What is Credit Risk?
Credit risk is the possibility of loss arising from a borrower or counterparty failing to meet its contractual obligations. It applies to loans, receivables, bonds, and derivative exposures.
How It Works
- Assess counterparty creditworthiness using ratings and scoring models.
- Set credit limits and require collateral or guarantees where appropriate.
- Monitor exposures and provision for expected credit losses under IFRS 9.
Saudi Context
Saudi banks under SAMA supervision apply IFRS 9 ECL models, segmenting books into Stage 1, 2, and 3. The Kafalah program partly guarantees SME loans to share credit risk.
Example
A Saudi bank rates an SME borrower at BB+, requires a 30% Kafalah guarantee, and books a 1.5% lifetime ECL on the SAR 5 million facility.