Addis Ababa University
College Of Business And Economics Department Of
Accounting And Finance
Risk Management & Insurance individual assignment
Submitted by: Yonas Yirga
ID Number: UGR/3929/15
Section: 5
Submitted to: Mr. derej W.
Submission date: 03/Jun/2024 G.C
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TABLE OF CONTENT
1, Introduction
2, Identification and Assessment of Key Risk Exposures
+ Credit Risk
+ Operational Risk
+ Foreign Currency Risk
+ Liquidity Risk and other risks
3, Risk Monitoring and Control
+ Enhancing Risk Monitoring and Control Measures
4, Liquidity Risk Management and credit risk management
+ importance of Effective Liquidity Risk and credit risk Management
+ Strategies for Minimizing Liquidity and market risk by awash bank
5 Market Risk Management and other risk management practice by the awash bank
+ Relationship between Market Risk and Overall Risk Management
+ Maintaining a Strong Focus on Market Risk Exposures
6, Conclusion
Summary of Key Findings
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Introduction:
Risk management is a critical aspect of the banking industry, as financial institutions like Awash Bank are
exposed to a wide range of risks that can significantly impact their financial stability, profitability, and
reputation. Effective risk management requires a comprehensive approach that encompasses the
identification, assessment, monitoring, and control of various risk exposures, including credit risk,
operational risk, foreign currency risk, and liquidity risk.
In this context, the present study aims to delve into Awash Bank's risk management practices, drawing
insights from questionnaire data assessments. The analysis sheds light on the bank's strengths and areas
for improvement in managing its risk profile, providing valuable guidance for enhancing the overall
effectiveness of its risk management systems.
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## In this risk management assignment, I will begin by examining the primary risks faced by banks in
Ethiopia. I will then focus on how AWASH International Bank effectively manages and controls these
risks. I also show the idea of all of the main risk types in a good way and demonstrate via a good
example using awash bank
MAJOR RISKS FACED BY ETHIOPIAN BANKS
1, Credit Risk: This refers to the risk of borrowers defaulting on their loan repayments. For example
if a customer of Awash Bank fails to repay their loan it would expose the bank to credit risk.
2, Operational Risk: This involves losses due to internal issues like human error, system failures, or
external events like natural disasters. For instance, if a branch of Awash Bank experiences a power
outage that disrupts its operations, it would be exposed to operational risk.
3, Legal and Regulatory Risk: This arises from non-compliance with laws, regulations, and industry
standards. For example, if Awash Bank fails to adequately protect customer data and privacy as per
regulatory requirements, it could face legal and regulatory risk in the form of fines or lawsuits.
4, Liquidity Risk: This is the risk that the bank may not have enough cash or liquid assets to meet sudden
withdrawals by depositors. For example, if there is a bank run where many Awash Bank depositors
suddenly withdraw their funds, the bank may be forced to liquidate assets at a loss to meet these
withdrawal demands.
5, Market Risk: This is the risk that the value of the bank's investment portfolio (e.g. securities, equities)
will decline due to changes in market conditions . For instance, if interest rates rise, the market value
of Awash Bank's bond portfolio would decrease.
6, Off-Balance Sheet Risk: This is the risk from contingent liabilities not shown on the bank's balance
sheet, such as guarantees or letters of credit. For Awash
Bank, an example would be the risk from issuing a standby letter of credit to a customer.
7, Foreign Exchange Risk: This is the risk of losses due to fluctuations in foreign currency exchange rates.
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If Awash Bank has foreign currency-denominated loans or investments, changes in the exchange rate
could negatively impact its profitability.
8, Interest Rate Risk: This is the risk that rising interest rates will reduce the market value of the bank's
assets, like its loan portfolio. For example, if interest rates go up, the value of the fixed-rate loans on
Awash Bank's balance sheet would decline.
*** i describe main risks which is faced by most Ethiopian banks and i demonstrate what there
meaning is in detail by the use of awash bank to provide example so now I will write the next step
which is involved report of my field work on awash bank and i assess how awash bank manage and
control these above risks in detail
### The main idea behind risk control and risk management is to identify, assess, and mitigate potential
risks that could impact an organization's ability to achieve its objectives. Risk control involves taking
proactive measures to prevent or reduce the likelihood of risks occurring, while risk management
encompasses the broader process of identifying, analyzing, and responding to the key points regarding
risk management practices in the banking sector, specifically at Awash Bank S.C. in Ethiopia:
1. ** key points regarding risk management practices in the banking sector, specifically at Awash
Bank S.C. in Ethiopia and I will provide a detailed information and report on the main and most
risks that the bank mainly faced and mechanisms how awash bank control it
The study used a descriptive analysis approach, employing measures of mean and
standard deviation (SD) to evaluate the current risk management practices at Awash
Bank S.C.
# the analysis focused on specific risk management elements, including:
*Risk Understanding
*Risk Identification
*Risk Monitoring and Controlling
* Managing Credit Risk
* Managing Liquidity Risk
* Managing Operational Risk
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## Findings and Interpretation:
* The study found higher mean values and smaller standard deviations for the examined risk
management practices at Awash Bank S.C.
* This suggests that the bank has a relatively strong and consistent approach to risk management in
these areas.
## Implications
* The findings imply that Awash Bank S.C. has a well-developed risk management framework in place,
with a good understanding and effective practices related to the various risk factors.
* The smaller standard deviation indicates a consistent application of risk management across the
organization, suggesting a robust and coordinated approach.
### Objectives:
* The assignment aimed to evaluate the level of risk management practices at Awash Bank S.C. by
focusing on the specific risk management elements mentioned earlier.
* The objective of the assignment was to answer research questions related to the effectiveness and
maturity of the bank's risk management system.
## HOW AWASH BANK MANAGES THE Credit Risk
* detailed overview of how Awash Bank manages credit risk:
++ Awash Bank has implemented a robust credit risk management framework to mitigate the
risks associated with its lending activities. This framework is built on several key components:
# Credit Risk Governance: The bank's Board of Directors sets the overall credit risk strategy and
policies, which are then effectively communicated and implemented by the top management team. This
ensures alignment between the board's risk appetite and the bank's day-to-day credit risk management
practices.
# Credit Risk Identification and Assessment: Awash Bank has a comprehensive credit risk
rating framework that is applied across all its lending activities. This allows the bank to thoroughly assess
the creditworthiness of borrowers and the risks associated with each credit exposure. The bank closely
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monitors the quality of its credit portfolio on an ongoing basis, and quickly takes remedial actions if any
deterioration is detected.
# Credit Risk Mitigation: To minimize credit losses, Awash Bank employs several risk mitigation
strategies. This includes conducting thorough due diligence on loan applications to verify the
trustworthiness of borrowers, obtaining adequate collateral coverage, diversifying the loan portfolio to
reduce concentration risks, and accurately pricing loans based on the borrower's repayment capacity
and intentions.
# Credit Risk Monitoring and Reporting: The bank regularly prepares detailed reports on the
status of its credit risk profile. This allows the management team and the board to stay informed about
emerging trends and proactively addresses any issues that may arise. The bank also fosters a culture of
risk awareness and collaboration across different departments to ensure a coordinated and effective
response to credit risk incidents.
### now I will demonstrate the idea of above risk management method practiced by awash
bank via a good scenario
### For example, consider the case of a small- to medium-sized enterprise (SME) that approaches
Awash Bank for a business loan. The bank's credit risk management process would work as follows:
# The relationship manager would first conduct a thorough assessment of the SME's financial health,
management team, business model, and market position. This would involve reviewing financial
statements, conducting site visits, and analyzing industry trends.
Based on this analysis, the bank would assign a credit risk rating to the SME, which would determine
the appropriate loan terms, pricing, and collateral requirements.
The bank would then closely monitor the SME's performance and repayment behavior, making
adjustments to the loan terms or triggering early intervention strategies if any signs of deterioration
are detected.
Throughout this process, the bank's risk management team would analyze the overall credit portfolio,
identify any concentration risks or emerging trends, and report these findings to the management and
the board. This would allow the bank to fine-tune its credit risk policies and practices as needed.
** By implementing this comprehensive credit risk management framework, Awash Bank is able
to effectively identify, assess, mitigate, and monitor credit risks, ultimately minimizing potential
losses and ensuring the long-term sustainability of its lending operations .
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# HOW AWASH BANK MANAGES THE Liquidity Risk
* detailed overview of how Awash Bank manages liquidity risk,
## Awash Bank has implemented a robust liquidity risk management framework
to ensure the stability and resilience of its operations.
++ Liquidity Risk Governance: The bank's Board of Directors has set a clear liquidity risk
strategy and policies, which are then effectively communicated and implemented by the top
management team. This ensures that the bank's liquidity risk management practices are aligned with
the board's risk appetite and strategic objectives.
++ Liquidity Risk Management Framework: Awash Bank has developed a comprehensive
liquidity risk management framework, including the necessary infrastructure, processes, and policies.
This framework enables the bank to identify, measure, monitor, and control its liquidity risk
exposures across different time horizons and under both normal and stressed conditions.
+ + Liquidity Risk Monitoring and Reporting: The bank regularly prepares detailed reports
on its liquidity risk profile, including metrics such as liquidity coverage ratios, net stable funding ratios,
and cash flow projections.
This allows the management team and the board to closely monitor the bank's liquidity position and
take proactive measures to address any emerging risks.
++Liquidity Risk Mitigation Strategies: Awash Bank employs various liquidity risk
management techniques to reduce its exposure to liquidity shocks and ensure the availability of
sufficient funding sources.
These strategies may include maintaining a diversified funding base, holding a portfolio of high-quality
liquid assets, implementing contingency funding plans, and engaging in liquidity stress testing.
## To illustrate how Awash Bank's liquidity risk management framework works in
practice, consider the following scenario:
*** Scenario: Awash Bank is experiencing a period of rapid deposit growth, leading to an increase in
its liquidity position. The bank's management team recognizes the need to effectively manage this
surplus liquidity to avoid potential risks.
Liquidity Risk Management Process:
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1. Liquidity Risk Identification and Assessment:
The bank's risk management team closely monitors the bank's liquidity position, cash
flow projections, and funding structure to identify any potential liquidity risks.
They analyze the impact of factors such as changes in market conditions, customer
behavior, and regulatory requirements on the bank's liquidity profile.
2. Liquidity Risk Mitigation:
Based on the risk assessment, Awash Bank decides to implement a strategy to
prudently deploy the surplus liquidity.
This may involve investing in high-quality liquid assets, such as government securities,
to maintain a cushion of readily available funds.
The bank also reviews its funding mix and explores opportunities to diversify its
funding sources, reducing its reliance on any single source of funding.
3. Liquidity Risk Monitoring and Reporting:
The bank's risk management team regularly monitors the bank's liquidity position,
including the composition and quality of its liquid asset portfolio, and the
diversification of its funding sources.
Detailed liquidity risk reports are presented to the management team and the board,
highlighting the bank's liquidity risk profile and the effectiveness of the implemented
mitigation strategies.
4. Continuous Improvement:
Awash Bank continuously reviews and enhances its liquidity risk management
framework to ensure it remains effective in addressing evolving liquidity risks and
regulatory requirements.
The bank engages in regular liquidity stress testing to assess the resilience of its
liquidity position under various adverse scenarios and refine its contingency funding
plans accordingly.
# HOW AWASH BANK MANAGES THE OPREATIONAL RISK
** Awash Bank has established a comprehensive operational risk management
framework to ensure the resilience and continuity of its operations.
++ Operational Risk Governance:
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* Awash Bank's Board of Directors and executive management have recognized, understood, and
defined all categories of operational risk applicable to the institution.
* This ensures that the bank has a clear understanding of its operational risk profile and can
effectively manage these risks.
++ Operational Risk Management Policy:
*The bank's senior management has transformed the strategic direction set by the board into a robust
operational risk management policy.
* This policy outlines the bank's approach to identifying, assessing, controlling, and mitigating
operational risks, aligning it with the overall risk appetite and strategic objectives.
++ Operational Risk Management Framework:
* Awash Bank has implemented a comprehensive operational risk management framework, which
includes the necessary infrastructure, processes, and controls.
* This framework enables the bank to identify, measure, monitor, and mitigate its operational risk
exposures across various business lines and functions.
++ Business Continuity and Contingency Planning:
* The bank has developed robust contingency and business continuity plans to ensure its ability to
operate as a going concern and minimize losses in the event of severe business disruptions.
1. * These plans cover a range of scenarios, including natural disasters, IT system failures, and
other operational disruptions, and provide a structured approach to recover and resume critical
operations.
++ Operational Risk Monitoring and Reporting:
* Awash Bank regularly prepares detailed reports on its operational risk profile, including the
identification of key risk indicators, loss event data, and the effectiveness of risk mitigation measures.
* This allows the management team and the board to closely monitor the bank's operational risk
exposure and take proactive actions to address any emerging issues.
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# HOW AWASH BANK MANAGES THE LEGAL REGULATORY AND OTHER RISKS
## # Legal and Regulatory Risk Management:
* Awash Bank has a dedicated team that closely monitors changes in laws, regulations, and industry
standards applicable to its operations.
* The bank has established clear policies, procedures, and controls to ensure compliance with all relevant
legal and regulatory requirements, such as those related to customer data protection and privacy.
*Awash Bank regularly reviews and updates its compliance framework to adapt to the evolving
regulatory landscape and mitigate the risk of non-compliance, which could result in fines, penalties, or
legal actions.
### Market Risk Management:
* Awash Bank has a well-defined market risk management policy that outlines its approach to
identifying, measuring, monitoring, and controlling market
* The bank's investment portfolio is subject to regular valuation and stress testing to assess its exposure
to interest rate, equity, and other market fluctuations.
* Awash Bank sets appropriate limits on the size and composition of its investment portfolio, and actively
manages the duration and reprising characteristics of its assets and liabilities to mitigate interest rate
risk.
* The bank's risk management team closely monitors market developments and adjusts the investment
portfolio accordingly to maintain an acceptable risk profile.
### Off-Balance Sheet Risk Management:
Awash Bank has established clear policies and procedures for the approval, monitoring,
and management of off-balance sheet exposures, such as guarantees and letters of
credit.
The bank carefully evaluates the creditworthiness of the counterparties involved and sets
appropriate limits on the size and tenor of these contingent liabilities.
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Awash Bank maintains adequate capital and liquidity buffers to account for potential
drawdowns on these off-balance sheet commitments, and regularly reviews the risk
profile of its off-balance sheet portfolio.
# # # IN general By effectively managing these additional risk exposures, Awash Bank is able to
maintain a well-rounded and comprehensive risk management framework. This allows the bank to:
Preserve the value of its investment portfolio and protect its earnings from adverse market
movements.
Manage its contingent liabilities and off-balance sheet risks, ensuring that they do not pose a
significant threat to the bank's financial stability.
Mitigate the impact of foreign exchange rate fluctuations on its profitability and balance sheet.
Through a combination of robust policies, processes, and control measures, Awash Bank is able to
identify, assess, and mitigate these diverse risk factors, thereby enhancing the overall resilience and
sustainability of its operations.
** Awash Bank can further strengthen its risk management capabilities, enabling the bank to better
identify, assess, monitor, and control the diverse risks it faces. This will help the bank maintain its
financial stability, protect its reputation, and ensure compliance with regulatory requirements, even in
the face of a dynamic and challenging operating environment.
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Summary:
The analysis of the questionnaire data assessments revealed that Awash Bank faces several significant
risk exposures, including credit risk, operational risk, foreign currency risk, and liquidity risk. While the
bank's management demonstrated a strong understanding of these risks, the data suggests that the
risk monitoring and control measures were not sufficiently effective.
Despite the bank's adoption of a systematic risk identification, assessment, and control approach, it
struggled to accurately pinpoint its primary risk areas. This underscores the need for Awash Bank to
further refine its risk identification and assessment processes to better align with its evolving risk
profile.
Moreover, the study highlighted the importance of enhancing liquidity risk management as a critical
component for improving the overall effectiveness of the bank's risk management framework.
Additionally, the positive relationship observed between market risk management and the bank's risk
management approaches suggests the need for Awash Bank to maintain a strong focus on managing
its market risk exposures.
By addressing these areas for improvement, Awash Bank can strengthen its risk management
capabilities, enabling the bank to better navigate the dynamic and challenging operating
environment. This, in turn, will contribute to the bank's financial stability, profitability, and reputation,
ultimately benefiting its stakeholders and the broader financial system.
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