Critical Success Factors of Credit Risk Management at Mashreq Bank - Essay Example

Working “Mashreq Bank’s Critical Success Factors of Credit Risk Management (CRM)” Background and Conceptual Framework Aside from identifying and discussing the area which requires further development to enable the local banks in UAE cope with challenges after the global financial recession, the proposed research topic aims to enumerate and critique the effectiveness of Mashreq Bank’s critical success factors of credit risk management (CRM). Normally, a sound lending procedure includes not only identifying and segregating the high-risk applicants from those who are prospective applicants but also the process of modifying the offered loan conditions such as loan requirements and terms of payment (Ralston and Wright 2003). Upon going through the process of a sound lending procedure, almost all banks are offering loans to its prospective bank borrowers because of the high interest rates that will be added to the principal loan. For individuals or business with good credit standing, banks are more than eager to extend loan in exchange of the agreed interest rate. However, external factors such as natural catastrophe, negative economic condition, a global financial crisis, and poor business performance could make the bank borrower fail to meet their financial obligations with the banks (Frenkel et al. 2005, p. 502). This makes bank loans aside from other banking practices such as interbank transactions, foreign exchange transactions, financial futures, bonds, equities, interbank transactions, and acceptances a good source of credit risk1. Credit risk strongly influences the overall bank performance and bank failure (Boffey and Robson 1995). Although credit risk is considered as one of the most common types of risk most UAE commercial banks are facing, the research findings of Hussein, Al-Tamimi and Al-Mazrooei (2007) revealed that risk related to foreign exchange is the most common in UAE commercial banks followed by credit risk and operating risk. Among the common causes of credit risk include not only the lax credit standards that has been extended to the bank borrowers but also some cases of poor portfolio risk management due to failure to predict and respond early to economic changes (Dufey and Rehm 2002). Based on historical facts, most of the global financial institutions such as banks had been facing serious banking problems during a global financial crisis. To counteract the long-term negative consequences of large amount of unpaid loans, bankers should properly manage the situation through credit risk management. Critical Success Factor (CSF) is referring to elements that can make the local banks in UAE achieve its organizational goal and mission. As a way of protecting the banks from credit risks, it is necessary for bankers to identify the critical success factors that will enable them to protect the bank from unpaid loans and other related banking problems. In line with this, identifying the critical success factors of credit risk management (CRM) in one of the UAE local banks can be useful in terms of improving the existing risk management strategy that is commonly used in most banks. As a result or improving the study behind the critical success factors of credit risk management, the local banks in UAE are expected to effectively increase the shareholder value despite the global financial recession. The relationship between chances wherein a bank borrower is able to pay the loan and credit risk is one of the best strategies that could protect banks from bad debts. In line with this, developing new strategies related to chance/risk identification, analysis, and monitoring that can promote a safe credit risk management that we can solve bank problems (Frenkel et al. 2005, pp. 502 – 509). Too much exposure to credit risk remains as one of the leading causes of bank problems around the world. To track down predictable bad loans, it is necessary to accurately identify measure, monitor and control bank credit risk. In relation to the importance of identification, measurement, monitoring and control of bank credit risk, the study of Hussein, Al-Tamimi and Al-Mazrooei (2007) revealed that most of the UAE banks had been successful in managing bank-related risks because of the local banks’ ability to identify, assess and analyze the different types of risk. In reality, a global financial recession may affect the riskier banks more than those that are safe. To secure investors’ investment in banks, investors who are willing to take risk tend to invest and demand more from riskier banks as compared to more established banks (Santos 2009). Because of the differences in which banks are affected by financial recession, each of the local banks is using a different set of credit risk management tools. Based on the research study that was conducted by Richard et al. (2008), the elements behind the credit risk management system of a commercial bank operating in a less developed country is totally different from the credit risk management system that is commonly used by commercial banks operating in a more developed country. Similar to the research findings of Richard et al. (2008), Hussein, Al-Tamimi and Al-Mazrooei (2007) confirmed that the UAE national banks and foreign banks are practicing different strategies when conducting risk assessment and analysis as well as risk monitoring and controlling. The research findings of Richard et al. (2008) and Hussein, Al-Tamimi and Al-Mazrooei (2007) suggest that it is critical to consider the kind of environment a particular bank is operating when designing an effective credit risk management system. Internal risk management includes not only the bank performance measurement but also the assessment of risk-based pricing, performance-based compensation, customer profitability analysis, and credit risk management. As part of improving a bank’s existing internal risk management, several credit risk models such as the identifying counterparty default risk, the counterparty migration risk, the proprietary model and the vendor-marketed model among others were developed to assist the bankers to easily measure, aggregate, and manage risk in different places suitable for different banking products. In relation with the use of the available credit risk models, the research study that was conducted by Fatemi and Fooladi (2006) revealed that the application of identying counterparty default risk is the most commonly used model in banks followed by the counterparty migration risk, the proprietary, and the vendor-marketed model. Other risk assessment criteria includes balance sheet and market risk, operational risk, liquidity risk, legal and regulatory risk, and strategic risk among others (Eastern Caribbean Central Bank, 2009; Bank for International Settlements 2001; Pages 2001; Reserve Bank of Australia Bulletin 1996). In general, the critical risk factors for the identification of a corporate credit risk includes: (1) general factors such as a significant change in the gross domestic product (GDP), climate changes or the incidence of a natural catastrophes, and newly introduced laws and regulations that can significantly affect the economic performance of a country; (2) market factors like the company’s position within a particular industry and major changes in supply and demand; (3) productive factors like value-creation process of a company; (4) financial factors like changes in the foreign exchange rate, interest rates, and changes in credit ratings; (5) organizational factors such as internal conflicts or incidence of business fraud; and (6) legal factors such as non-compliance on certain policy which leads to serious penalty or fine (Frenkel et al. 2005, p. 502). Mashreq bank (previously known as the Bank of Oman) started operation in 1967 based in Dubai. It is the second oldest bank in UAE. The bank played a remarkable role in retail banking industry. Mashreq bank was the first to introduce ATMs, credit cards and travellers’ cheques. Knowing the critical risk factors for identifying a corporate credit risk is useful for bankers to determine the capacity of bank borrowers to payback loan. In terms of minimizing and controlling its credit risk, it remains a question as to what kind of critical risk factor is applicable in the case of Mashreq Bank. In line with this, it is crucial to determine specific banking areas that require further development to enable Mashreq Bank cope with challenges after the global financial recession. Significance of Research This research is undertaken specially in the wake of the recent financial crisis where many financial institutions, due to their poor credit risk management practices suffered losses and went out of the business. Researcher therefore is of the opinion that in order to assess and explore some of the critical success factors in credit risk management in one of the most important banks in the region, other banks can effectively implement the best practices to manage themselves against the credit risk. It is the general belief of the researcher that a sound credit risk management framework can effectively help any financial institution to better manage their assets and guard their capital against any adverse movements in market variables such as interest rates. Purpose of the Study and Research Objectives To enable the local banks in UAE cope with challenges after the global financial recession, the purpose of this study is to enumerate and critique the effectiveness of Mashreq Bank’s critical success factors of credit risk management (CRM) and identify the banking areas that will require further development. In line with this, the research objectives of this research proposal include the following: To identify the critical success factors of credit risk management (CRM) at Mashreq Bank. To propose measures that can be undertaken to improve credit risk management (CRM) at Mashreq Bank and other banks. Research Philosophy The overall research philosophy of this research will be deeply rooted into the researcher’s general belief in positivitism. Positivist philosophy of research outline that the truth can only be uncovered through a consistent application of scientific methods and applications. However, this research will also be following logical positivitism with an strong belief that rationalization along with observations can provide credible results Research Strategy Research can be performed in many ways and there are different methods of collecting the data and performing the statistical analysis to derive the meaningful interpretation from the data obtained. However, to formulate a particular research strategy depends upon various factors and peculiar considerations of the overall research objectives. Research strategies such as grounded theory, action research as well as the development of case studies are some of the strategies which can be employed successfully to obtain perform a good quality research. Proposed Research Design Due to the fact that it will be very difficult to search and visit each manager or individuals who are currently working in some of the local banks’ credit risk management department, the proposed research methodology for this study will be divided into two parts: (1) an explanatory non-experimental research which combines the use of quantitative and qualitative research survey questionnaire; and (2) a semi-structured research interview. It is however, important to note that the questionnaire design as well as the subsequent date collection can be limited in many respects. The design process of questionnaire can itself be faulty and as such subsequent date collected through questionnaire may therefore provide a misleading picture. Further, questionnaire are subject to individual interpretation and as such each respondent may interpret the questions in different manner therefore researcher may have difficulty in assimilating and combining the information together. The first part of the primary research will utilize a combination of quantitative and qualitative research survey questionnaire which will focus on questions that will cover Mashreq Bank’s critical success factors of credit risk management. Further, the specific questionnaire will be designed for the managers at Masherq Bank In line with this, the research questionnaire will be mailed together with an information letter that will explain the main purpose of the research study. Eventually, follow-up call together with a follow up letter will be mailed to respondents in Mashreq Bank to increase the overall rate of response. The second part of the primary research method may contain some information which may be shared by the bank on the condition of maintaining the confidentiality of the data with regards to Mashreq Bank’s critical success factors that enabled the bank sustain the financial difficulty during the period of global financial recession. In exchange with keeping the identity of the prospective research interviewee confidential, a promised permission from the researcher’s target interviewee has been obtained prior to the submission of this research proposal. With a promised permission from the target interviewee, the second part of the primary research will focus on conducting research interview with either the credit risk manager of Mashreq Bank or any person who is currently working in the credit risk department of Mashreq Bank. A semi-structured interview questionnaire will be used as a template to ensure that all necessary questions will be asked during the personal interview. Using the semi-structured interview questionnaire as a guide in conducting the interview, the main purpose of this interview is to determine the specific strategies and critical success factors of credit risk management used by Mashreq Bank in managing credit risk. Basically, a strategic questioning is highly correlated to the accuracy and validity of the research survey and interview results in the sense that the data that has been collected through the research interview process and research survey should be appropriate to the research questions and purpose of the study. Therefore, the researcher should carefully prepare the kind of questions to be asked to each participant. To achieve a good quality research survey questionnaire, the researcher should have a good understanding and analysis of the main purpose of the study. In line with this, Keith Richard (2006) stated that ‘understanding the research process is important when a researcher has chosen to adopt a qualitative research study in order to avoid heading into a wrong direction’. As soon as the researcher is finished writing a list of research questions, it is essential for the researcher to go through the research questions again in order to determine the specific questions that need to be refined. To enable Mashreq Bank specifically and the local banks in UAE cope with challenges after the global financial recession, the purpose of this study is to enumerate and critique the effectiveness of the critical success factors of credit risk management (CRM) and identify the banking areas that will require further development. Therefore, intentionally conducting a research interview with either the credit risk manager of Mashreq Bank or any person who is currently working in the credit risk department of the Bank is necessary since information gathered from this type of research method will enable the researcher address the main purpose of this study. Together with the gathered secondary research and the research survey results, the interview research result will be analyzed thoroughly. Basically, comparing and analyzing the critical success factors used by Mashreq Bank and industry wide best practices of credit risk management will provide the researcher with better understanding necessary to avoid bias judgment. In general, gathered literature review related to the critical success factors of credit risk management adapted by some of the local banking companies will be useful in terms of enabling the readers to have a full understanding concerning this matter. As part of conducting the secondary research review, related journals, book, reports, and electronic materials will be consulted to enable the researcher have an access to useful and updated information concerning the proposed research topic. Site Setting, Population and Sample Size Qualified research survey respondents will be individuals who are working with Mashreq Bank who personally handles or work within the credit risk department for more than two (2) years. Individuals who do not meet the said requirements will automatically be excluded in the research sample. On the other hand, the qualified interviewee for this study will be the credit risk manager or staff who handles credit risk at Mashreq Bank. Since the target research survey respondents will be receiving the research survey questionnaire through post mail, the site setting for this part of the primary research will be at the comfort place of each qualified respondent. On the other hand, the site setting for the research interview will be at the place where the qualified interviewee would agree to meet up with the researcher. The interview though will be based on the questionnaire developed however, it will be treated as a different data collection method and results will be analysed separately. It is unlikely for the researcher to receive 100% response rate when mailing the research questionnaires to target respondents. Method of Measurement and Research Findings Analysis The collected data from this study will be derived coming from the research survey questionnaire results, interview result, and the secondary findings which will be composed of gathered previous studies concerning the critical success factors behind credit risk management. When measuring the significance of the quantitative data gathered, the researcher will make use of a simple statistical measurement which includes the basic computation of frequency and percentage using the Microsoft Office Excel software. Aiming to increase the reliability and accuracy of the research survey results, it is best to compare the tallied figures with its corresponding semi-structured interview result and results obtained after by scrutinizing the responses received through questionnaire. This strategy will minimize the risk of bias analysis and findings. For the same reason, the qualitative research findings coming from both the research survey questionnaire and the one-on-one interview with the target interviewee will be analyzed together with the gathered secondary research findings. Research Ethics As a standard operating procedure, it is ethical to obtain permission or seek approval from the researcher’s target research survey respondents and target research interviewee prior to conducting the research study. In line with this, the researcher should clearly explain to the target research survey respondents and interviewees the main purpose of this research study. It is unethical to force or threat any person to participate in this study without the voluntary agreement with the target research participants. Therefore, it is ethical for the researcher to give the research target participants the option as to whether or not they are willing to participate in the study. In case a research survey respondent decided to withdraw from the study, the researcher should grant the research respondent’s wish without further questions asked. In line with this, the researcher should provide his / her personal contact information on the information letter posted to each of the researcher’s target research survey respondents. This strategy will allow the target research survey respondents to contact the researcher when necessary. It is equally ethical for the researcher to keep the research respondents’ and research interviewee’s identity confidential at all times. This particular research practice gives respect to the research participants’ privacy and personal rights. Keeping the research participants’ identity confidential can be achieved by eliminating all personal information from the official research study report. When conducting a research study, the researcher should keep in mind that a strategic questioning is highly correlated to the accuracy and validity of the research survey and interview results. It simply means that data that will be collected through an interview process and other data gathering techniques such as the actual research survey should always be appropriate to the research question and main purpose of the proposed research study. For this reason, it is necessary for the researcher to be meticulous when preparing the type of questions to be asked with the interviewee and research respondents. In terms of the research findings, the result of the survey data should accurately be based on the actual survey result. In line with this, the researcher should statistically measure the survey results according to his / her best ability. Likewise, it is but ethical for the researcher to fully understand the subject matter that has been presented in this study. Any forms of research deception, deceit, bluff, or subterfuge which could distort the research survey result will be identified and removed from the research study. This is the main reason why the researcher will include questions that will make the researcher determine whether or not the research survey respondents has been serious in answering the research survey questionnaire with pure honesty. In line with the data gathering, it is ethical not to include misrepresented data gathered in the measuring of data results. In case some of the research survey respondents would give a bias answer by answering both ‘yes’ and ‘no’ question within a specific question, it is best not to include the data entry in the official list of statistical measurements. Instead, the researcher should take note or mention the reason for disregarding the sample data. Time Scale and Resources In compliance with the master’s programme requirement, there are quite a lot of things that needs to be done throughout the completion of the research study. Within the first four (4) weeks, the researcher will conduct related literature related to the critical success factors that are commonly used by Mashreq Bank in relation to credit risk management followed by designing a research interview questionnaire based on the gathered literature review between 4th to 5th week. Between 5th to 12th week, the researcher will contact and set appointment with a credit risk expert who is currently working at Mashreq Bank. Due to the difficulty to contact the researcher’s target interviewee, a longer time frame was allocated for this particular task to ensure that the researcher will have sufficient time to be able to successfully accomplish this challenge. Between 11th to 14th week, the researcher will start designing a set of research survey questionnaire and information sheet containing the main purpose of the research study together with the researcher’s contact information. It is unlikely for the researcher to be able to come up with a good research survey questionnaire at once. For this reason, a time frame of 4 weeks is needed for this task to enable the researcher to have sufficient time to re-align the research survey questions when necessary before reproducing 30 sets of research survey questionnaires and information sheet which will be mailed to the researcher’s target respondents. On the 17th week onwards, the researcher will send out the 30 sets of research survey questionnaires and information sheets by post mail. After a week, the researcher will start making a follow-up call and send out a follow-up mail. Making a follow-up call combined with the sending out of follow-up mail is necessary in terms of increasing the researcher’s overall response rate. The research survey and interview results will be tallied and analyzed between the 21st to 23rd week respectively. Eventually, the researcher will finalize the official research findings. To sum it up, the proposed research study will be completed within the time span of six (6) months. In line with this, the Gantt chart presented in this proposal summarizes the schedule which will be used throughout the completion of the research study. (Please refer to Gantt Chart – Proposed Research Schedule on page 16 – 17) Gantt Chart – Proposed Research Schedule Events 1 Conduct related literature review on the critical success factors commonly used by banks in relation to credit risk management   2 Design research interview questionnaire based on the gathered literature review     3 Contact & set appointment with a credit risk expert from Mashreq Bank     4 Design Research Survey Questionnaire & information sheet       5 Make 30 copies of research survey questionnaire & information sheet     1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Week   Read More