Risk management

All banking activities involve taking a certain level of risk. The Bank is continually endeavouring to identify, manage and minimise risk.

The credit manual of the Bank lays down the policies and procedures and the review process for identifying non-performing advances and the provisioning procedures.

The Risk Management Department reviews all credit proposals which are beyond the branch managers’ approval powers. The Risk Committee sanctions credit proposals which are above Risk Management's delegated limits and the Board Credit Committee and Board of Directors approve proposals which exceed the pre-set limits of the Risk Committee.

The custody of all security related documents is centralised within Risk Management which also keeps a close watch on the utilisation of the limits and takes necessary corrective steps to prevent accounts exceeding the approved limits. There is also a continuous review of the overdue loans and non-performing accounts. These are actively followed up before any decision on provisioning is made by the management. In addition, examination by the professionally organised internal audit team enables an independent assessment of the provision requirements to ensure that an adequate provision is carried in the Bank’s accounts.

The Central Bank of Oman examiners and the external auditors carry out an independent yearly review of the loan portfolio and also assess the provision requirements of the Bank.

Credit risk

Credit risk is the risk that a counter-party to a transaction will fail to perform according to the terms and conditions of the contract thus causing the Bank to suffer a loss in terms of cash flow or market value.

The Bank centrally carries out credit assessments and follows established policies and procedures set out in the credit manual. Exposure to individual customers, including related parties, is restricted to a percentage of the Bank’s networth as per the Banking Law of the Sultanate of Oman and the regulatory bodies of the foreign countries in which branches of the Bank operate.

The Bank generally deals with creditworthy parties to lessen its risk on each individual credit exposure by adhering to the laid down policies and procedures.

On the money market and treasury-related activities, limits have been set for financial institutions and customers. These are regularly monitored to prevent undue exposure to a single customer/institution/country. The limits for financial institutions are based on the net worth of the Bank and that of the counter-party. All cross border exposures are monitored with aggregate country risk and transfer risk controlled by the Risk Committee.

Lending by economic sectors described in note 24 to the financial statements spells out the diversification of the loan portfolio thus reducing the chances of losses in the event of a downturn in any one economic sector. Further, lending to the real estate sector and personal loans are subject to ceilings imposed by the Banking Law of the Sultanate of Oman.


Market and currency risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices.

The Bank has an active dealing room, which is manned by experienced staff. The treasury manual of the Bank sets out the details of the intra day and overnight exposures, which are strictly adhered to. In addition, the Central Bank of Oman restricts the net foreign currency exposure to a maximum of 40% of the net worth of the Bank. The foreign currency positions of local and overseas operations are monitored continuously by Head Office.

Liquidity risk

Liquidity risk is the risk that an enterprise will encounter in raising funds to meet its obligations at any given time.

The Bank’s liquidity management policies are designed to ensure that even under adverse conditions the Bank should be in a position to meet its obligations.

The Asset Liability Committee (ALCO) of the Bank, which comprises members of senior management, meets monthly to monitor liquidity requirements, lending ratio, interest (gap) limits, foreign currency exposure and other relevant measures. The ALCO also develops the information base and analytical tools to support the management of assets and liabilities besides developing policies and procedures on a continuing basis.

The Bank continuously pursues its efforts to raise low cost deposits, which are stable in nature. Over the years of operation, the Bank has gained the confidence of the international community and has adequate funded and non-funded limits to enable it to raise resources to manage the short to medium term requirements.

Interest rate risk

Interest rate risk is the sensitivity of the Bank’s financial condition to movements in interest rates.

Mismatches or gaps in the amount of assets, liabilities and off-balance sheet instruments can generate interest rate risk, the impact of which is a function of the interest rate changes and the maturity profile of the assets and liabilities. In order to minimise this risk, the Bank generally adopts the following:

• Interbank placements and borrowings have a tenor of less than six months;

• The Bank’s foreign currency loans are periodically repriced on a Libor basis, thus eliminating interest rate risk. Out of the total facilities, 53% are subject to re-pricing within a year. The remaining Rial Omani facilities maturing above one year and up to five years are hedged predominantly by savings deposits, which are stable and have a low sensitivity to instant rate changes;

• The Bank uses interest rate contracts and forward rate agreements to hedge interest risk.