Management Practices of the Arab Bank-Free Samples for Students

Question: Discuss about the Risk Management Practices of the Arab Bank. Answer: Introduction This is a report, which will highlight the risk management practices of the organization named Arab Bank. Arab Bank is one of the largest banks in Jordon and focusing on managing risk in their organization. The report will portray the objectives, potential threats, weaknesses, strengths and opportunities for the organization. The existing risk management policies of the organization and new policies that have to be accommodated according to the needs of the bank will be critically analyzed to give a better understanding of the study. Background Arab Bank is one of the largest financial institutions in the Middle East and belongs to the private sector. Arab Bank has its headquarters in Amman, which is situated in Jordon. The organization has been catering to large number of consumers over 600 branches, which are spread in five continents. Arab Bank is one of the major economic contributors in Jordon as they provide banking solutions to their clients and at the same time facilitates in development of business growth (Arabbank.jo 2017). The organization has grabbed the majority of stakes and has highest capitalization in the market. The bank faced some issues right after the global economic crisis, which lead to the decrease in the credit rating of the organization. However, they have been able to bounce back and regain their strong hold in the market. Aims of organisation The political instability of the Arab countries is increasing the amount of risk in the market. The bank is aiming to incorporate strong information technology systems, efficient governance and employment of workforce, which are highly skilled (Arabbank.jo 2017). Thus, the organization will have to prioritize the risk issues; this will enable to include flexibility within the risk structure of the organization. Arab Bank has its own set of values and principles that are developed based on the interest of the stakeholders. The values are as follows: Commitment: The organization has aimed to support economies and the people in that region. Trust: Arab Bank has been able to successfully protect the customer interest, they have kept a secured network and maintains confidentiality of the client data. Citizenship: The organization has been involved in corporate social activities by nurturing advancement and growth of the industry and the people. Arab Bank has been able to contribute to the overall development of the society. Customer Focus: The bank is focused on fulfilling the needs of the organization. Service Excellence: Customer experience management has been incorporated in to the business model of the organization, which has facilitated in providing extraordinary service by improving the experience of the customer. Teamwork: The work culture is based on teamwork and the organization provides encouragement in making efforts of collaboration. Empowerment: The organization had aimed to provide effective training and development program for the workforce. This will enable the workforce to grow personally and professionally at the same time. Transparency: The organization has tried to keep the communication with the consumers as open as possible so that they can maintain the transparency of the processes and gain their trust. Identified threats and opportunities STP Segment Corporate banking, Private banking, Loans, commercial lending, Structured finance, Project Finance, Savings account and current account. Target Group Various business organizations and corporate individual who are in need of financial services Positioning A financial institution, which maintains transparency and be a responsible corporate citizen SWOT Analysis Strengths Globally established in five continents Major contributor to economy Good awareness Asset base is huge One of the largest financial institutions Weaknesses Involvement in controversies which has affected the global image of the brand Opportunities Demand of banking services in the Middle East is booming in nature Opportunity of forming alliances, which will facilitate in penetration in international market Threats Increase in competition in the Middle East market Getting exposed to Euro zone crisis Fluctuating for currency values and economic scenario The swot analysis of Arab Bank highlights the fact that the organization has a strong position in the market. However, even though the organization is globally recognized, the organization is facing risks in certain areas. They have to mitigate those threats and opportunities so that they can gain competitive advantage in the market. The competition in the Middle East market is growing and Arab Bank is facing steep competition from other banks in the industry. Risk management practices Risk management is assessment, prioritization and identification of risk so that the unfortunate events probability can be minimized. This will enable the maximization of opportunities in the market. Risk can develop due to different types of uncertainty in the market and internal weaknesses (McNeil, Frey and Embrechts 2015). This may include problems in the financial market, credit risk, legal liabilities and natural calamities. Risk management will ensure that the organization will be able to increase their revenue streams by mitigating the risks that they may face during the different aspect of the organization. The different types of risk faced by the banks are described below in detail: Credit risk Liquidity risk Market risk Compliance risk Operational risk Credit risk is the probability that a borrower will be fail in making payments on any type of the debts. Credit risk will monitor the loss reserves and the adequacy o0f the capital to mitigate the risk. The global economic crisis has made the banks understood the importance of credit risk management and how it can be used to minimize the chances of loss within a bank (DeAngelo and Stulz 2015). Thus, the regulators want to maintain transparency in all the processes so that all banks may have essential information regarding their customers and credit risk associated with it. Thus, the banks will have to follow the Basel III norms so that they are able to mitigate the risks in a better, which means that the burden of the banks have increased significantly. The management of credit risk in an effective way will ensure competitive advantage and overall improvement in the performance in the organization (Ramakrishna 2015). However, in order to maintain effective credit risk management, the bank will have to gain a complete understanding of the banks overall credit risk. This can be done by evaluating the customer, level of portfolio and individual risks. However, the banks will try to evaluate the risk profiles in an integrated way. However, the information regarding risk portfolios are distributed among all the units of business. Thus, an in depth risk assessment is required for accurately identifying the capital reserves. This will reflect the risk associated and the short-term losses in credit; thus, this will ensure that the organization is able to increase the capital adequacy and reduce the short credit losses by using solutions for credit risk mitigation (Matthews 2013). Simple portfolio measures can be used for mitigation of credit risk for the banks, which are severely facing issues with the credit risk management. However, in the long term the organization will require more sophisticated risk management measures for managing credit risk. This will include real-time monitoring and scoring, management of the model in a better way to ensure that it increases the longevity of the modelling cycle and stress testing capabilities that is robust (Abiola and Olausi 2014). Liquidity is the ability of the bank to finance all the obligations, which are of contractual of nature. This will include the factors such as investment, lending and withdrawal of funds. This is a practice in which the banks are making use of the short-term liabilities to finance the long-term assets. This gives rise to rollover and refinancing risk; it is the prime responsibility of the banks to define clearly the liquidity policy of the banks (Waemustafa and Sukri 2016). Thus, the banks will have to make anticipation regarding withdrawal of funds and deposits as the contractual maturity of the loans are shorter. Thus, the banks will have to create a cushion period for reducing the risk by maintaining the level of liquidity in the banks. Liquidity of the bank is important, as it will facilitate in accommodating the deposits and funding of the loan growth. The banks are dividing the cash flows in terms of buckets, which will facilitate in maintaining the liquidity of the bank for all the quarters in a given fiscal year. Liquidity risk of the bank can be divided in to factors such as asset liquidity risk and funding liquidity risk. The losses incurred by the bank due to the transacting at the present price in the market can be defined as asset liquidity risk (Waemustafa and Sukri 2015). This may happen due to the fluctuation in the market and selling products at such prices will result in loss. When the bank is unable to meet the funding requirements then it is exposed to funding liquidity risk. This may lead to the development of problems such as failure in meeting the capital withdrawal requests and margin calls. Thus, the bank may be forced to liquidate the assets and the organization may be forced to sell their assets at fire price. The risk of loss due to the factors, which will affect the overall market, is known as market risk. Market risk cannot be diversified, as it will affect the overall industry, which means hedging of the portfolio is the only option. This means that the risk cannot be completely mitigated and the losses incurred can be only reduced. The main sources of risk from the market, which will include equity price risk, interest rate risk, commodity risk and foreign exchange risk (Leung, Banks and Saary-Littman 2016). The changes in the interest rate due to the volatility in the market will give rise to interest rate risk. When there is a change in the interest rate risk in the market it will give rise to risk such as options risk, repricing risk and basis risk. The changes in the spreads in the interest rate risk in the market will give rise to fluctuations, which can be denoted by the basis risk (Calomiris and Carlson 2016). The changes in the spread among the various market interest rates wi ll give rise to basis risk. The volatility in the prices of the security will give rise to equity price risk; in simple words decline in the prices of security or a portfolio will give rise to this risk. However, there are two categories one is the unsystematic risk which is the internal risk of the organization where as the systematic risk is the overall risk in the market which cannot be mitigated. Unsystematic risk of equity price risk can be mitigated through diversification of the portfolio but the systematic risk cannot be mitigated as it will affect the overall asset class (Waemustafa and Sukri 2016). Hedging is the only option for the systematic risk that can only be reduced and cannot be only mitigated. Foreign exchange risk is faced by the bank to the change in the currency exchange rates. The volatility in the exchange rate among the currencies will definitely impact the foreign direct investments of the banks. The fluctuation in the currency exchange rates will decrease the profit margin of the organization if there is depreciation in the value of the currency (Roy 2017). The fluctuations in the prices of the commodities in the market will give rise to the commodity risk. However, in this scenario, commodity risk will not have much impact on the banks. Compliance risk is the legal risk, which arises due to the ambiguous practices of the clients of the banks that will affect the performance of certain bank products. This risk may expose the financial institutions to penalties, fines, and contract voiding and damage payments. This risk will hamper the reputation, restrict the business opportunities, reduce the value of the franchise and decrease the potential for expansion (Woods et al. 2017). Thus, the compliance risk is the factor, which is very important for the long-term sustainability of the organization. Thus, the regulation of the internal policies of the bank has to be maintained in order to identify the quality and the quantity of the risk factors. The quantity of the risk will be evaluated based on the seriousness of the issue and the quality of the issue will be dependent on the quality measures applied to mitigate the issues. Operational risk is associated with all the products, processes and activities of the bank. Thus, the higher officials in the organization will have to incorporate strategies for managing risk in a better way (Jaber, Ismail and Ramli 2017). Operational risk management is used to effectively protect the organization from all sorts of uncertainties. The organization will have to set appropriate standards for managing risk and a strong operational risk management system is required for maintaining the operational performance of the organization. These are the major risk factors, which Arab bank monitors on a daily basis to maintain their sustainability in the market. These practices will provide stability to the bank and the organization will be able to improve the capitalization in the market. Risk register Risk register is one of the major factors for the management of operational risk of the bank. It uses the upbeat management of the internal controls of the organization through effective control of the business units and assessment of the inherent risk. Audit function and the inspection are the internal control for managing the operational risk of the banks (Mace et al. 2015). However, the changes in the market trends have increased the complexity of the management of the risk of the banks due to the invention of information technological based banking facilities. Thus, the banks are4 forced to make use of structured and scientific approaches for the enhancement of the internal controls of the banks. Risk register approach will help the bank to foresee and visualize the risks that may occur in the future and thus, the bank can take precautionary measures. However, this does not mean that the degree of uncertainty in the market will be reduced and the bank may incur loss due to unsyst ematic risk (Chen et al. 2014). Thus, the bank will have to make use of the risk register factor for assessing the processes, products, activities and systems. This is applicable for the new products and the instruments that will be incorporated within the organization. Risk register will identify the risk factors for these instruments and thus, the bank will be able to mitigate the risk factors in an effective way. There is no specific way of using the risk register within the banks and it has to be developed based on the needs of the organization. Various aspects of the operational risk of the bank will be evaluated to establish the factors that will be included in the Risk register of the bank. Risk register is developed in a phased manner and a timeline will have to be maintained which will continuously keep on updating the controls and risks within the register (Black et al. 2016). The higher official in the organization continuously scrutinizes the format for the assessment of the risk so that the parameters for risk register can be set. Moreover, this will, enable the higher ups in the organization to be aware of the control gaps. Thus, risk register will facilitate in providing the higher officials in the banks to be aware of the suggestive approaches that has to be implemented. It is essential to identify all the activities that will be vulnerable to operational risk. There are several stages that would be include in the execution procedure which will include the various business functions. Such as Treasury, Credit, retail and branch operations. Thus, it is essential for the banks to define the risk register for the verticals of the organization (Pritchard and PMP 2014). For better examination and granularity, subsequent to posting down of the considerable number of exercises, items and procedures of the exercises ought to be recorded down. Amid posting down procedures, it ought to be smarter to compose every one of the means of the procedure successively. In the wake of posting of items and procedures, the different operational dangers related with these items/procedures ought to be recorded. Subsequent to posting of every single Operational Risk, the controls utilized for relieving/limiting the dangers, ought to be distinguished. Despite the fact that app raisal of risk and controls won't be directed in the main period of risk enrol arrangement however these are vital piece of risk enlist format (Hopkin 2017). When chance enrol is arranged every one of the dangers and controls will be evaluated in RCSA practice on their parameters. However, as all the banks use different regulatory guidelines and Basel norms for evaluation of internal and external risk within the organization. Thus, the evaluation of the residual risk within the organization has often been avoided by most of the banks. However, it is essential to monitor both the controls and the inherent risk as the residual risk can be derived from these factors. A well-developed Risk Register is a win-win circumstance for both Risk Management Function and Business and Support capacities (Sadgrove 2016). It encourages the association to manufacture better operational risk administration system, it causes chance administration office to effortlessly distinguish and oversee operational risk and it enables business and support to work in better item advancement. Real advantages of Risk Register are as underneath: Risk Register will help in recognizing every one of the dangers engaged with saving money operations (Internal and External Risks). RCSA will help in investigate and observing of the risk on the premise of nature and criticality. Business Units will have better items and procedures regarding risk control. Periodical RCSA exercise will advance familiarity with Operational Risk at worker and forefront officer who are taking an interest in the everyday movement. Risk Register and RCSA exercise will help taking part office/vertical and worker to comprehend the hugeness of control that is set up for alleviation of Operational Risk. Successful RCSA exercise will enable a bank to better comprehend its risk profile. The RCSA exercise will uncover regions of shortcoming and organizes ensuing administration activity. Functional unit will have a profile of risk of their procedure and item at the granular level. Aides in limiting the operational/extortion misfortune. Aides in working up an operational risk administration culture. To enhance the risk capital. To adjust the risk and control with the change in inside and outside condition. To meet the administrative necessities. Calculation of risk and risk threshold Risk appetite can be defined as the type and the amount of the risk that the organization is willing to take in order to fulfil the strategic objective of the organization. Organizations will have diverse risk appetite relying upon their division, culture and goals. A scope of appetite exists for various dangers and these may change after some time (Young 2014). Risk tolerance and appetite should be high on any board's motivation and is a centre thought of an enterprise chance administration approach. IRM's direction gives down to earth bearing, guidance and data to help meeting room banter about. While chance appetite will constantly mean distinctive things to various individuals, a legitimately imparted, fitting danger hunger proclamation can effectively enable organizations to accomplish objectives and bolster maintainability. Execution of a successful ERM program is deficient without deciding and characterizing an association's risk tolerance and risk appetite. Actually, as indicated by the RIMS Risk Maturity Model, "risk appetite management" is one of seven basic traits of a successful ERM system and a fundamental piece of any risk develop association (Gutteling 2015). Development is additionally dictated by the degree of comprehension and responsibility of five elements: Defining adequate limits Calculating and articulating tolerance Developing risk portfolio Making risk and reward exchange offs in day by day administration Attacking gaps amongst actual and the perceived. Plainly communicated risk appetite and tolerance articulations help secure organizations against exclusively seeking after single, limit objectives without considering potential outcomes as they seek after prizes for a "suitable" level of risk. What is suitable and adequate for one association might be unsuitable to another, as their mentalities toward chance fundamentally may extend along a continuum from chance taking to chance opposed. Risk tolerance and appetite definitions frequently can be an exercise in careful control as an association's partners may have changing methods of insight on how much risk ought to be sought after or held. Risk appetite and resistance are impacted by the idea of the association and by the business that an association works in. Companies with higher risk hunger for the most part are more engaged on the potential for a huge increment in esteem and profit (Ittner and Keusch 2017). Thus, these organizations might will to acknowledge higher risk consequently. Beginning period, high-potential, high-risk, development new businesses have a high hunger for chance and are generally ready to acknowledge more prominent unpredictability and vulnerability. Conversely, organizations with bring down risk appetite by and large are more risk unwilling as their attention is on stable development and income. They might be more disinclined to showcase vacillations and significantly affected by legitimate and administrative prerequisites (Ittner and Oyon 2014). A few definitions recognize appetite and tolerance in that hunger is seen as an announcement that characterizes the hierarchical rationality for overseeing and going out on a limb and resistance as a quantitative metric keeping in mind the end goal to bound exercises and results inside the metric. In this manner, an association's risk hunger must be adjusted with its risk resiliences. Risk tolerance can be measured as a satisfactory/unsuitable scope of variety with respect to the accomplishment of a particular goal or, then again to the accumulated risk hunger. Risk resistance gives imperatives around the level of risk, which may have upper limits (e.g., endure close to) and bring down limits (e.g., endure at a base or not endure an arrival not as much as x in light of the risk expected). It might be measured utilizing some indistinguishable units from the related goal. These risk resiliences might be joined by a risk target. A risk target is a coveted level of risk that the association accepts is ideal to meet its destinations. This regularly can be some level inside the risk tolerance limits, conceivably delineated along a risk/remunerate bend (Huzdik, Bres and Nmeth 2014). Verifiable in the risk tolerance and risk target ideas are surveys to decide the appropriateness, ampleness and viability in working inside the limits at the coveted target levels. Checking changes from the normal results is indispensable for risk tolerance proclamations to be significant. Startling or unsatisfactory deviations should trigger encourage examination and activity, including acceleration to senior administration. Similarly, as with hunger, an association's risk tolerance by and large is driven by its destinations and partner desires, running from esteem security (for the most part br ing down tolerance levels) to esteem creation (by and large higher tolerance levels). Resistances are additionally profoundly needy on how very much promoted or financed the association is. An association ought not characterize risk appetite without considering its risk limit (Baldan, Geretto and Zen 2016). Risk limit is the measure of risk an association can really tolerate. An association's board and administration may have a high-risk appetite yet not have enough limit to deal with a risk's potential instability or effect. On the other hand, the risk limit might be high yet the organization may choose in light of methodology, administration goals and partner desires to embrace a lower chance hunger. Thus, risk threshold is the limit of the banks to which they can go in order to fulfil their strategic goals. Mitigation actions Thus, Arab Bank will have to make use of the guidelines provided by the regulators to incorporate the different risk aversion techniques which are being discussed. The management of liquidity and the credit risk is one of the major factor for the organization. however, operational risk should be focused on by incorporating risk register which will define the control parameters which will have to be monitored. Conclusion Thus, it can be concluded form the study that Arab Bank will have to face various kinds of risks such as credit risk, market risk, liquidity risk and operational. These risks will have to be monitored on a regular basis by the application of the Basel guidelines. 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