Page 371 - Bank Muamalat_AR24

ANNUAL REPORT 2024 1 2 3 4 5 6 7 Our Numbers 8 369

3.0 RISK MANAGEMENT (CONT’D)

Risk Appetite
Central to the Bank’s risk management framework is the risk appetite. The risk appetite is defined as the level of risk that
the Bank is willing to accept in fulfilling its business objectives. The Board, BRCC and senior management is responsible
for determining the Bank’s risk appetite and risk management strategy. The risk appetite is reviewed by the Board on an
annual basis, in alignment with the annual strategic and business planning process.

The risk appetite framework is embedded within the Bank’s key decision-making processes and supports the
implementation of its strategy. It sets out the principles and policies that guide the Bank’s behavior and decision-making for
all risk taking activities towards achieving an optimal balance between risk and return. It also provides a clear reference point
to monitor risk taking, to trigger appropriate action as the boundaries are approached or breached, and to minimize the
likelihood of ‘surprises’ when adverse risk events occur.

As outlined in the risk appetite framework, a set of risk appetite statements has been developed to define the related
risk capacity, appetite, tolerance and limits/targets of the Bank. The risk appetite statements, together with the risk tolerance
limits and thresholds, are formulated to cover several key strategic and business risk levels or metrics such as capital
ratios, liquidity, earnings volatility, asset portfolio composition and asset quality. The risk appetite, which is expressed
in quantitative and qualitative forms, also incorporates the Bank’s key performance indicators and states its stance
towards reputational and Shariah non-compliance.

4.0 CREDIT RISK (GENERAL DISCLOSURE)

Credit risk is defined as the potential financial loss caused by a retail customer or a wholesale counterparty failing to meet
their obligations to the Bank as they become due. This covers all credit exposures, including guarantees and irrevocable
undrawn facilities.

Risk arising from changes in credit quality is a central feature of the Bank’s business, where uncertainty over the
recoverability of financing and other amounts due from counterparties are inherent across most of the Bank’s activities.
Adverse changes in the credit quality of a customer/counterparty or a general deterioration in the economic condition
could affect the value of the Bank’s assets and its overall financial performance. To a lesser degree, the Bank is also
exposed to other forms of credit risk, such as settlement and pre-settlement risks, arising mainly from activities involving
foreign exchange, investment securities, equities, commodities and derivatives transactions.
The BRCC and ERMC are the key board and management-level oversight committees responsible for the overall credit
risk management activities. These include approving and review of risk strategies and policies, resolving any
policy-related issues, and monitoring of the Bank’s asset portfolios and risk profile.
Credit risk is managed under an established framework of policies, processes and procedures, which forms part of the
overall risk governance framework. The risk management processes include assessing, measuring, mitigating and
managing credit risk and maintaining it within the Bank’s risk appetite.
Key components of the framework are the Credit Risk Policy (“CRP”) and Guidelines to Credit Risk Policies (“GCRP”),
which contain credit-related policies and procedures for the management of credit risk. These policies and procedures
cover risk policies, controls and prudential limits; risk rating methodologies and application; financing underwriting
standards and pricing; delegated credit approving authority; credit review and management of distressed assets;
and rehabilitation, restructuring and provisioning for impaired financing. The policies are periodically reviewed and
updated to ensure its efficacy and continued relevance.

An important element of credit risk management involves the allocation of the Bank’s financing exposures into risk rating
categories. This approach provides for sufficient level of granularity and detail of the financing assets to facilitate the
identification, monitoring and management of the overall credit risk profile on a regular basis. These rating categories are
also linked credit pricing and defined in relation to profit spread.