required resolution.” (BCBS 165).

a) Assess the importance of sound liquidity management within banks;

b) Explain sources and types of liquidity risk and how it is measured and managed.

You may refer to CBO Circular BM 955.

Word limit: 600 words.

End of assignment. Use relevant theories and apply good academic practice, including in-text citations, references, and Turnitin submission guidelines.

Paper For Above Instructions

Introduction

Credit risk and liquidity risk are foundational concerns for banks and other financial institutions. In the context of Oman, these risks are shaped by local regulatory expectations, SME financing patterns, and the macroeconomic environment. This paper addresses three interconnected tasks: (1) the loan approval procedure and documentation for a small business loan scenario, (2) the regulatory and governance framework surrounding credit risk management, and (3) the key concepts and practices in liquidity risk management. Throughout, the analysis integrates established risk management theory with references to relevant circulars and international standards to highlight how banks can balance credit discipline with the need to support productive SME activity in Oman (Basel Committee on Banking Supervision; Central Bank of Oman).

Task 1 – Loan approval procedure and documentation (Samiha’s case)

Loan approvals for SMEs typically follow a structured credit appraisal process designed to assess repayment capacity, collateral, cash flows, and the overall risk profile. In Samiha’s case, the bank should first verify the purpose of funds, the project scope (equipment and working capital), and the expected impact on cash flows. A comprehensive credit assessment should include:

• Creditworthiness assessment: evaluate business viability, historical performance, and owner’s credit history.
• Cash flow analysis: projected (and, where possible, historical) cash flows to service debt, including debt service coverage ratio (DSCR) and break-even analysis.
• Collateral evaluation: determine the value and quality of assets securing the loan and any gap between loan size and collateral value.
• Debt structure and terms: appropriate tenure, pricing, and covenants aligned with liquidity and cash-flow projections.
• Compliance and AML checks: ensure the customer and the transaction comply with local regulations and anti-money-laundering requirements.
• Risk rating and approval conditions: assign a credit risk rating consistent with the bank’s framework and establish pre-disbursement conditions.

Documentation typically required includes: business plans and financial projections, past three years’ financial statements (if available), personal guarantees or loan collateral documents, tax returns (or certified statements for SME owners), bank statements, details of existing debt and repayments, inventory and fixed assets schedules, owner identification documents, and any licences or permits relevant to the bakery operation. The exact set may vary by bank policy, but alignment with the bank’s credit policy and regulatory expectations is essential.

Task 2 – Reasons, framework, culture, and mitigants of credit risk management

Regulators monitor credit risk exposure to preserve financial system stability, ensure prudent lending, and protect depositors. Key reasons include the following:

• Macroprudential stability: controlling credit growth and concentration risk to reduce systemic vulnerability (BCBS guidelines and national prudential standards).
• Capital adequacy and risk-based pricing: ensuring banks hold sufficient capital against expected and unexpected losses (Basel III principles).
• Transparency and market discipline: requiring robust risk disclosures and governance to support supervisory oversight.
• Financial soundness and consumer protection: mitigating the risk of bank failures that could harm SMEs and the broader economy.

The Credit Risk Management Framework (CRMF) typically comprises policy governance, risk identification, measurement (including PD, LGD, and EAD), risk monitoring, reporting, and governance features such as independent risk oversight. A sound framework integrates systems for data quality, model validation, and stress testing to capture potential downturn scenarios. The concept of credit risk culture emphasizes organizational norms, incentives, and behaviors that encourage prudent lending, robust risk reporting, and accountability across levels of decision-making. Mitigants include collateral, guarantees, credit risk transfer (e.g., securitization or credit default swaps where applicable), diversification, and robust post-disbursement monitoring and remedial actions.

References to CBO Circular BM 955 and BM 977 anchor the Oman-specific regulatory expectations for credit risk management, including supervisory risk rating processes, capital adequacy considerations, and approved risk mitigants. (Central Bank of Oman, BM 955; Central Bank of Oman, BM 977). In addition, Basel III and related supervisory standards inform best practices for LCR, NSFR, and risk governance that banks apply domestically (Basel Committee on Banking Supervision, 2011; 2013).

Task 3 – Liquidity risk and its management

The global financial crisis underscored the central role of liquidity risk: even solvent banks can fail if liquidity evaporates under stress. Sound liquidity management requires robust funding strategies, diversification of funding sources, prudent concentration management, and contingency funding planning. Key sources of liquidity risk include maturity mismatches, wholesale funding dependence, deposit volatility, and off-balance-sheet commitments. Measuring liquidity risk typically involves metrics such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), stress testing under multiple scenarios, and liquidity gap analysis across time horizons. Management practices emphasize long-term financing stability, liquidity risk appetite setting, and clear governance structures to ensure timely access to contingency funding and effective communication with regulators and stakeholders. (Basel Committee on Banking Supervision; BCBS 2011, 2013).

In Oman, consistent with CBO expectations, banks should implement regulator-approved liquidity frameworks that address both domestic funding vulnerabilities and external market conditions (Central Bank of Oman, BM 955; BM 977). The BCBS guidance and international best practices advocate a holistic approach to liquidity risk that integrates early warning indicators, stress testing, and credible contingency funding plans. The objective is not only to satisfy regulatory metrics but also to preserve customer confidence and ensure the ongoing ability to meet withdrawal demands and funding commitments during stress periods (Basel Committee on Banking Supervision, 2009; 2011).

Discussion and synthesis

The three tasks collectively emphasize that prudent risk management hinges on rigorous credit appraisal, a robust and well-governed risk culture, and proactive liquidity planning. A SME loan like Samiha’s requires careful cash flow forecasting, sensible risk-adjusted pricing, and explicit pre-disbursement conditions tied to covenants and monitoring. Regulators’ focus on credit risk and regulatory capital alignment reinforces the need for sound risk governance, independent risk oversight, and transparent reporting. Finally, liquidity risk management must be embedded in strategic funding decisions, with a credible contingency plan for times of market stress. Integrating these elements supports both bank safety and SME financing goals in Oman’s evolving financial landscape.

References

• Basel Committee on Banking Supervision. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel: Bank for International Settlements.
• Basel Committee on Banking Supervision. (2013). Basel III liquidity standards and the LCR/NSFR framework. Basel: Bank for International Settlements.
• Basel Committee on Banking Supervision. (2009). Liquidity risk measurement and management: A framework for liquidity risk management. Basel: Bank for International Settlements.
• Central Bank of Oman. BM 955. (n.d.). [Circular on credit risk management and related governance]. Muscat: Central Bank of Oman.
• Central Bank of Oman. BM 977. (n.d.). [Circular on risk management and prudential standards]. Muscat: Central Bank of Oman.
• Hull, J. C. (2018). Risk Management and Financial Institutions (5th ed.). Hoboken, NJ: Wiley.
• Mishkin, F. S. (2015). The Economics of Money, Banking, and Financial Markets (10th ed.). Boston, MA: Pearson.
• Jorion, P. (2007). Value at Risk: The New Benchmark for Measuring Financial Risk (3rd ed.). New York, NY: McGraw-Hill.
• World Bank. (2019). Global Financial Development Report. Washington, DC: World Bank.
• IMF. (2015). Global Financial Stability Report. Washington, DC: International Monetary Fund.