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Credit risk is historically the most significant risk faced by banks. It is measured by estimating the actual or potential losses arising from the inability or unwillingness of the obligors to meet their credit obligations on time. Credit risk could stem from both on and off balance sheet exposures of banks. Keeping in view the importance of effective credit risk management for the safety and soundness of banks, these Rules are being issued by SAMA to set out the regulatory requirements for further strengthening of credit risk management framework in banks.
All banks operating in Saudi Arabia are required to ensure that they have put in place an elaborate credit risk management framework to effectively manage their credit risk. Such framework would cover various types of lending including corporate, commercial, SME, retail, consumer, etc. The credit risk management framework should include, inter alia, the following components:
i.
Board and senior management’s Oversight;
ii.
Organizational structure;
iii.
Systems and procedures for identification, measurement, monitoring and control of credit risk.
While designing and strengthening their credit risk management framework, banks should ensure compliance of these Rules. Furthermore, banks should also take into account the requirements of the “Principles for the Management of Credit Risk”, “Sound credit risk assessment and valuation for loans”, and “Principles for enhancing corporate governance” issued by the Basel Committee on Banking Supervision in September 2000, June 2006 and October 2010 respectively, and any other related principles and standards including updates thereof issued by the relevant international standard setting bodies.
