• CM-1 CM-1 General Procedures

    • CM-1.1 CM-1.1 Overview

      • CM-1.1.1

        Credit risk is the likelihood that a counterparty of the bank will not meet its obligations in accordance with the agreed terms. The magnitude of the credit risk depends on the likelihood of default by the counterparty, and on the potential value of the bank's contracts with the customer at the time of default. Credit risk largely arises in assets shown on the balance sheet, but it can also show up off the balance sheet in a variety of contingent obligations.

        October 07

      • CM-1.1.2

        Exposure to credit risk, notably in the form of traditional bank lending, has historically been the most frequent source of bank problems. The assessment of credit risk is a challenging task where bankers are often faced with making decisions based on outdated or partial information.

        October 07

      • CM-1.1.3

        The lack of continuous loan supervision and effective internal controls, or the failure to identify abuse and fraud are also sources of risk. The overall lending policy of the bank should be monitored by a Credit Committee composed of officers with adequate seniority and experience.

        October 07

    • CM-1.2 CM-1.2 Credit Analysis

      • CM-1.2.1

        Proper credit risk management will help banks to discipline their lending activities and ensure that credit facilities are granted on a sound basis, and that bank funds are invested in a profitable manner. The process of managing credit risk starts at the origination of the credit facility. Standards for credit analysis should stress the borrower's ability to meet his future financial needs through analysis of his cash-flow generation capacity.

        October 07

      • CM-1.2.2

        Measurement of credit risk is complicated by the fact that both credit exposures and the likelihood of default can vary over time and may be interdependent. The creditworthiness of customers shifts, as reflected in credit rating upgrades and downgrades. Customers that originally are highly rated are more likely to default later in a loan's life than earlier.

        October 07

      • CM-1.2.3

        Banks should properly assess the inherent risk factor of each credit facility; monitor the risks arising from any portfolio concentration; and ensure that appropriate precautions against losses have been taken in the form of collateral and/or provisioning as described in Chapter CM-2.

        October 07

      • CM-1.2.4

        Banks which provide credit facilities to residents in Bahrain must become members of the Credit Reference Bureau (CRB). All requests for new credit facilities in Bahrain must be submitted to the CRB.

        Amended: January 2014
        Amended: October 2013
        October 07

      • CM-1.2.5

        All CRB members must fully abide by the agreed Code of Practice of the CRB (see Appendix CM-3), in matters such as the protection of confidential customer data and payment of enquiry fees. Any such breaches will be viewed as calling into question the "fit and proper status" of persons involved, potentially making the licensee and the person liable to enforcement action by the CBB.

        October 07

      • CM-1.2.6

        All CRB members must meet the following requirements and incorporate them into their policies and procedures:

        a) Establish an electronic monitoring system to detect, monitor and maintain records and a log of all access to CRB data by the CRB member’s employees;
        b) Conduct a monthly internal audit on the access logs to identify unauthorised access to CRB data by any employee without securing customer consent and report to the CBB any observed violation of Article 68(bis(2)) of CBB Law;
        c) Require the sign off of a CRB member’s designated employee on their legal obligations concerning the confidentiality of CRB data and that any violation of Article 68(bis(2)) of CBB Law would subject them to an enforcement action in accordance with CBB Law; and
        d) Cover compliance with the above requirements in the performance appraisal of relevant employees.
        Added: July 2020

      • CM-1.2.7

        Failure to comply with Article 68(bis(2)) of the CBB Law and Paragraph CM-1.2.6 may result in an enforcement action taken against the CRB member, as well as the relevant employee in accordance with CBB Law.

        Added: July 2020

    • CM-1.3 CM-1.3 Credit Policy

      • CM-1.3.1

        A properly documented credit policy is an essential element of and prerequisite for the credit risk management process. Consistent with the Board's objectives, it assists bank management in the maintenance of proper credit standards and the avoidance of unnecessary risks.

        October 07

      • CM-1.3.2

        It is prudent to review the credit policy regularly to ensure that once it is established, it remains flexible enough to be current and continues to accomplish its original purpose taking into consideration market developments.

        October 07

      • CM-1.3.3

        Explicit guidelines in credit policy provide the basis for effective credit portfolio management. A sound credit policy should consider which types of credit products and borrowers the bank is looking for and the underwriting standards the bank will utilize.

        October 07

      • CM-1.3.4

        A bank's credit policy should address all credit matters of significance including:

        (a) Objectives of credit monitoring;
        (b) Organisation and reporting structure of the credit department;
        (c) Designated markets and products;
        (d) Establishment of a credit limit framework;
        (e) Guidelines for assessment of concentration;
        (f) Authorisation procedures for the advancement of credit;
        (g) Establishment of credit committees;
        (h) Establishment of desirable pricing levels and criteria; and
        (i) Problem credit identification and administration.
        Amended: January 2011
        October 2007

      • CM-1.3.5

        After the credit facility has been granted, its performance should be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of collateral and update of appraisals, and attentive monitoring of conditions in the borrower's industry. Credit supervision constitutes the first line of detection of difficulties and provides the bank with an opportunity to address problems before losses are sustained.

        October 07