Finance companies should establish a funding strategy for effective diversification in the sources and tenor of funding. Companies should establish strong relationship with fund providers and presence in different funding markets to ensure continued access to diversified and reliable funding sources. The company should frequently assess its ability to raise funds quickly from each funding source and should identity the key factors affecting this ability and monitor them closely to ensure that the assessment of fundraising capacity remains valid.
A finance company should maintain a cushion of unencumbered high quality liquid assets as a readily available source of funding to meet unexpected net cash outflows and survive a liquidity stress event. Availability of sufficient stock of high quality liquid assets allows the company necessary time to access alternative sources of funding until other longer term measures can be implemented. Assets are considered to be high quality liquid if they can be easily and immediately converted into cash at little or no loss of value. The liquidity generating capacity of these assets is assumed to remain intact in periods of market stress, in addition to ease and certainty of valuation and low volatility in prices.
In determining the appropriate level of liquid assets relative to the company's liquidity risk profile, finance companies should consider, among other things, the stability of funding sources, cost and diversity of funding (companies with higher funding costs compared to similar peers and/or those that rely on a limited number of funding sources may need to hold a larger stock of liquid assets), short-term funding requirements (companies with a funding mix geared towards shorter term maturity of liabilities should hold a larger stock of liquid assets) and contingent funding needs.
Assets normally pledged to secure specific obligations should be excluded from the stock of liquid assets that are available to meet unexpected cash shortfalls.
Finance companies should ascertain their collateral needs for secured funding to manage their liquidity over various time horizons in both normal and stressed times. A finance company should actively manage its collateral positions, differentiating between encumbered and unencumbered assets. Unencumbered assets have the potential to be used as collateral to raise additional secured funding in secondary markets and as such may potentially be additional sources of liquidity for the company.
SAMA may also impose specific limits for controlling liquidity risk exposure of finance companies as and when deemed necessary.
