The Board of Directors is ultimately responsible for the liquidity risk assumed by the finance company and should ensure that the company has the necessary liquidity risk management framework and is capable of dealing with normal and stressed scenarios. The strategy and significant policies related to the management of liquidity risk should be approved by the Board of Directors. The Board is responsible for:
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| | a. | Establishing liquidity risk tolerance, which should define the level of liquidity risk that the company is willing to assume in line with its business strategy; |
| | b. | Instituting an appropriate organization structure with clearly defined roles and responsibilities for management of liquidity risk exposure. |
| | c. | Reviewing and approving the liquidity risk strategy and liquidity risk management policies including contingency funding plan and liquidity stress testing framework at least on an annual basis; |
| | d. | Continuously monitoring the company's performance and overall liquidity risk profile through reviewing various reports. The Board should be informed regularly of the liquidity situation of the company and immediately if there are any material changes in the company's current or prospective liquidity position; and |
| | e. | Ensuring that senior management takes necessary steps to identify, measure, monitor, control and report on liquidity risk. The Board should also ensure that senior management transforms board-approved strategies and policies into detailed and well-documented guidance, procedures and operating instructions that are properly aligned from risk and reward perspectives.
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The governance structure of the company should specify the roles and responsibilities of senior management, as well as various functional and business units, including that of the risk management department, with appropriate segregation between operational and monitoring functions. Function responsible for monitoring of liquidity risk management should be independent of risk taking units to avoid any conflict of interest and ensure that the monitoring responsibilities are discharged effectively. Senior management of the company has responsibility for executing the liquidity risk management strategy and policies approved by the Board in an integrated manner and ensuring that liquidity is effectively managed by establishing appropriate processes and controls to limit and monitor material sources of liquidity risk.
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Senior management should have a thorough understanding of how other risks, including credit, market and operational risk impact on the company's overall liquidity strategy and position. Senior management is responsible for ensuring implementation of adequate internal controls and audit mechanism to safeguard integrity of liquidity risk management process in the company.
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Finance companies are recommended to establish an asset and liability committee (ALCO), comprised of senior management including CEO, personnel from the risk management function, treasury function, financial control function and other key business areas that affect the company's liquidity risk profile, to oversee liquidity risk management. The Board should define the mandate of this committee in terms of planning, directing and managing the liquidity risk.
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The committee members should ensure that the framework established for liquidity risk management is able to adequately identify and measure the risk exposure and provide timely, accurate and relevant reports to senior management, the Board and SAMA about the company's liquidity risk exposure.
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Cash flow mismatch, asset liability maturity gaps, key assumptions used in the preparation of cash flow forecasts, early warning signals, funding concentration, available funding including the status of contingent funding sources and availability of collaterals, among other things, can be reported to senior management and other stakeholders including SAMA through quarterly risk reports or other reports specified in this regard.
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