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  • Effectiveness of Internal Control System

    • CM-1.2.22

      An effective internal control system for credit risk assessment and measurement is essential to enable senior management to carry out its duties. An effective internal control system must include:

      (a) Measures to comply with applicable laws, regulations and internal policies and procedures;
      (b) Measures to provide oversight of the integrity of information used and to reasonably ensure that the allowances reflected in the licensee’s financial statements and its supervisory reports are prepared in accordance with the applicable accounting framework and relevant supervisory guidance;
      (c) Well-defined credit risk assessment and measurement processes that are independent from (while taking appropriate account of) the financing function and include:
      (i) An effective credit risk rating/ scoring system that is consistently applied, accurately grades differing credit risk characteristics, identifies changes in credit risk on a timely basis, and prompts appropriate action;
      (ii) An effective process which ensures that all relevant/ reasonable and supportable information, including forward-looking information, is appropriately considered in assessing and measuring expected credit loss (‘ECL’). This includes maintaining appropriate reports, details of reviews performed and identification and descriptions of the roles and responsibilities of the personnel involved;
      (iii) An assessment policy that ensures ECL measurement occurs not just at the individual credit exposure level, but also when necessary to appropriately measure ECL at the collective portfolio level by grouping exposures based on identified shared credit risk characteristics;
      (iv) An effective model validation process to ensure that the credit risk assessment and measurement models, including ECL models, are able to generate accurate, consistent and unbiased predictive estimates on an ongoing basis. This includes establishing policies and procedures which set out the accountability and reporting structure of the model validation process, internal standards for assessing and approving changes to the models and reporting of the outcome of the model validation (see also Paragraph CM-1.4.10);
      (v) Clear formal communication and coordination among the licensee’s credit risk staff, financial reporting staff, senior management, the Board and others who are involved in the credit risk assessment and measurement process for an ECL accounting framework, as applicable (e.g. evidenced by written policies and procedures, management reports and committee minutes); and
      (d) An internal audit function that independently evaluates the effectiveness of the licensee’s credit risk management framework, and in particular, assessment and measurement systems, models and processes, including the credit risk rating system. Refer to HC-6.5.
      Added: June 2022

    • CM-1.2.23

      Islamic bank licensees must ensure that the credit risk policy establishes the objectives that guide the licensee’s credit-granting activities.

      Added: June 2022

    • CM-1.2.24

      The credit risk policy must give recognition to the goals of credit quality, earnings quality and sustainability and growth. Islamic bank licensees, regardless of their size, must determine the acceptable risk/reward trade-off for their activities, factoring in the cost of capital.

      Added: June 2022

    • CM-1.2.25

      The credit risk appetite/limits framework of Islamic bank licensees must take into consideration the cyclical aspects of the economy and the resulting shifts in the composition and quality of the overall credit portfolio. The credit granting criteria must be periodically assessed and amended and it must be viable in the long-run and through various economic cycles. The credit risk procedures must be reviewed at least once every three years or more frequently as may be necessary if there are changes in internal or regulatory requirements.

      Added: June 2022

    • CM-1.2.26

      The credit granting criteria must be designed and implemented within the context of internal and external factors, such as the licensee’s market position, trade area, staff capabilities and technology.

      Added: June 2022

    • CM-1.2.27

      Islamic bank licensees must have a clearly defined credit risk appetite statement which is implemented through comprehensive policies and procedures for limiting and controlling credit risk. Islamic bank licensees must also establish credit limits in a meaningful manner for different types of exposures, both on and off-balance sheet.

      Added: June 2022

    • CM-1.2.28

      Bahraini Islamic bank licensees must consider the results of stress testing in the overall limit setting and monitoring process. Such stress testing must take into consideration economic cycles, profit rates and other market movements and liquidity conditions.

      Added: June 2022