article on crg

Credit Risk Management Practices in Banks: An Appreciation

Md. Saidur Rahman

Abstract The banks in Bangladesh have started undertaking a number of quantitative and qualitative measures to understand the risks involve in credit or chance of default which may come from the failure of counterparty or obligor (client) to fulfill his/her commitments as per agreed terms and contractual agreement with the bank. Traditionally, a bank gives emphasis on collateral in funding to the clients whereas in the concept of modern banking a bank keenly feels to measure the business risk over the security risk for ensuring the timely repayment of invested funds. Now-a-days a banker likes to adopt a number of sophisticated financial techniques in credit appraisal process with a view to assessing the borrowers business as well as financial position rigorously. The use of sophisticated techniques for measuring the financial, business and other risks is yet to be established in the banking operations very fast due to the advent of computer based technologies. In some cases, the rate of adoption of analyzing tools and techniques is highly remarkable in credit operation. This attitude of the bankers has been changed by introducing quality training and reinforcing sophisticated financial as well as risk grading techniques. A strong database is the demand of the day for the proper application of the much-demanded credit risk management guidelines along with effective risk grading system.

1. Introduction Credit risk may be defined as the possibility that the potential client or counterparty will fail to meet its obligations in accordance with the agreed terms with the bank. It also signifies the risk of making credit to a risky customer for a risky venture which is not likely to generate enough revenue to repay the money back to the bank. Credit risk is the largest and most obvious source of risk in banking and it comes from a banks credit portfolio. The credit portfolio of a bank usually consists of money market portfolio, capital market portfolio and general credit portfolio. Here a bank is highly exposed in the risks of capital market and general credit portfolio. In recent times, the awareness among the bankers has grown regarding the need for managing

The author is Joint Director (Training) and Faculty Member, Islami Bank Training and Research

Academy (IBTRA), Dhaka. The views expressed in this article are authors own.

Journal of Islamic Economics, Banking and Finance, Vol. 7, No. 3, Jul Sep 2011 38

perceived risks in credit related activities. One of the goals of credit risk management in banks is to maximize a banks risk-adjusted rate of return by maintaining credit risk exposure within the acceptable level. Hence, the credit risk assessment and grading system are being applied to evaluate, identify, measure and monitor the level or status of perceived risk associated with a credit proposal. A number of financial and non-financial factors or parameters are used by the banks for these purposes. The use of comprehensive credit risk assessment and grading techniques increasing very rapidly in the banking sector in Bangladesh because of deterioration in the credit standing of the clients, adoption of Basel accords, compliance of international accounting standards (IAS) & international financial reporting standards (IFRS) and the fast revolution of technologies that has made the bankers user friendly in the adoption of these techniques.

From the findings of different studies, it can be noted that at the very outset the banking sector in Bangladesh provided huge amount of soft debt facilities to trade, industry and farming activities for enhancing overall economic growth of the country and it was done as a part of social commitment of the nationalized sector. Therefore, the bankers were more concerned to disburse credit to the clients and not to control the credit flow. At that time, bankers used to take credit decisions mostly on the basis of 5Cs consists of character, capacity, capital, collateral, condition and control for safeguarding their credit and without requiring any information of much sophisticated nature from the borrowers for using credit risk assessment for qualifying credit. Even in many cases bankers were reluctant to apply very sophisticated financial techniques in credit decision making if they were satisfied with the security or collateral supplied by the borrowers. Thus the practice of sophisticated financial techniques as well as credit risk assessment system for evaluating borrowers creditworthiness were more or less absent in credit operations. But the bankers attitudes towards applying in-depth financial analysis in credit decision making have been changed - particularly after 1980s when they observed an alarming amount of default credit in their portfolio. They started taking the whole financial scenario of the business of the borrowers along with the security and collateral. They also started practicing the techniques of financial analysis to evaluate the financial statements submitted by the borrowers. But again the use of financial techniques was limited to the study of income statement, balance sheet and cash flow statement only with the application of some traditional financial ratios like current ratio, gross profit margin, debt service coverage ratio, debt-equity ratio, break-even point analysis, net present worth, benefit cost ratio, internal rate of return, etc.

All the bankers were seen quite enthusiastic in the early 1990s when a broad based Financial Sector Reforms Program (FSRP) was undertaken in the financial sector for improving the efficiency of the banks. Under the said program, much emphasis were

Credit Risk Management Practices in Banks: An Appreciation 39

given in the process of selecting a credit proposal, risk analysis, credit pricing, classification and provisioning thereof. In 1993, Bangladesh Bank made the first regulatory move to introduce the best practices in this area through the introduction of the Lending Risk Analysis (LRA) manual for all credit exposures undertaken by a bank in excess of Tk.10 million. Bankers were asked to prepare Financial Spread Sheet (FSS) to cover financial trend analysis through comparative and common-size financial statements, cash and funds flow analysis, measuring credit scores like Z-score and Y-score along with Lending Risk Analysis (LRA) for a particular amount of credit. Under LRA, more emphasis was given to measure the business risk of the clients. Henceforward, for the first time the bankers in Bangladesh started using formal risk analysis techniques for measuring risk level of a credit proposal. The concept of security in credit has been changed by adopting new techniques of credit analysis. The bankers started understanding that the collateral or customers pledge for credits is just one of the safety zones that a banker must keep for giving overall protection against the funds which is given to the customers and the liquidate value of the collateral or pledged goods must be equal or greater than the exposed risk value of credit sanctioned. But from a number of studies it is found that the legal system in our country sometimes makes it difficult for the bankers to repossess and sell out the collateral taken against the credit. So it is clear that the income and cash flow from business are to be the primary safety zones of a credit (Figure-1) and these are actually preferred sources of ensuring repayment of credit.

Figure -1: Safety Zones Surrounding the Funds Credited by a Bank

Source: Rose, Peter S. (1996), Banking Credit: Policies and Procedures, Commercial Bank Management ,3rd edition, Boston: Irwin-McGraw-Hill Publishing.

Personal guarantees and pledges made by the

owners of a business firm or by cosigners to a credit.

Resources on the customers balance sheet

and collateral pledged.

Customers expected profits, income

or cash flow.

Principal amount of credit plus interest owed the bank.


The most outer or remote safety zone of a credit is the guarantee from the borrowers or cosigners where they pledged their personal assets to back the credit taken from the bank. Before taking any personal guarantee, banker must have the idea about personal net-worth of the person (s) which may help in mitigating risk. Very recently the Focus Group on risk management has prepared an industry best practice guidelines titled Credit Risk Management Guidelines for the scheduled banks in Bangladesh under the leadership of Bangladesh Bank with a view to managing risk exposure effectively. To shed light this purpose and improving the credit portfolio of the banks, the guidelines consists of some directional policy frameworks and procedural methods like credit policy, credit risk assessment and risk grading system, segregation of duties of approval authority, internal audit, preferred organizational structure and responsibilities, approval process, credit administration, credit monitoring and credit recovery. To supplement the policy frameworks another manual on risk grading has also been prepared under the leadership of Bangladesh Bank. Risk Grading Manual mainly deals with the credit risk grading process by considering the principal risk components associated with the clients, early warning signals (EWS), credit risk grading review, MIS on credit risk grading, financial spread sheet (FSS), etc. It is expected that these guidelines along with the grading system will improve the risk management culture, establish minimum standards for segregation of duties and responsibilities, and will assist in the on going improvement of the banking sector of Bangladesh.

2. Objectives, Scope and Methodology The main objectives of this study is to make a thorough review of tools and techniques of credit risk management practices in banks and financial institutions in Bangladesh as suggested by the relevant bodies and experts under the leadership of Bangladesh Bank and highlighting the key features in order to grow awareness of the users about credit risk management practices and its proper implementation in the credit decision making. Banks and financial institutions put their significant portion of funds in the long-term financing along with other forms of advances to the public and private sector programs. As a developing country a huge amount of credit flow is very much needed both in public and private sector. But it is mentionable that the credit operation involves risk of non-repayment from the counterparties or clients. In order to manage the risk exposure which may come from such activities, the credit risk management practices is one of the important aspects in bank management and it must be proper and in systematic manner. This study is the result of consulting the existing literature and is basically theoretical in nature on the subject. All the discussions that have been included in this paper are the results of extensive study of existing credit risk grading and risk management systems prevailing in this sector which were issued by the central bank and international bodies time to time.


3. Observations on Previous Practices The Financial Sector Reform Program (FSRP) was introduced in the early nineties in Bangladesh with a view to bringing about financial discipline by undertaking appropriate reform measures in the financial sector. The program was undertaken by the Government of Bangladesh (GoB) with combined support of the World Bank and USAID under the Structural Adjustment Program. The program mainly covered the banking institutions in the financial sector and suggested several reform measures. Among the measures that FSRP recommended, the Lending Risk Analysis (LRA) constitutes as an important measure. LRA was prescribed for taking sound credit decision in consolidated form on the basis of analyzing risks involved in borrowers business and security. With a view to ensuring better credit risk management, the use of LRA was made mandatory in case of sanctioning or renewing large credits until the adoption of Credit Risk Grading (CRG) in 2003. At present LRA has been replaced by the CRG.

Lending Risk Analysis (LRA) was involved in assessing the likelihood of non-repayment of credits (mainly credit risk) from the borrowers as per credit agreement by analyzing some sort of risks associated with the borrowers business and security. Business risk, the prime component of credit risk, was viewed from two angles viz. industry risk and company risk.

Table-1: Contents of Risk under LRA Manual

Business Risk Security Risk

1.Industry Risk

1.1 Supplies Risk

1.2 Sales Risk

2.Company Risk

2.1 Company Position Risk

Performance Risk

Resilience Risk

2.2 Management Risk

Management Competence Risk

Management Integrity Risk

1. Security Control Risk

2. Security Cover Risk

Source: FSRP Bangladesh, Credit Risk Analysis, June 1993.


Again, industry risk was consisted with two types of risks viz. supplies risk and sales risk. On the other hand, company risk was consisted with four types of risks like performance risk and resilience risk under company position risk and management competence risk and management integrity risk under management risk. Finally, security risk was broken down into two segments like security control risk and security cover risk. But in practice it limits the use in taking sound decision making due to some reasons. Saha et al. (2001) conducted a study titled LRA Practices in Credit Decision in Banks. The study mentioned that for the purpose of processing term credit proposal, LRA is being used as a supplementary tool by the banks side-by-side traditional approach. LRA helps to magnify the use of traditional approach of credit analysis and there is no conflict between them no doubt. But LRA is not yet used as a monitoring or follow-up tool in credit operation. However, banks are not using the techniques of giving early warning signal on the basis of changing risk status under LRA. More emphasis was given here for the subjective ranking. The possibilities to reflect the individuals own judgment and biasness are remained in assessing credit risk through LRA. Single Form for assessing varieties of credits and ambiguities regarding some terms and concepts incorporated in the LRA Manual makes it difficult to use a proper credit risk assessment tool. Keeping these limitations in mind, the Lending Risk Analysis Manual (under RSRP) of Bangladesh Bank has been amended, developed and re-produced in the name of Credit Risk Grading Manual (Bangladesh Bank: Credit Risk Grading Manual, November 2005). Under the newly issued manual, the process of credit risk grading has been made more effective and easier to use in credit decision. It has also been prepared in line with the business complexities of banks and various processes and models followed by the different countries and organizations in assessing credit risk.

Note that before adopting new practices under CRM Guidelines, the credit risk management practices were confined to examine only the risk level for the larger amount term credits and no attempt used to take to risk grading system for unclassified accounts in subsequent stages.

4. Findings and Observations on Recent Risk Management Practices in Banks Bangladesh Bank issued its BRPD Circular No. 17 dated October 07, 2003 advised all the scheduled banks to put in place an effective risk management system by December, 2003 based on the certain guidelines furnished to them. It appears from the circular that the banking industry is completely different from other industries in terms of the diversity and complexities of the risks they are exposed to. For sustainable performance of the banks in view of the deregulation and globalization,


the banks must be capable of managing their risks. Credit Risk Management Guidelines involves in assessing and managing credit risks associated with the selection process of a potential borrower, credit structuring (amount, duration, purpose, repayment, and support), approval process of credit, credit documentation (security and disbursement), credit administration, credit monitoring and recovery functions of a bank or financial institution. At the selection stage, credit risk grading is essential to keep the credit risk exposure at a tolerable level.

Table-2: Contents of CRM Guidelines

Policy Framework Organization Procedures Credit Guidelines Credit Assessment &

Risk Grading Approval Authority Segregation of Duties Internal Audit

Structure Key Responsibilities

Approval Process Credit

Administration Credit Monitoring Credit Recovery

Source: Bangladesh Bank (2003), Managing Core Risks in Banking: Credit Risk Management, Dhaka: Bangladesh Bank, Head Office.

Bangladesh Bank, under its prudential regulatory guidelines, advised all the banks and financial institutions in Bangladesh to follow a robust and structured framework for risk management. In order to help them in building such type of effective risk management system, it formed some Focus Groups comprising the representatives from Bangladesh Bank, SCBs, PCBs and FCBs to study the global industry best practices in banking and to recommend a suitable framework of the risk management system. The present guidelines on core risks management are the outcome of such types of exercise. The Focus Groups have identified some risk areas which are associated with the banking operations like credit risk, asset-liability management risk, foreign exchange risk, internal control and compliance risk, money laundering risk and ICT risk. These risks are referred to collectively core risks in banking. The credit risk is one of the major core risks faced by the banks. It is the possibility of potential losses that may arise from the failure of counter party or obligor (client) to meet its contractual agreement with the bank. Again, the failure may come from the declining in financial condition, adverse situation in the industry or unfavorable condition of the business, trouble in management, weak support due to inferior quality of security, lack of ready succession and bad relationship with the bank of the counterparty.


The main feature of these guidelines is the flexibility in practice. Bangladesh Bank has made the guidelines flexible for the banks in the sense that the respective banks can design their own risk management system depending on their size and complexity of business. Central bank, however, trained a good number of officers of the scheduled banks who in turn may help their respective banks in building up the capacity to adopt the risk management system. Other features of credit risk management guidelines have been discussed below:

4.1 Centralization of Major Credit Related Activities All the banks should have comprehensive credit risk management policies and procedures to ensure earnings at acceptable level and minimize losses in their portfolio. The policies will provide directional guidelines to perform credit related activities properly and efficiently. Credit policy, credit assessment and risk grading system, approval procedures, internal auditing system are the major areas of credit risk management policy. Procedural guidelines consist of some set rules of activities to conduct specific credit function effectively. Credit approval process, credit administration, credit monitoring, and credit recovery are the part of procedural guidelines. These policies and procedures should be approved and strictly enforced by the managing director or chief executive officer and the board of directors. It is noted that any credit activity which does not comply with the policy guidelines will require approval from head of credit or managing director or chief executive officer and board of directors. Security documents should be centralized at the head office or regional office besides the copy of the same preserving in safe custody at branch level.

4.2 Establishing Own Credit Policy

For the purpose of performing credit activities in desired manner, each bank needs to establish own credit policy in accordance with their business philosophy. The banks credit philosophy its general goals and objectives including the mission and vision of the banks are reflected in its credit policy. Thus industry and business segment focus, types of credit facilities, single client or group limits, credit caps, discouraged business types, credit facility parameters, system of approval etc. shall be incorporated in the credit policy in black and white with a view to providing overall framework of credit activities. However it should cover, at a minimum, what constitutes proper credit support, risk based pricing and documentation of credit for safety.

4.3 Customization of Credit Policy Based on Changing Circumstances

Now in a deregulated environment, banks are no longer considered as passive takers. Therefore after the introduction of prudential credit policy, the banks must stand


ready to meet all the legitimate demands for credit facilities at all the times by customizing their credit policy. While looking into the matter of customizing credit policy, the changes in economic outlook and the evolution of banks credit portfolio should be taken into account. The credit policy can also be modified and tuned to match the changing credit related rules and regulations of the country and all the modifications and changes must be approved by the managing director or chief executive officer and board of directors.

4.4 Introduction of Credit Risk Grading (CRG) System in Credit Operations The risks associated with the borrower or counter-party need to be carefully and critically analyzed before funding to the clients business. To quantify the risk exposure, it should be graded as per credit risk score sheet by the individual banks in line with the guidelines of CRG Manual. Risk grading is a key measurement of a banks asset quality and it is a robust process. Therefore borrowers risk grade should be clearly stated on the credit application form for using credit decision making process. In CRG Manual, five risk components viz. financial risk, industry/business risk, management risk, security risk and relationship risk have been identified which are responsible of failing to meet the obligations by the borrowers. These risk components are rated based on the some basic parameters. Note that there are twenty parameters under the five risk components to reflect the risk exposure. Financial risk comes from the financial distress of the counterparty. It includes identification of extent of leverage through debt-equity ratio, liquidity of the borrower through current ratio, profitability performance through operating profit margin and coverage through debt-service coverage ratio. Business/Industry risk arises due to adverse change in business or industry situation. In order to assess the borrowers business/industry risk the size of borrowers business in terms of annual sales volume, age of business, industry growth, market competition and entry & exit barriers are to be assessed. Management risk is conducted in assessing the competence and risk taking propensity of the management. It covers the parameters like experience, second line/succession plan and team work of the management. Security risk is assessed by analyzing the primary security, collateral security and support. Relationship risk is considered under CRG by assessing the account conduct, utilization of limit, compliance of covenants and balance of personal deposits. There is a wide range of risk exposure or grading system in the present practices where superior is the top position and bad & loss is the worst position. In between superior and bad & loss there are six types of risk exposures say, good, acceptable, marginal/watch list, special mention, substandard and doubtful (Table-3).


Table-3: A Typical Risk Grading (Credit Rating) System under CRG Manual Grade

Description Weighted Score

Key Indicators

1 Superior (SUP)

None -Facilities are fully cash secured, secured by Government/international bank guarantee.

2 Good (GD) 85 + - Repayment capacity: Strong - Liquidity: Excellent - Leverage: Low - Earnings & Cash Flow: Consistently Strong - Track record/Account conduct: Unblemished

3 Acceptable (ACCPT)

75 - 84 - Repayment capacity: Adequate. - Liquidity: Adequate - Earnings & Cash Flow: Adequate & Consistent.

- Track record/Account conduct: Good 4 Marginal

/Watch List (MG/WL)

65 - 74 - Repayment: Routinely fall past due - Liquidity: Strained liquidity - Leverage: Higher than normal -Earnings & Cash Flow: Thin, incurs loss and inconsistent. -Track Record/Account conduct: Poor

5 Special Mention (SM)

55 - 64 -Repayment: Deteriorate repayment prospects -Net-worth: Negative -Management: Severe problems -Leverage: Excessive -Earnings & Cash Flow: Consecutive losses

6 Substandard (SS)

45 - 54 -Repayment: Capacity and inclination to repay is in doubt. -Financial condition: Weak

7 Doubtful (DF)

35 - 44 -Repayment: Unlikely and possibility of credit loss is extremely high

8 Bad & Loss (BL)


reputation etc. However, a borrower with special mentions, sub-standard, doubtful and bad/loss rating at pre-sanction stage will be treated as not-feasible. A borrower with superior, good and acceptable rating at post-sanction stage is a performing one. Borrower who is beginning to demonstrate above average risk i.e. marginal/watch list or special mention at post-sanction stage will require bankers attention because it has become as early alert (warning) account. Rest of the ratings of a borrower at the post-sanction stage exhibit as non-performing or classified status.

Table-4: Decision Matrix of CRG Pre-Sanction Stage Grading Status Post-Sanction

Stage Superior

Good

(1) F

easible

Acceptable

(1)

Perfo

rming

(2) Conditional/ Exceptionally Acceptable

Marginal/Watchlist

Special Mention

(2) Early Warning Account

Sub-standard

Doubtful

(3) N

ot -F

easible

Bad/Loss

(3)

No

n-

Perfo

rming

4.5 Use of Classification and Provisioning Rules in determining Credit Risk Grading Out of the eight categories of risk exposures mentioned under the guidelines, four risk exposures or grading are determined as per the prevailing loan classification and provisioning rules of the central bank. Therefore, central banks rules for credit classification shall be applied irrespective of risk rating under CRG sheet in case of risk exposures like special mention, sub-standard, doubtful and bad & loss.

4.6 More Emphasis has been given on the Financial Risk of the Borrowers under the New Guidelines

Five major risk components are considered to quantify the risk status of a potential client before funding like financial risk (50%), business/industry risk (18%),


management risk (12%), security risk (10%) and relationship risk (10%). It is to be mentioned that according to the importance of risk profile, the highest weightage (i.e. 50% out of 100%) has been assigned against the financial risk and the rest weightages are assigned for the rest principal risk components.

4.7 Introduction of Credit Assessment System Besides credit risk grading, a thorough credit assessment should also be done before sanctioning any credit facility in line with the credit risk management guidelines. The task of credit assessment will cover analysis of borrower, its guarantors, suppliers, buyers, etc. To supplement such assessment all banks must have well equipped Know Your Customer (KYC) form. Credit assessment starts with some summaries results from the credit application of the borrower like the amount and types of credit facility proposed, purpose of the credit, its structure, security arrangement, etc. In addition, some risk areas viz. borrower analysis, industry analysis, supplier/buyer analysis, historical financial analysis, projected financial analysis where term facilities require more than one year tenor, account conduct, adherence to credit guidelines, mitigating factors, security and name credit are to be addressed here.

4.8 Segregation of Major Credit Functions With a view to improving the knowledge levels and expertise in various functional areas of credit, to impose controls over the disbursement of authorized credit facilities and to obtain an objective and independent judgment of credit proposal it is advised to segregate the credit functions into Credit Approval, Relationship Management/Marketing and Credit Administration. Moreover, it is advised to make separate approval function from the marketing function.

4.9 Suggestions for Delegating Approval Authority to Individual Executive not to Committees To ensure the accountability in the approval process, the authority to approve or sanction facilities must be delegated to the senior credit executive not to the committees based on his/her knowledge and experiences. Approving authorities should have at least 5 years experience working in corporate/commercial banking as a relationship manager or account executive, training and experience in financial statement analysis, financial reporting and full disclosure, cash flow, projections, trade cycle, risk analysis, credit structuring and documentation, a thorough working knowledge of accounting, local industry and market dynamics, etc.

4.10 Suggestions for using Computer Based Forms and Templates Credit risk management is a comprehensive and robust process. It calls for various sorts of analysis, preservation of results of the analysis and communicating the same


among the parties involved with the process. It has been advised that banks should create and use some computer based forms and templates to perform the credit risk related activities to ensure the accuracy and easy access of information.

4.11 Preferred Organizational Structure Like all businesses, banks have a hierarchy of command and a division of responsibility in different functional areas. Credit activity is one of them and it is also a subject of large dimension. Therefore, within the credit function the banks need to establish organizational structure and it must be in place to ensure the objectivity and accountability in credit risk management. As per the proposed organizational structure of CRM guidelines, below the position of MD or CEO there should be the Head of CRM and the Head of Corporate/Commercial Banking. Other direct reports say, internal audit may also belong to the position of MD/CEO. The credit administration, credit approval and credit monitoring/recovery function may come under the Head of CRM. On the other hand, relationship management/marketing and business development may come under the Head of Corporate/Commercial Banking.

4.12 Introduction of Internal Audit System Credit audit is an important yardstick to measure how well a credit policy and guidelines, operating procedures, central banks directives and credit practices are being followed. The independent internal audit should seek at a minimum whether the credit amount is within the bankers approval authority, whether the security is valid and sufficient, whether the documentation is complete and accurate, whether review has done on a timely basis, whether credits are being graded on a timely basis, whether the credit administration is in overall compliance with the credit operation, and so forth.

4.13 Credit Monitoring, Review and Early Alert Process Credit monitoring helps to ensure that the banks funds are being used to make profitable credits with a minimum risk exposure. It includes periodic reviews, ratings and audits to provide an early indication of the financial health of a borrower. The frequencies of the review of the CRG of the client shall be regulated by the risk exposure at the inception of credit and subsequent updated grading. Lower grading requires more frequency of review. Annual review is to be done in case of superior, good and acceptable risk grading, half yearly review is to be done in case of marginal/watch list risk grading and quarterly review is to be done in case of special mention, sub-standard, doubtful and bad & loss grading. 4.14 Credit Recovery It is suggested that every bank should have a separate Recovery Unit for conducting effective and efficient credit recovery functions. This unit will take specific action


plan/ recovery strategy for the accounts with sustained deterioration based on the recommendations of CRM, pursue all sorts of options to maximize recovery, ensure adequate and timely credit loss provisioning and regular review of sub-standard and worse accounts.

4.15 Non-performing Assets (NPA) Management The Recovery Unit is also responsible for managing NPA of a bank. For this all NPAs should be assigned to an Account Manager within the Recovery Unit, who will coordinate and administer the action plan/recovery of account. There should be a Classified Credit Review Form to know the status of the action plan/recovery plan, adequacy of provisions etc. on regular basis.

4.16 MIS on Risk Exposure To maintain the MIS reports of credit risk grading, banks may develop some forms for the purpose of reporting various risk grading say superior, good, acceptable, marginal/watch list, special mention, sub-standard, doubtful and bad/loss. Bank-wise consolidated report, branch and risk grade wise report and grade wise borrower list may be developed.

4.17 Separate Guidelines for Assessing Risk Exposure of Small Enterprise and Consumer Financing Like other credit facilities, the Small Enterprise and Consumer Financing facilities must be a subject to the banks risk management process. Small enterprise means an entity, ideally not a public limited company, does not employ more than 60 persons (if it is manufacturing concern) and 20 persons (if it is trading concern) and 30 persons (if it is service concern) and also a service concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 30 lac and a trading concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 50 lac and a manufacturing concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 1 crore (Bangladesh Bank, 2004). At the time of granting facility under various modes of small enterprise and consumer financing banks shall follow the prudential guidelines issued by the central bank.

4.18 Application of Financial Spread Sheet For the purpose of reporting the financial strengths and weakness of the clients in a precise but comprehensive manner it is advised to use the financial spread sheet (FSS) in credit decision making under Credit Risk Management practices. The newly adopted financial spread sheet facilitates trend analysis with the help of common-size financial statements covering audited as well as company prepared balance sheets and income statements, financial ratio analysis and cash flow analysis. The cash flow statement has been adopted in such a way that anyone can easily identify the


Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) cash flow which is very much essential to know to determine the Debt Service Coverage (DSC) of a borrower. However, cash flow before and after capital expenditure, total change in working capital during the year and its impact on cash flow, financing need or surplus and financing support from the outsides of the business can also be found from this Cash Flow Statement. FSS contains thirty financial ratios with a view to assessing the growth of key financial indicators, profitability, debt service coverage, activity, liquidity and leverage position of the business of a borrower.

5. Basel Principles and Credit Risk Management The Basel Committee provides some guidelines in order to encourage the banking sector globally to promote sound practices for managing credit risk. The sound practices set out under the Basel guidelines specially address the following areas:

(a) establishing an appropriate credit risk environment; (b) operating under a sound credit granting process; (c) maintaining an appropriate credit administration, measurement and

monitoring process; and (d) ensuring adequate controls over credit risk. Although specific credit risk

management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk.

Each bank should develop a credit risk strategy or plan that establishes the objectives guiding the banks credit-granting activities and adopt the necessary policies and procedures for conducting such activities. The credit risk strategy, as well as significant credit risk policies, should be approved and periodically reviewed by the board of directors. The board needs to recognize that the strategy and policies must cover the many activities of the bank in which there is a significant credit risk exposure. The credit risk strategy should include a statement of the banks willingness to grant credit based on type (for example, commercial, consumer, real estate), economic sector, geographical location, currency, and maturity and anticipated profitability. This would include the identification of target markets and the overall characteristics that the bank would want to achieve in its credit portfolio (including levels of diversification and concentration tolerances). A banks board of directors should approve the banks strategy for selecting risks and maximizing profits. The board should periodically review the financial results of the bank and,


based on these results, determine if changes need to be made to the strategy. The credit risk strategy should be effectively communicated throughout the organization. All relevant personnel should clearly understand the banks approach to granting credit and should be held accountable for complying with established policies and procedures. Credit policies establish the framework for credit and guide the credit-granting activities of a bank. Credit policies should address such topics as target markets, portfolio mix, pricing, the structure of limits, approval authorities, etc. The policies should be designed and implemented within the context of internal and external factors such as the banks market position, business area, staff capabilities and technology. Policies and procedures that are properly developed and implemented capable the banks to: (i) maintain sound credit-granting standards; (ii) monitor and control credit risk; (iii) properly evaluate new business opportunities; and (iv) identify and administer problem credit. Establishing sound, well-defined credit-granting criteria is essential to approving credit in a safe and sound manner. The criteria should set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the credit should be granted. Banks must receive sufficient information to enable a comprehensive assessment of the true risk profile of the borrower or counter party. According to the Basel guidelines, at a minimum the following factors to be considered and documented in approving credits:

the purpose of the credit and source of repayment;

the integrity and reputation of the client/borrower or counter party;

the current risk profile (including the nature and aggregate amount of risks) of the borrower or counter party and its sensitivity;

The borrowers repayment history and current capacity to repay, based on historical financial trends and cash flow projections;

A forward-looking analysis of the capacity to repay based on various scenarios;

The legal capacity of the borrower or counter party to assume the liability;

The borrowers business expertise and the status of the borrowers economic sector and its position within that sector;

The proposed terms and conditions of the credit, including covenants designed to limit changes in the future risk profile of the borrower; and

Where applicable, the adequacy and enforceability of collateral or guarantees, etc.


Once the credit-granting criterion has been established, it is essential for the bank to ensure that the information it receives is sufficient to make proper credit-granting decisions. This information will also serve as the basis for rating the credit under the banks internal rating system.

Banks should have in place a system for ongoing administration of their various credit risk bearing portfolios. Credit administration is a critical element in maintaining the safety and soundness of a bank. Once a credit is granted, it is the responsibility of the business function, often in conjunction with a credit administration team, to ensure that the credit is properly maintained. This includes (i) keeping the credit file up to date; (ii) obtaining current financial information; and (iii) sending out renewal notices and preparing various documents such as credit agreements, etc. Given the wide range of responsibilities of the credit administration function, its organizational structure varies with the size and sophistication of the bank. In developing credit administration area, bank should ensure:

The efficiency and effectiveness of credit administration operations, including monitoring, documentation, contractual requirements, legal covenants, collateral, etc.;

The accuracy and timeliness of information provided to management information system;

The adequacy of controls overall back office procedures; and

Compliance with prescribed management policies and procedures as well as applicable laws and regulations.

Banks must have in place a system for monitoring the condition of individual credit. An effective credit monitoring system will include measures to: (i) ensure that the bank understands the current financial condition of the borrower or counter party; (ii) ensure that all credits are in compliance with existing covenants; (iii) follow the approved credit lines; (iv) ensure that projected cash flows on major credits meet debt servicing requirements; (v) ensure that, where applicable, collateral provides adequate coverage relative to the obligators current condition; and (vi) identify and classify potential problem credit on a timely basis. An important tool in monitoring the quality of individual credits, as well as the total portfolio, is the use of an internal risk rating system. A well-structured internal risk rating system is a good means of differentiating the degree of credit risk in the different credit exposure of a bank and facilitates early identification of problem credit. This will also allow more accurate determination of the overall characteristics of the credit portfolio, concentrations, problem credits, and the adequacy of credit loss provisions.


Banks must ensure that the credit-granting function is being properly managed and that credit exposures are within levels consistent with prudential standards and internal limits. The establishment and enforcement of internal controls, operating limits and other practices will help ensure that credit risk exposures do not exceed levels acceptable to the individual bank. Limit systems should ensure that granting of credit exceeding certain predetermined levels receive prompt management attention. An appropriate limit system would enable management to control credit risk exposures, initiate discussion about opportunities and risks, and monitor actual risk taking against predetermined credit risk tolerances. Internal audits of the credit risk process should be conducted on a periodic basis to determine that credit activities are in compliance with the banks credit policies and procedures.

6. Stress Testing A Sophisticated Approach for Managing Risks in Banks & FIs Bangladesh Bank introduced a Guideline on Stress Testing through Department of Offsite Supervision Circular No.01 dated 21 April, 2010 with effect from June, 2010. In this guideline it is noted that the recent financial turmoil in the US financial system has augmented the importance of establishing more developed risks management regime in the financial industry. The financial institutions around the world are increasingly employing stress testing to determine the impact on the financial institutions under set of exceptional but plausible assumptions through a series of tests. IMF and Basel Committee on Banking Supervision have suggested for conducting stress testing on the financial sector. Bangladesh bank has already designed the stress testing framework for the banks and financial institutions to proactively manage risks in line with the international best practices. Initially, stress testing begins with the simple sensitivity analysis and scenario analysis considering only credit risk and market risk. Eventually it is to be developed as a more comprehensive approach. As a starting point the stress testing is limited to simple sensitivity analysis approach with covering five different risk factors viz. non-performing loans (investment), forced sale value of collateral, interest rate risk, exchange rate risk and equity price risk Moreover, the liquidity position of the institutions is to be stressed separately. As per desire of the central bank, all the banks and financial institutions operating in Bangladesh are to carry out stress testing on quarterly basis i.e. on March 31, June 30, September 30 and December 31. The reporting format of stress testing has been designed in line with the Basel II framework. At institutional level, stress testing techniques provide a way to quantify the reactions of changes in a number of risk factors on the assets and liabilities portfolio of the institution. Effective stress testing requires:


Defining the coverage and identifying the data required Identifying, analyzing and proper recording of the assumptions used for stress

testing Well organized management information system Setting up some specific trigger points to meet the benchmark/standards set

by central bank Calibrating the scenarios or shocks applied to the data and interpreting the

results, etc. Ensuring a mechanism for an ongoing review of the results of stress testing

7. Risk Management Practices in Islamic Banks in Bangladesh Islamic banks are entities that perform financial intermediation according to the rulings of Islamic Shariah. The unique nature of products differentiates Islamic banks from conventional banks in many aspects. Exclusion of interest, prohibition of making money from money, implementation of profit and loss sharing system and prohibition against excessive uncertainty are main sources of differences associated with Islamic banks. The types and extend of risks of Islamic banks also differ in great extend (Hasan and Dicle, 2005).Today nearly four hundred (400) banks and financial institutions are providing their banking services under Islamic Shariah rulings in about one hundred thirty (130) countries of Asia, Africa, Europe, America, Australia, Argentina, Germany, Denmark, Luxembourg, Switzerland and United Kingdom. The banking system of Pakistan and Iran is Islamised and that of Sudan has been totally remodeled on the basis of Islamic Shariah. There has been a rapid growth of Islamic banking industry and the estimated growth rate not less than 15 per cent annually. The history of Islamic banking began from the early days of Islam. The establishment of Mit Ghamr Local Savings Bank (Islamic Shariah based bank) in the Nile Delta of Egypt is considered one of the important events in the history of Islamic banking. In 1963/1964, the first financial year after commencement of banking business a total of 17,560 depositors put their many as deposit in this bank. Mit Ghamr is considered as the milestone of modern Islamic banking system. The achievements made by the Mit Ghamr Bank in Egypt and subsequently the establishment of the Islamic Development Bank (IDB) in 1975, the International Association of Islamic Banks (IAIB) in 1977 motivated the Scholars and Jurists throughout the Muslim world to take steps for establishing Islamic banks in their own countries with the support of regulatory authorities and Governments. The Association provides technical assistance and expertise to Islamic communities wishing to establish Islamic banks


and assist in the development of such banks both at national and international levels. Islamic Banking is a form of banking where banking operations are conducted in consonance with the Islamic principles. The philosophies and objectives of Islamic banking are not similar to the conventional banking rather these are in line with the principles highlighted in the Holy Quran and Hadith/Sunnah. In view with the Islamic principles particularly prohibition of interest, establishing honesty, justice and equity in socio-economic arena it may be considered as a system of financial intermediaries (FIs) that avoids receipt and payment of interest (riba) in its operations and conducts its operations in a way that it helps achieving the objectives of an Islamic economy. The General Secretariat of the OIC defined the Islamic bank as a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operation. The Islamic banking system in Bangladesh started with the establishment of first private sector commercial bank Islami Bank Bangladesh Limited (IBBL) in 1983. At present seven (7) full-fledged Islamic banks and eleven (11) conventional banks with their twenty-four (24) Islamic banking branches are providing Islamic banking services. Internationally reputed banks like the Hong Kong and Shanghai Banking Corporation (HSBC) Ltd., Citi Bank N.A., Standard Chartered Bank and Commercial Bank of Ceylon introduced Islamic products. The state owned commercial banks (former NCBs) have opened their Islamic banking wings to provide Shariah compliant services. A state owned bond called Bangladesh Government Islamic Investment Bond (BGIIB) has been issued by the central bank. The five Islamic insurance companies operating under the private sector in this country as Islamic financial institutions these are Islamic Insurance Bangladesh Limited, Islamic Commercial Insurance Limited, Takaful Insurance Company Limited, Far East Islamic Life Insurance Limited and Padma Islamic Life Insurance Company Limited. In Bangladesh, the share of deposit mobilization and investments of Islamic banking in total banking industry are 16 per cent and 20 per cent respectively. Recently a study was done by Ahmed (2010) to identify the potential for Islamic finance and to examine its impact. This study shows the trends of savings and investment of some selected Islamic and conventional banks which are established in contemporary period in Bangladesh. According to the findings of the study, during 2004 to 2008 the total savings of Islamic banks is higher than those of the conventional banks (Table 1). Over the years the savings mobilization gaps widened in favor of the Islamic banks. The differential amounts of savings mobilization between Islamic and conventional banks are BDT 45,036 million, BDT 49,897 million, BDT 56,821 million, BDT 89,109 million and BDT 113,180 million during the period under study.


Table 1: Savings Mobilization by Islamic and Conventional Banks

Amount in Million BDT Savings of Islamic Banks

(A) Savings of Conventional

Banks (B) Year IBBL SIBL ARAFAH

Total (A) NBL IFIC CBL

Total (B)

Difference (A-B)

2004 87721 19704 10108 117533 29486 20774 22237 72497 45036 2005 107788 16863 11644 136295 33335 22505 30558 86398 49897 2006 132419 16171 16775 165365 40351 28621 39572 108544 56821 2007 166325 18176 23009 207510 47961 29900 40540 118401 89109 2008 200343 22688 31470 254501 60195 36092 45034 141321 113180

Source: Ahmed (2010). Note: IBBL = Islami Bank Bangladesh Ltd., SIBL=Social Islami Bank Ltd., ARAFAH= Al-Arafah Islami Bank Ltd., NBL= National Bank Ltd., IFIC= International Finance Investment and Commerce Bank Ltd. and CBL=The City Bank Ltd.

The study also shows the investment trends of Islamic and conventional banks to justify the potential of Islamic finance. Table 2 shows the year-wise amount of investment of Islamic and conventional banks under study.

Table 1: Investment of Islamic and Conventional Banks Amount in Million BDT

Investment of Islamic Banks (A)

Investment of Conventional Banks (B) Year

IBBL SIBL Arafah

Total (A) NBL IFIC CBL

Total (B)

Difference (A-B)

2004 76826 12887 8150 97863 22972 21281 17028 61281 36582 2005 93644 15097 11474 120215 27020 21695 23326 72041 48174 2006 1113575 15313 17423 146311 32709 25490 30789 88988 57323 2007 144921 15869 19214 180004 36476 28361 26788 91625 88379 2008 191230 18725 29723 239678 49665 33018 34421 117104 122574

Source: Ibid.

It is observed that like savings mobilization gaps, the gaps of investment making also widened in favor of Islamic banks. Though the market penetration of Islamic banks in Bangladesh is significant but still now there no separate risk management guidelines for Islamic banks. Both the conventional and Islamic banks are following the same guidelines which have been advised by the central bank for managing their risks in operations. The central bank through a circular dated November 09, 2009 introduced a Guidelines for Islamic Banking with a view to bringing greater transparency and accountability in Islamic banking. The Guideline covers the main areas of Islamic banking liquidity, maintenance of books of accounts, preparation of financial statements and related issues. It is a supplementary to the existing banking laws.


Islamic banking, also known as participatory banking, refers to a system of banking or banking activity that is consistent with the principles of Islamic Shariah and its practical application through the development of Islamic economics. In order to fully comply with the Islamic Shariah rules in banking transaction all the banks have their own Shariah Council. Besides Bangladesh Bank has formed a Central Shariah Council and related issues. In addition, they are also advised to follow the accounting and auditing standards prescribed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). There are seventy (70) standards on accounting, auditing and governance along with the code of ethics and Shariah Standards of AAOIFI. The Islamic banks have a number of objectives to perform their activities say, abolition of interest (riba) in banking operations, allowing Shariah permissible products/sectors for financing, risk sharing and participatory banking, working as catalyst of development, upholding Islamic ethical standards etc.

7.1 Guiding Principles of Islamic Financial Services Board (IFSB) for Managing Risks Islamic banking sector continues to grow globally at a rapid pace. The Islamic Financial Services Board IFSB) is even more optimistic in its outlook for the growth of the global Islamic banking industry. It forecasts that total asset value of Islamic banking industry will expand to US Dollar 2.8 trillion in 2015 compared to US Dollar 1.4 trillion in 2010. The IFSB has developed guiding principles for Islamic banking industry. The issuance of the Guiding Principles of risk management by the Islamic Financial Services Board (IFSB) is a giant step for the Institutions offering Islamic Financial Services (IIFS). The IIFSs include the commercial banks, investment banks, finance houses and other fund mobilizing institutions that offer services in accordance with Islamic Shariah rules and principles. The Guiding Principles of IFSB provides a set of guidelines of best practice for establishing and implementing effective risk management in IIFS. The main features of the Guiding Principles are:

It has been endorsed by the Shariah Advisory Committee, Islamic Development Bank (IDB) and co-opted Shariah scholars representing central banks and monetary agencies which are members of the IFSB.

It has been designed to complement the current risk management principles issued by the BCSB and other international standard setting bodies.

It sets out fifteen principles of risk management that have practical effect to managing risks. The IFSB will oversee these matters.

It retains the existing applicable Shariah-compliant international principles.


It outlines a set of principles applicable to managing major six risk areas like credit risk, equity investment risk, market risk, liquidity risk, rate of return risk and operational risk.

7.2 Compliance of Basel II Accord with the Islamic Banks Hassan and Dicle (2005) have noted in a recent article that the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI, 1999) suggests a formula for the capital adequacy ratio: CAR = OC / (WOC+L+WPLS * 50%). Where, CAR is the capital adequacy ratio, WOE+L is the average risk weight of assets financed with the Islamic banks own capital and liabilities other than investment accounts, WPLS is the average risk weight of investment accounts. AAOIFI requires the CAR to be equal to 8 percent.

In Bangladesh, Basel-I accord was started in 1996. Initially in accordance with Basel-I the Capital Adequacy Ratio (CAR) was 8% on Risk Weighted Assets which was increased to 9% on 30.06.2003 and 10% on 31.12.2007. The revised accord i.e. Basel-II was introduced in Bangladesh through a BRPD circular No.9 dated 31.12.2008. For implementing the revised accord experimentally, the parallel run of Basel-II was started from 01 January, 2009 for 1 year and full operation was started from 01 January, 2010. All the banks are advised to meet the regulatory capital BDT 400 crore or 9% of risk weighted assets whichever higher by August, 2011. It is noted that most of the Islamic banks have fulfilled the revised capital requirements. The Basel Committee on Banking Supervision suggests considering the credit risk, operational risk and market risk determining the risk weighted assets through using various approaches say standardized approach, internal rating based approach, basic indicator approach, advanced measurement approach, internal model approach etc. Note that Bangladesh Bank has advised all the scheduled banks (both conventional and Islamic banks) to follow standardized approach, basic indicator approach and the standardized approach to measure credit risk, operational risk and market risk respectively.

8. Concluding Remarks In every economy bankers are regarded as a creator of socio-economic development as they collect funds from the surplus units of the society and to channelise the same to the deficit units (user groups) of the society with the objectives to deploy the funds in economic activities for enhancing industrial growth and employment. But to earn positive return or profit from the credit activities is also the prime consideration for their survival. Since banking business is a mechanism of channeling depositors funds as advance from one unit to another unit of a society and the derivative products of this mechanism are to earn profit, generate employment etc. thats why bankers are to


take a lot of precautions before disbursing the depositors money as credit. Banks deal with the depositors money and the banking philosophy is primarily based on trust and any inconsistency in the case of disbursing credit may breach the trust and confidence of the depositors and which may ultimately create the financial distress in the economy. Thus, an efficient banker should always think about the probability of non-repayment of credit (credit risk) before disbursing it to the borrowers. In this context, the use of sophisticated risk grading techniques shows paramount importance for measuring the financial risk, business or industry risk, management risk, security risk and relationship risk of the borrowers so as to minimize the risk exposure of credit which may come from default. The banks in Bangladesh should follow the techniques for measuring risk by customizing these according to our socio-economic circumstances and organizational set up. Each bank may establish data bank for its own consumption at the time of taking credit decision under the sophisticated credit screening techniques. Besides the data bank, well accepted norms and industry average may be developed based on the clients information in sector-wise funding for better practicing financial analysis. Uniform practices for preparing projected financial statements may be established in the banks for the clients who will seek facilities from the banks. Most of the banking problems have been either explicitly or indirectly caused by weakness in credit risk management. Several credit losses in the banking system usually reflect simultaneous problem in several areas such as concentration, credit processing, failure of due diligence and inadequate monitoring. First, concentration would include concentration of credits to single borrower or counterparty, a group of connected counterparties, and sectors or industries. Banking supervisors should have specific regulations limiting concentrations to one client or set of related clients, and, in fact, should also expect banks to set much lower concentrations Banks are to explore techniques to identify concentrations based on common risk factors. Second, many credit problems reveal basic weaknesses in the credit granting and monitoring process. A thorough credit assessment (or basic due diligence) needs for financial information based on sound accounting standards and timely macroeconomic and flow of funds data. When this information is not available or reliable, banks may dispense with financial and economic analysis and support credit decisions with subjective information. The absence of testing and validation of new techniques of credit decision making is another important problem. Third, many banks that experienced asset quality problems due to lack of effective credit review process. The purpose of credit review is to provide appropriate checks and balances to ensure that credits are made in accordance with bank policy and to provide an independent judgment of asset quality. Fourth, a common and very important problem in credit process is lack of monitoring client or collateral value. In absence of monitoring process the bank will fail to recognize early signs that asset quality will


deteriorate and will miss the opportunities to work with clients to stem their financial deterioration and to protect the banks position. In some cases, the failure to perform adequate due diligence and financial analysis and to monitor the client can result in a breakdown of control to detect credit related fraud. So, an effective credit review department and independent collateral appraisals are important protective measures. Fifth, due to lack of sufficient account of business cycle effects in taking credit decisions, the banks will fail to understand the income prospects and assets value that may change for changing business cycle. Effective stress testing which takes account of business or product cycle effects is one approach to incorporating into credit decisions a fuller understanding of a clients credit risk. Fifth, the lack of applying risk sensitive pricing methodology in credit decision making. Banks that lack a sound pricing methodology and the discipline to follow consistently such a methodology will tend to attract a disproportionate share of under-priced risks. These banks will be increasingly disadvantaged relative to banks that have superior pricing skills. Finally, Hassan and Dicle (2005) have noted in their article that the unique products and procedures of Islamic banks require specialized rating process. Such process should include specialized models and rating systems designed in accordance with Islamic banks and associated risks. Basel II proposes internal ratings based (IRB) approach for banks to differentiate their risk measurement systems

References Ahmed, Mahmood (2010), The Potential for Islamic Finance, A Paper Presented in The

International Seminar on Islamic Finance in India: Products, Institutions & Regulations, organized by The Islamic Research and Training Institute (IRTI), IDB and The Islamic University (Al Jamia Al Islamia), Kerala, held in Kerala, India, October 4-6.

Bangladesh Bank (2003), Managing Core Risks in Banking: Credit Risk Management, Dhaka: Bangladesh Bank, Head Office.

______________ (2005), Credit Risk Grading Manual, Dhaka: Bangladesh Bank, Head Office.

______________(2004), Prudential Regulations for Small Enterprises Financing, Dhaka: Bangladesh Bank, Head Office.

______________ (2010), Guidelines on Stress Testing, Dhaka: Bangladesh Bank, Head Office.

FSRP Bangladesh (1993), Credit Risk Analysis Manual, Dhaka: Bangladesh Bank, Head Office.


Hassan, M. Kabir and Mehmet F. Dicle (2005), Basel II and Capital Requirements for Islamic Banks, in the Proceedings (Volume 2) of International Conference on Islamic Economics and Finance, Islamic Economics and Banking in the 21st Century, held in Jakarta, Indonesia, November 21-24.

Hassan, M. Kabir and Mehmet F. Dicle (2007), Basel II and Corporate Governance of Islamic Banks, in Integrating Islamic Finance into the Mainstream: Regulation, Standardization and Transparency, edited by Nazim Ali, Islamic Finance Program, Islamic Legal Studies Program, Harvard Law School.

Rose, Peter S. (1996), Commercial Bank Management, 3rd edition, Boston: Irwin-McGraw-Hill Publishing.

Saha, Sujit, Md. Saidur Rahman and Mosaddak Ul Alam (2001), Credit Risk Analysis Practices in Credit Decisions in Banks, Bank Parikrama, Vol. XXVI, No.2, June, Dhaka: Bangladesh Institute of Bank Management.

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