Empirical Investigation Of Implementation Of Credit Risk Management Among Iraqi Banks

Abstract

In order to properly manage risks, an institution must recognize and understand risks that may arise from both existing and new business initiatives; for example, risks inherent in lending activity include credit, liquidity, interest rate and operational risks. Risk identification should be a continuing process, and should be understood at both the transaction and portfolio levels. Credit risk is the likelihood that a debtor or financial instrument issuer is unwilling or unable to pay interest or repay the principal according to the terms specified in a credit agreement resulting in economic loss to the banking institution. Credit risk means that payments may be delayed or ultimately not paid at all, which can in turn cause cash flow problems and affect its liquidity. Credit risk is still the major single cause of bank failures. Credit concentrations, are viewed as any exposure where the potential losses are large relative to the banking institution’s capital, its total assets or, where adequate measures exist, the bank’s overall risk level. This may be in the form of single borrowers or counterparties, a group of connected counterparties, and sectors or industries, such as trade, agriculture, etc or in the form of common or correlated factors. The Asian crisis demonstrated how close linkages among emerging markets under stress situations and correlation between market and credit risks as well as between those risks and liquidity risk, can produce widespread losses. The credit process issues, many credit problems reveal basic weaknesses in the credit granting and monitoring processes. While shortcomings in underwriting and management of credit exposures represent important sources of losses at banking institutions, many credit problems would have been avoided or mitigated by a strong internal credit process. The paper reviews existing literature that consists mostly evidence from developed countries. A study model is proposed with amendment to fit Iraqi environment.