CHAPTER two REVIEW

of LITERATURE
CHAPTER
TWO REVIEW OF LITERATURE

2.1 INTRODUCTION

REVIEW OF LITERATURE OF RISK AND CREDIT

2.2
RISK MANAGEMENT

REVIEW OF LITERATURE: INDIAN

2.2.1
PERSPECTIVE

REVIEW OF LITERATURE : YEMEN

2.2.3
PERSPECTIVE

REVIEW OF LITERATURE: INTERNATIONAL

2.2.4
PERSPECTIVE

REFERENCES

14
CHAPTER TWO : REVIEW OF LITERATURE

CHAPTER-2
REVIEW OF LITERATURE

2.1 INTRODUCTION
Risk and credit Risk Management in Banks has been the subject of study of many
Agencies, Researchers and Academicians. There is a treasure of literature available on
the subject. A careful selection of relevant material was a formidable task before the
Researcher. Efforts have been made to scan the literature highly relevant to the
Context.
The main sources of literature have been the Website of the Reserve Bank of India,
the Central Banks of Yemen, the website of the Basle Committee on Banking
Supervision and the websites of several major Private Sector Banks both in India and
Yemen. The publications of Academicians engaged in the Risk Management and
Central Banking Supervision spheres also throws valuable insights into the area. The
occasional Research papers published by the Reserve Bank of India and Central
Banks of Yemen, the Publications of the Reserve Bank of India, the Indian Banks
Association have proved quite relevant to the study in Yemen and India.
this chapter provides an overview of various areas related to the research , as well as a
theoretical background for risk and credit risk management in private sector banks of
Yemen and India. this chapter consists of three parts; the first part describes the
literature review in Indian perspective and the second parts describe the literature
review in Yemen perspective and third parts describe the literature review in
international perspective.

2.2 REVIEW OF LITERATURE OF RISK AND CREDIT RISK

MANAGEMENT
2.2.1 REVIEW OF LITERATURE : INDIAN PERSPECTIVE
Swaranjeet Arora (2013)[1] made an attempt to identify the factors that
contribute to Credit Risk analysis in Indian banks and to compare Credit Risk analysis
practices followed by Indian public and private sector banks, the empirical study has
been conducted and views of employees of various banks have been tested using
statistical tools. Present study explored the phenomenon from different perspectives
and revealed that Credit Worthiness analysis and Collateral requirements are the two

Ph.D. Thesis, N.M.U., Jalgaon. 15

important factors for analyzing Credit Risk. From the descriptive and analytical
results, it concluded that Indian banks efficiently manage credit risk. The results also
indicate that there is significant difference between the Indian Public and Private
sector banks in Analyzing Credit Risk.

T. VEERABHADRA RAO (2011)[2] in his study assessed the Risk

Management, Regulation and Supervision of the Financial Sector in general and the
Banking Sector in particular is of paramount importance for the orderly growth of the
economy. The present study is undertaken to assess the impact of such Risk
Management and Risk Based Supervision measures introduced by the Reserve Bank
of India (RBI) in the post Reform period. The main objective of the study is to
evaluate the benefits of these measures on the overall working of the Scheduled
Commercial Banks (SCBs)belonging to the three Sectors viz., Public Sector, Private
Sector and Foreign Banks. The study also made inter- sector cross comparisons to see
if the impact is uniform among these sectors and if not, to find out which sector has
performed better due to these changes. It found that the impact of the changes was
favorable in the case of the sample SCBs in general. It observed that the Public Sector
Banks have shown outstanding performance indicating significant difference in their
working the results of the ANOVA and Post Hoc Tests have also confirmed that that
the difference is significant in the case of Public Sector Banks as compared to Private
Sector and Foreign Banks. It concludes that Sector wise, the Public Sector Banks have
shown significant difference in their working. Banks in all the three Sectors have also
been ranked on the basis of their performance on individual parameters. Composite
Ranking also was given taking into account the results of all the Parameters. As per
this analysis, Development Bank of Singapore in Foreign Sector secured the 1st Rank,
while the second position has gone to Corporation Bank Ltd. in the Public Sector.
HDFC Bank Ltd. in Private Sector stood 4th in the overall Ranking. It recommended
that Banks should adopt Risk Based Audit which should be more IT based. And On
the Human Resources Development front, it is recommended that Banks should
develop well designed training facilities in areas such as Treasury Management,
Credit Risk Management, and Operations Risk Management etc. It is further
recommended that promotions Should be based on merit rather than conventional
seniority.
 Dr. Krishn A. Goyal (2010)[3] made an attempt to discuss in depth, the
importance of risk management process and throws light on challenges and
opportunities regarding implementation of Basel-II in Indian Banking Industry. The
fast changing financial environment exposes the banks to various types of risk. The
concept of risk and management are core of financial enterprise. The financial sector
especially the banking industry in most emerging economies including India is
passing through a process of change. Rising global competition, increasing
deregulation, introduction of innovative products and delivery channels have pushed
risk management to the forefront of today's financial landscape. Ability to gauge the
risks and take appropriate position will be the key to success. It Concluded that Risk
is an opportunity as well as a threat and has different meanings for different users.
The banking industry is exposed to different risks such as forex volatility, risk,
variable interest rate risk, market play risk, operational risks, credit risk etc. which can
adversely affect its profitability and financial health. Risk management has thus
emerged as a new and challenging area in banking. Basel II intended to improve
safety and soundness of the financial system by placing increased emphasis on bank's
own internal control and risk management process and models. The supervisory
review and market discipline. Indeed, to enable the calculation of capital requirements
under the new accord requires a bank to implement a comprehensive risk management
framework. Over a period of time, the risk management improvements that are the
intended result may be rewarded by lower capital requirements. However, these
changes will also have wide-ranging effects on a bank's information technology
systems, process, people and business, beyond and regulatory compliance, risk
management and finance function.

Dr. Yogieta S. Mehra (2010)[4] analysed the impact of size and ownership of
banks on the range of operational risk management practices used by the banks
through execution of survey comprising of a questionnaire. The study aimed to
explore the range of practices used by Indian Banks in management of operational
risk essential for achievement of Advanced Measurement Approach (hereafter
referred to as AMA) for a cross –section of Indian Banks and perform a comparative
analysis with AMA compliant banks worldwide.
The analysis was performed to extract the most important variables which
differentiate performance of one bank from other. The study provides a conclusive
evidence of heightened awareness and due importance given to operational risk by
Indian banks. Size was observed to be a deterrent to collection of external loss data,
deeper level of involvement of operational risk functionaries, data collection and
analysis. The practices of average and small sized public sector and old private sector
banks were observed to be lagging behind that of new private sector banks in usage of
BEICFs (RCSA, KRIs), usage of scenarios, updating of these indicators and
collection and usage of external loss data. Wide gap was observed in the range of
practices followed by Indian Banks and the AMA compliant banks worldwide.

Bodla, B. S., Verma, Richa(2009)[5] designed a paper to study the

implementation of the Credit Risk Management Framework by Commercial Banks in
India. The results show that the authority for approval of Credit Risk vests with
‘Board of Directors’ in case of 94.4% and 62.5% of the public sector and private
sector banks, respectively. This authority in the remaining banks, however, is with the
‘Credit Policy Committee’. For Credit Risk Management, most of the banks (if not
all) are found performing several activities like industry study, periodic credit calls,
periodic plant visits, developing MIS, risk scoring and annual review of accounts.
However, the banks in India are abstaining from the use of derivatives products as
risk hedging tool. The survey has brought out that irrespective of sector and size of
bank, Credit Risk Management framework in India is on the right track and it is fully
based on the RBI’s guidelines issued in this regard.

Usha, Janakiramani (2008)[6] assessed in detail the status of operational risk

management in the Indian banking system in the context of Basel II. The expected
coverage of banking assets and the approach adopted for operational risk capital
computation is compared broadly with the position of the banking system in Asia,
Africa and the Middle East. A survey conducted on twenty two Indian banks indicates
insufficient internal data, difficulties in collection of external loss data and modeling
complexities as significant impediments in the implementation of operational risk
management framework in banks in India. The survey underscores the need to devote
more time and resources if banks desire to implement the advanced approach under
Basel II. The results of the survey clearly indicate that the process of designing the
framework for operational risk has just begun for Indian banks. Basel II /regulatory
compliance and desire to establish and implement good controls emerged as two
major drivers of operational risk management in banks. The positive features are that
all banks have well defined organizational structure and Board approved policies for
operational risk management; a majority of the banks were using some for of self-
assessment- a qualitative factor, as an important tool in their operational risk
framework; many banks had started the operational risk loss data collection exercise
for moving over to the advanced approaches though these were still in the formative
stages. However, it also emerged that many banks did not have a clear idea about the
elements/factors required for moving over to the Advanced Measurement Approach
(AMA). Insufficient data, difficulties in gathering external data and modeling
difficulties were cited as very significant obstacles in the implementation of the
operational risk management (ORM) framework in banks. A majority of the banks
have also cited lack of regulatory clarity as a moderately significant obstacle in
moving over to the advanced approaches. Banks await regulatory guidance
particularly on the quantification aspects. Regarding the approach to be adopted for
regulatory capital under Basel II, all the banks expect to adopt the Basic Indicator
Approach by 2008-09. A majority of the banks had a desire to move over to the
advanced approaches, though no clear roadmap /Board approval for moving over to
advanced approaches was evidenced. The entire commercial banking system in India,
i.e. 100% of the commercial banking assets is expected to be Basel II compliant by
2009, albeit with the simpler approaches to start with. This position compares
favorably to the coverage of Asia (70% of banking assets), Africa (65% of banking
assets) and the Middle East (89% of banking assets).

Diction O.B. Sathish Kumar(2007)[7] in their study evaluated the financial

performance of Indian private sector banks. Private sector banks play an important
role in development of Indian economy. After liberalization the banking industry
underwent major changes. The economic reforms totally have changed the banking
sector. RBI permitted new banks to be started in the private sector as per the
recommendation of Narashiman committee. The Indian banking industry was
dominated by public sector banks. But now the situations have changed new
generation banks with used of technology and professional management has gained a
reasonable position in the banking industry. It summarized That ICICI Bank
employees are those who generate more profit. Similarly the operating profit is the
highest among all private sector banks. ICICI bank Ltd., and Yes bank Ltd., are those
which maintain a good liquidity position.

NAJAF, Gharachourlou Aghjelou (2007)[8] investigated risk analysis and risk

management in selected Co-Op banks in Pune . Objectives of this research are
verifying the integrity of internal risk management systems. During the verification
process, the researcher test independently in proportion to the risk. And validate
periodically; all key control functions within a bank, even those designated as low
risk. Beside the general purpose of the research, the following specific objectives have
been mentioned in the research: identifying significant risks, Quantifying the risk ,
Evaluating management’s , the board’s awareness , understanding of the significant
risks facing in the banks and Recommend action plan for reducing risk. It findings,
that The results study indicates that 20.2 percent of risk factors is not applied to
cooperative banks and it shows that there is a big gap between theory and practice for
reduction risk in cooperative banks in Pune. The investigation represent that there is
no enough data and useful data system for facing with risk management in
cooperative bank and the risk management process should capture usable data and be
kept as simple as possible. Documentation is critical, and properly recording the
identification, analysis, and risk mitigation plans and results for each risk element
allows for lessons to be learned and actions to be taken if necessary. Finally, the
analysis shows that more bankers cover only credit risk by using simple methods, it
represent need of study to develop other kind of risk analysis methods in cooperative
banks.

Rekha Arunkumar and G. Koteshwar (2006) [9] in their study felt that the
Credit Risk is the oldest and biggest risk that Banks faced, by virtue of their very
nature of business inherit. The pre-dominance of credit risk is the main component in
the capital allocation. As per their estimate credit risk takes the major part of the Risk
Management apparatus accounting for over 70 per cent of all Risks. As per them the

Ph.D. Thesis, N.M.U., Jalgaon. 20

Market Risk and Operational Risk are important, but more attention needs to be paid
to the Credit Risk Management in Banks.
Concentration risk is a very significant component of overall credit risk profile of a
banking institution. A prudent credit risk management is based on the principle of
diversified portfolio to avoid concentrations in any one or couple of occupations or
industry. It conclude that public sector bank’ s risk profile is low while that of private
sector bank’ s risk is moderate. Similarly, under the concentration-index method it
was found that there exists strong relationship between occupation-wise concentration
risk profile and NPAs level with higher values of coefficient of determination of 0.64
and 0.45 for public sector banks and private sector banks respectively. Similarly,
strong positive relationship between industry-wise concentration risk and NPAs level
in case of public sector banks, as confirmed by high value of r2=0.78. But same is not
pronounced in case of private sector banks.
Finally, the results concluded that The declining trends in Non-Performing Assets
(NPAs) in public sector banks during the post-liberalization period is an outcome
mainly caused by the improved credit portfolio diversification,The concentration risk
profile of credit portfolio of private sector banks is higher than that of public sector
banks impacting adversely the NPAs level of private sector banks vis-à-vis public
sector banks.

Ajit and Bangar (1998)[10] in their paper entitled “The Role and Performance of
Private Sector Banks in India-1991-92 to 1996-97” presented a tabulation of the
performance of private sector banks vis-à-vis public sector banks over the period
1991-1997, using a number of indicators: profitability ratio, interest spread, capital
adequacy ratio, and the net NPA ratio. The conclusion is that Indian private banks
outperform public sector banks. What is of interest, however, is that they find Indian
private banks have higher returns to assets in spite of lower spreads.

2.2.2 REVIEW OF LITERATURE : YEMEN PERSPECTIVE

Almaidama (2012)[11] identified the role of the central bank of Yemen in credit
risk control at the commercial and the Islamic Yemeni banks, which is the
development of an integrated framework that helps banks to develop credit risk
control systems according to the standards and guidelines of the central bank of
Yemen. In addition to the knowledge of the difficulties and obstacles that limit the
control of the central banks over the credit risk. The study come out with several
results that there is a role for the central bank of Yemen in credit risk control through
monitoring and evaluation and correction of the credit process. Also ,the inspection
plan helps facilitate work and the main results of the study referred to the obligation
of the commercial and Islamic Yemeni banks controls and the mandatory rules drown
up by the central bank of Yemen to mitigate credit risk . it is recommendations have
been reached , including: the commercial and the Islamic Yemeni banks have to work
to improve credit risk management, and maintain credit policies compatible with
changes in economic conditions, and the existence of the specialized management of
credit risk that work to identify, measure and control credit risk and way to face these
risks, and enhance the internal and external oversight on its banking operation in
accordance with the instructions of the central banks of Yemen.

Alnasani (2011)[12]. has pointed out that the evaluation the performance of
banks, a high level of importance in light of developments in the banking sector,
because the financial statements are no longer able to give a clear picture of how the
Bank's success in achieving the highest returns, banking, therefore, considered the
financial analysis of the most important methods of performance evaluation because it
provides the financial indicators that serve the process of planning and evaluation and
oversight, and lay the foundations for sound thinking in the formulation of future
plans in light of banking risks, as these risks can lead to increase in bank failures and
financial crises. And evaluate the performance of the Bank and the study and analysis
of banking returns in light of the risks the bank aims to examine the port activity, and
identifies the strengths and weaknesses of the banking system of accounting, so that
shows how the efficiency of management in the recruitment of financial resources
available to them optimally. The study came to several conclusions and proposals for
the most important to rely on standards to measure and evaluate performance allows
to manage the Bank the possibility of identifying deviations causes and how to
address them and policy-making appropriate to the high and improving level of
performance, the data is contained in the financial statements give good results for the
performance of the bank but not enough to show the true performance of the bank
where the needs the matter to the standards for measuring bank returns. Strengthen the
oversight role of the banking risks in order to adequate protection to the bank money,
especially in light of the global financial crisis, which led to the bankruptcy of many
global banks.

Al-Maktary (2010)[13] has investigated the use of non-financial (NFI) &

financial (FI) information to assess credit risk in banking industry of Yemen. For
achieving this goal, a questionnaire is distributed to respondents who work in credit
departments in Operating Banks in Yemen (OBY). Inferential methods and
descriptive analysis were used to achieve the research objectives. The results
exhibited that the use of NFI (Capacity, Collateral and Character) & FI (Liquidity,
Efficiency, Comparative Analysis and Solvency) by OBY to assess credit risk of
customers considered to be higher than the moderate extent of usage. In addition,
OBY consider the NFI more important than the FI. Furthermore, the use of project
financing techniques (PFTs) by OBY is almost moderate extent of usage. Also, there
is no significant relationship between all factors (demographic factors, bank size,
bank nationality and bank type) and the extent of using NFI & FI except the age factor
and the use of FI. Finally, researcher recommends that OBY should give the
following maximum importance when evaluating credit risk of customers: Capital,
Conditions, Long term debt and Profitability. Techniques that take into consideration
the time value of money (Net present value (NPV) & Internal rate of return (IRR))
must be given maximum importance additionally to other techniques (Sensitivity (SA)
& Break-Even (BEA) Analyses).

Al-Mojahid (2010)[14] in his study indicated that The importance of this study
faced by the banks of the problem of bankruptcy, especially with the recent period
due to a lack of risk bank expected through the development of plans to address them
or mitigate their impact, this is what caused a significant reduction of revenue and
therefore to bankruptcy. Therefore, necessary to study the effect banking risks and
their impact on returns, has been selected study sample of Bank of Credit Agricultural
cooperative(CAC BANK ) which is considered an appropriate model for banks
Yemen to study the problem of search .it has been the selection of indicators for the
types of risks and returns and study the relationship between them through the
financial and statistical analysis during the Period of the research 2004 to 2008.
The study concluded that there is much direct impact between the banks risks and
returns which have reached the most important results of that over the years the bank.
High risk is in 2004 and 2005, where and in this period occurred miss the proportion
of financial and analytical results largely have been the reason in the main
administration changes the banks and the chairman of the board, which has worked to
change policy and strategy of the bank largely and focus on profit over the long
term, and to engage in market to competition, where it has become world bank loan
specialist agricultural bank to the concept of nearly universal.

The recommendation of the researcher is that, the bank’s deposits should be invested
properly and to maintain an appropriate level of liquidity in order not to affect the
profit or minimize the degree of safety, and follow a balanced policy to invest in
assets that there are sensitive to interest rate commensurate with the size of the rate
sensitive liabilities interest, and to increase the proportion of grant to loan agricultural
and saving the country’s development directly. And try to increase capital in order to
suit with the increase in external funding sources and thereby reduce the degree of
risk.

Abdullah ,Maria Mohammed (2010)[15] have identified the banking risks faced
by banks, and how to deal with these risks and the lack of exposure and manage these
risks through the development of standards and provisions to avoid banks from falling
into the risks in order to achieve maximum profits at the lowest possible risk. Since
the Bank of Cooperative and Agricultural Credit is nascent, with change objectives
into a commercial bank, is moving towards expansion in banking activity, It
determines the nature of banking risks in terms of the concept and the types and
causes as a theoretical framework in terms of banking in general, and this relates to
actively Bank Cooperative and Agricultural Credit as a case study, the goal of which
analyze the credit risk faced by the bank and the means by which followed in the face
of these risks, and therefore assess the effectiveness of these methods and demonstrate
their ability to reduce banking risks that may affect its activity. It concluded that The
banking risks is an integral part of the banking activity and the more varied and
numerous banking activities whenever associated with the emergence of new types of
risks associated with the new nature of the activity of banks. Given the significant
impact of the risks on the activity of banks and their impact beyond the borders of the
banking business, has been of interest globally in this matter and put international
standards designed to ensure the stability of the international banking system and raise
its efficiency in the management of banking risks, which accounted for the decisions
of the Basel Committee I and Basel II principles and foundations that are built upon in
evaluating the performance of banks in terms of their ability to face risks. Despite the
positive developments in the banking activity but it still suffers from a number of
manifestations of imbalances Perhaps the most prominent of not raising some banks
to their capital to the minimum level set by the Central Bank of Yemen to strengthen
capital adequacy in these banks, in addition to focusing assets in a limited number of
banks, which limits the possibility of competition between Yemeni banks.

Al-Hamid (2009)[16] made an attempt to study, measure, and analyze the

financial analysis using the financial ratios. the study presents the complete data of
the performance of these organizations through which it is considered as the idle
method through which organizations performance level can be judged, and
determining the points of strength and weakness in them.
Through financial ratios, the financial performance could be judged from the angles
of revenue and risks that the organizations have faced in general, and the banks on
particular. This study has been showed the significance of using the financial ratios ,
and its role in measuring the strategic risk faced by the banks , though analysing the
factors of internal and external environment , as well as analysing the financial
performance indicators that are presented for this study objectives ( profitability and
the banking risk) , and its impact on the strategic threat . The study has reached to a
number of conclusions that the researched banks have achieved weak strategic
position except the national bank of Yemen and the Yemeni bank of construction and
building , where the points of weakness exceeds the points of strength in the other
banks. The relation between profit indicators and the strategic risk was morally
impact relation, whereas the relation between banking risk indicators and the strategic
risk has no moral impact relation.

Al-Mikhlafi (2004)[17] in his study aimed to test the effect of capital adequacy
indexes of banking on both risk and return of banking and reflect that on the value of
bank, this has been carried out through a deliberate sample of (5) commercial
Yemeni banks. The study has covered the period from 1998 to 2002 .(9)indexes were
used from capital adequacy of banking which include ; capital to deposits , capital to
total assets , capital to risk assets ,capital to loans, capital to contingent liabilities ,
capital to investment ,capital to risk weighted assets.
The analysis of these indexes were performed in order to Clarify the role which that
experience or behavior these indexes in supporting the believer of Yemeni banks and
its financial system, and the result that achieve the appropriate tradeoff between risks
and return of banking , and the effect of thus on maximization of value to bank.

The study concluded a number of conclusions , and the most important of these
results were agreement with the same result of indexes analysis on Arabic and non-
Arabic banks, and lead to group recommendations, most of them , necessary taking
procedure ,precautions, and internal steps by financial and monetary authorities and
by Yemeni banks itself , to save the requirements of basle2 documents related to
capital adequacy of banking throw the light Yemenis banking systems and choice
suitable period tables of performance .

2.2.3 REVIEW OF LITERATURE : INTERNATIONAL PERSPECTIVE

Asim, Abdullah,et al (2012)[18] in their paper evaluated the firm’s level
aspects which have more influence on the Credit risk managing of domestic and
foreign banks in Pakistan. Secondary data for the period of 2001 to 2010 is used,
taken from various data sources. Augmented Dickey Fuller test is used for checking
stationary, while for long run relationship Johansson’s Co integration test is used.
Linear regression model is used for coefficients analysis with OLS techniques. The
result shows that the model is best fit for both Domestic and Foreign banks. Bank size
have positive and significant relationship with credit risk in domestic banks and
positive and insignificant in foreign banks. Liquid assets and credit risk have positive
and insignificant relationship in domestic banks and negative and significant in
foreign banks. The researcher has recommended that credit risk may be minimize if
(i) size of the banks maintain with a specify limit and (ii) increase liquidity of the
banks.

Shafiq& Nasr (2010)[19] in their study aimed to explore the current risk
management practices that are being followed and exercised by the banks,
specifically, commercial banks in Pakistan. Primary and secondary data sources are
used to serve this study . Results reveal a significant difference in the application of
risk management aspects among the public sector commercial banks and local private
banks. Also the financial soundness indicators differ in value for each type of
commercial bank. Although there is a general understanding about risk and its
management among staff of commercial banks, still there is a need for commercial
banks to devise training courses tailored to the needs of Banking Personnel in Risk
Management. This study has been conducted to estimate the average returns on
investment portfolio and risk involved in the return on investment of portfolio in each
of selected insurance companies before and after GATS membership. The study
concludes that there is a significance difference between the average return of
investment of each of the Pakistani insurance companies before and after GATS..
Even after performing well, there is an intensive increase in the risk involved in
investment after GATS membership. The study is expected to provide a useful
reference for Insurance managers as well as the ministry of Finance and Securities &
Exchange Commission of Pakistan in their efforts to control and improve the
performance of insurance in Pakistan.

Bujerami,Shadi (2011)[20] aimed at recognizing the role of internal audit in risk

management at the banking sector, internal audit function helps the senior
management and board of directors in the process of identifying and assessing risks
and response to it, through the provision of consulting and assurance services during
the implementation of risk management process.
The study results that there is no effective contribution to the internal audit function in
the process of risk management in the Syrian public banks, and that to the all steps of
the risk management process, the identify, evaluation, and risk response. The internal
audit function contribute effectively in the process of risk management in the Syrian
private banks, where they contribute to all steps of the risk management process, the
identify, evaluation, and risk response. There are significant differences in favor of
the private sector between the responses of respondents from the public and private
sectors with regard to the contribution of internal audit to identify and assess risks and
respond to them.
The researcher recommended that the necessity of activating the role of the internal
audit functions in the process of risk management in the Syrian public banks to help
them in the face of future financial crises. The necessity of public banks to the process
of risk management has, and its substantial role in the face of the types of risks
surrounding their work. The need for the public and private banks to conduct internal
and external training, and continuing in the area of internal audit and risk management
for the survival of their employees Informed of ongoing developments professional in
these areas and any other areas related to internal audit.

Ahmed et al (2011)[21] studied the Islamic banks of Pakistan with a sample of 6

Islamic banks for the time period of 2006 to 2009. The data was collected through
secondary sources. Pearson correlation was used to find the relationship between
variables and regression was used to find the coefficients. The results indicated that
size of bank has directly associated with credit and liquidity risk, while its association
with operational risk is found to be negative and statistically irrelevant. The asset
management creates a positive link with liquidity and operational risk. The gearing
ratio and Non-Performing Loans ratio have a negative and significant association with
both liquidity and operational risk while these have directly linked with credit risk.
The capital adequacy has a negative and significant relationship with credit and
operational risk, while it has positive association with liquidity risk.

Romzie Rosman(2009)[22] made an attempt to propose a research framework on

risk management practices and the aspects of risk management processes. The four
important aspects of risk management processes are: (1) understanding risk and risk
management; (2) risk identification; (3) risk analysis and assessment; and (4) risk
monitoring Conceptual and empirical literatures are explained to suggest the
conceptual model. The framework suggests that there is a positive relationship
between the aspects of risk management processes and risk management practices.
Then, the discussions are used to generate research hypotheses to suggest the
relationships. Hence, further research can prove empirically the relationships and
provide contribution in the area of Islamic banking.
 Al-Tamimi&Hussein (2008)[23] in their paper aimed at exploring the UAE
banks' Basel II preparations. It is essential for the UAE banks to make adequate
preparations to their compliance with international standards and practices in the field
of banking. Design/methodology/approach – The author developed a modified version
of the Ernst & Young questionnaire to examine the UAE banks' Basel II preparations.
Five hypotheses have been formulated and tested. Findings – Based on the results of
the analysis in the study, it is concluded that the UAE banks are ready for the
implementation of Basel II. This conclusion is supported by the fact that the UAE
banks have sufficient resources for the implementation of Basel II, which represents a
prerequisite for the implementation. The readiness of the UAE banks for
implementing Basel II is also supported by the common understanding of Basel II by
the employees of the UAE banks and the satisfactory level of education on Basel II.
The results also indicate that there is no difference between UAE national and foreign
banks in their readiness for the implementation of Basel II, which gives a positive
impression about the competitive advantage of the national banks. Finally, the results
support the importance of training and education on Basel II as one of the
requirements of the implementation. Practical implications – Improving the level of
education on Basel II is still needed and this can be achieved because of the
availability of the required resources and the awareness of the UAE banks of the
benefits, the positive impact, and the challenges of the implementation of Basel II, as
indicated by the results. The results also support the importance of training and
education on Basel II as one of the requirements of the implementation.
Originality/value – The paper is important for the decision makers of the UAE banks
and the regulators as the main objective of the study is to increase their awareness of
the implementation of Basel II. The results would help the UAE banks to know the
level of their Basel II preparations and what are the necessary steps that should be
taken in this regard. The results would also help the regulators regarding the required
steps that should be taken by the UAE Central Bank in order to motivate or encourage
the UAE banks in implementing Basel II properly.

Jawbreh,Wafaa (2008)[24] in her study aimed to analyze the various types of

risks (credit, liquidity, operation &capital risk) at the Jordanian commercial banks
exposed on and the strategies, Which follow by this banks to manage these types of
risk’s, finally appear effect’s on basil 2 on this types of risks (credit, liquidity,
operation &capital risk).
The sample of the study contains 4 Jordanian banks during the period from 1995-
2007.The survey method from one side and the pooled data regression methods from
another side were utilized to analyze the study data. The results in terms of financial
ratios indicated that banks have the ability to consider and manage some types of
risks, and there is statistics relation between total risk and all types of risks.
These study appear ( liquidity risk and credit risk ) is the most effect on total risk, and
operation risk is the least effect on total risk compared to other risk .

Okan Veli ŞAFAKLI(2007)[25] has examined the credit risk for the banking
sector of the Northern Cyprus, which carries a lot of significance for the banking
sector. When examined retrospectively, it is observed that the credit risk had a
determining effect on the banking crisis previously experienced in the country.
Regarding the fundamental ratios, until the starting point of the crisis, though, there
were steady increases in the credit risk of banking sector as a whole. However,
following the crisis, it is observed that with the administrative, legal and financial
measures taken, the risk dropped. Not only this situation has been determined with the
credit risk ratios, but it has also been found out during the regulatory and supervisory
stage of credits that no provision for loan losses had previously been allocated.
However, the necessity for strengthening of banks, from the point of view of equity
capital, which is seen as a safety valve, has been very apparent. Furthermore,
necessary preparations of technological, administrative, know-how and qualified
personnel should be made in accordance with Basel II framework.

Al-Tamimi & Al-Mazrooei (2007)[26] have investigated the UAE national and
foreign banks with a sample of 17 banks. The data was collected through
questionnaires and Pearson correlation and ordinary least square regression were used
to test the data. research helped them to find that three most important types of risk
facing the UAE commercial banks were foreign exchange risk flowed by credit risk
and then operating risk. They found that the UAE banks were somewhat efficient in
managing risk; however the variables such as risk identification, assessment and
analysis proved to be more influencing in risk management process. Finally, The

Ph.D. Thesis, N.M.U., Jalgaon. 30

results indicated that these banks are more capable in managing risk and also found
that there is a major differentiation between the UAE national and foreign banks in
observing of risk assessment and analysis and in risk examine and controlling.

Abu Kamal, Mervat (2007)[27] has evaluated the credit risk management
systems and strategies that the operating banks in Palestinian banking system
mandate.
And the steps they take to develop these practices according to the international
banking supervision regulations and standards "Basel II: Revised international capital
framework". That to adopt a methodology for managing credit risk related to the
contemporary banking risks management. The research used the analytical description
methodology, to describe the new Basel accord for effective banking supervision, the
principles for the management of credit risk which prepared by Basel committee Sep
2000. And discuss the measurement approaches for calculating capital requirements
to credit risk. Then analyze and asses the competency of credit risk management in
the operating banks in Palestine, and their ability to develop their systems.
The main results of the study are: the competency of credit risk management in
operating banks in Palestine, the adequacy of reserves and provisions for hedging the
probability of loans losses, the banks succeeded in treatment the doubtful loans in
their portfolios, there's a compliance of PMA rules and instructions, that are necessary
to mitigate credit risk, there's also independent internal auditing in banks with direct
relationship to the board of director, but banks face difficulties to implement the Basel
II methodologies for credit risk measurement. Those banks don't have the factors
needed to implement these methodologies. Banks prefer to use the standardized
approach than the internal rating based approach IRB, and PMA hasn't determined the
suitable approach for credit risk measurement yet.
The research reached to the following main recommendations: Banks have to keep on
better and more systematic risk management practices, especially credit risk
management. Also keep on amendment their credit polices to changes in economic
conditions. And have to be a specialized credit risk management department to
identify, measure, monitor, and control credit risk. Also support independent internal
and external bank auditing processes, core credit risk. And develop human resources
by conducting worth training courses. And develop analytical techniques.
 Mohammed T. Amro (2006)[28] has investegated the various types of risk
(credit , liquidity,market,operation,and capital risk ) that the jordanian comercial
banks exposes to and realization that banks declar and manage these types of risk, in
order to sugest amodel that enable these banks to deal and manage risk in an efficient
way. The study contains 11 jordanian banks during the period from 2000-2005.
The result indicated that banks in terms of risk realization realize all risk types
together , and only as individually realize the operational and capital risk . and it also
indicate that it can mange all risk types, but at the individual level banks can manage
only the liquidity and capital risks . result also indicated in term of management and
realisation of risk that banks have not the ability to manage at both whole and
individual levels. Result in terms of financial ratios indicated that banks have ability
to conceder and manage all type of risks.The study has sugested amathmatical
models in which banks can benefit to manage all type of risk .

Fatemi A. and Fooladi I. (2006) [29] have investigated the current practices of
credit risk management by the largest US-based financial institutions. Owing to the
increasing variety in the types of counterparties and the ever-expanding variety in the
forms of obligations, credit risk management has jumped to the forefront of risk
management activities carried out by firms in the financial services industry. This
study is designed to shed light on the current practices of these firms.
A short questionnaire, containing seven questions, was mailed to each of the top 100
banking firms headquartered in the USA. It was found that identifying counterparty
default risk is the single most-important purpose served by the credit risk models
utilized. Close to half of the responding institutions utilize models that are also
capable of dealing with counterparty migration risk. Surprisingly, only a minority of
banks currently utilize either a proprietary or a vendor-marketed model for the
management of their credit risk. Interestingly, those that utilize their own in-house
model also utilize a vendor-marketed model. Not surprisingly, such models are more
widely used for the management of non-traded credit loan portfolios than they are for
the management of traded bonds. The results help one to understand the current
practices of these firms. As such, they enable us to make inferences about the
perceived importance of the risks. The paper is of particular value to the treasurers
intending to better understand the current trends in credit risk management, and to
academics intending to carry out research in the field.

Wolfgang Bauer & Marc Ryser,(2004)[30] in their study made an attempt to

analyze optimal risk management strategies of a bank financed with deposits and
equity in a one period model. The bank's motivation for risk management comes from
deposits which can lead to bank runs. In the event of such a run, liquidation costs
arise. The hedging strategy that maximizes the value of equity is derived. The study
identify conditions under which well-known results such as complete hedging,
maximal speculation or irrelevance of the hedging decision are obtained. The initial
debt ratio, the size of the liquidation costs, regulatory restrictions, the volatility of the
risky asset and the spread between the riskless interest rate and the deposit rate are
shown to be the important parameters that drive the bank's hedging decision. The
study further extend this basic model to include counterparty risk constraints on the
forward contract used for hedging. The focus of this paper is to study the rationale for
banks' risk management strategies where risk management is defined as set of
hedging strategies to alter the probability distribution of the future value of the banks'
assets. The study has presented a one-period model in which we analyze the bank's
risk management decision. The bank is regulatory restricted, financed by deposits and
is subject to liquidation costs in the event of a bank run. The study find that the
common interpretation of equity as an ordinary call option does not apply: Equity
value is not always increased by increasing the asset's volatility, since this also raises
the likelihood of a bank run. Whenever the expected costs of such a run for
shareholders cannot be outweighed by an increase of the expected return (because
regulatory restrictions limit the maximum achievable risk), it is not optimal to take as
much risk as possible. In these cases, safe banks with low debt ratios and asset
volatility can still augment their risk exposure to the point where downside loss comes
into play. However, for banks with a high debt ratio and high asset volatility, risk
reduction is the optimal strategy.

OThman, Mohammed Daoud(2008)[31] has analyzed the effect of using the

techniques of credit risk mitigation on banks' value including: principles of good
lending, market segmentation, credit portfolio diversification, credit insurance,
monitoring credit and bank strategy. It also explores the awareness of Jordanian banks
of credit portfolio risk that leads ultimately to credit default in payment of obligations
and its effect on the market value of the bank through returns to owners and
stockholders. To assess the bank value, the researcher applies the measurement on the
approximate equation of Tobin's Q. The study sample consists of eleven Jordanian
commercial banks during the years of 2001-2006. He focuses on finding the relation
between the independent variables and the dependent variable through using Multiple
Linear Regression, a questionnaire and the financial indicators depending on the
financial statements of the banks.
The researcher has shown the presence of a positive effect between the bank value
and credit risk mitigation. He also studied the importance of maintaining the quality
and components of the credit portfolio and containing its risks within accepted levels
to establish the bank's value. In conclusion, the researcher asserts the necessity of
using credit risk mitigation by Jordanian commercial banks to decrease portfolio
credit risk and default risk in order to ensure acceptable returns for owners and
stockholders.
The researcher recommended that dependence on the principles of good lending when
awarding credit, in addition to the work of monitoring and periodic review.

Conclusion

This chapter describes the literature review related to risk and credit risk management
and to gain the depth understanding of various risks that banks faced. The above
mentioned literature review shed light on the research problem, and helped researcher
to complete the research.
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