Credit Risk Management in Mashreq bank UAE - Case Study Example

Introduction Credit risk management is one of the most important aspects of modern banking as it allows banks and financial s to manage their return in-line with the risks taken. Credit risk often arises when it is significantly estimated that the counterparty i.e. the party to whom bank has lent its funds may not be able to honor its obligations when they become due. Bank of International Settlements defines credit risk in following manner: “Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise a banks risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters.”(bis.org, 1999). Though banks face problems of different nature however, the most important issue which can endanger the existence of any bank is to have lax credit policy and poor credit risk management infrastructure in place that may result into higher provisions and thus more losses to book. Mashreq Bank is one of the leading banks in Gulf Region however, due to its diverse and international exposure it faces unique credit risk and need to manage it in most appropriate manner. However, it is important that it must also critical identify the critical success factors of credit risk management and must manage them in most optimal manner to achieve maximum returns at acceptable risk level. This research study will therefore identify and discuss some of the critical success factors for credit risk management at Mahsreq Bank. Introduction to Organization Mashreq Bank is in the business since 1967 and has now established itself as one of the leading banks in UAE and is also growing in countries like Qatar and Bahrain. It is the highest earning bank in the region with profitability of over AED 1 Billion with total assets of AED 94.26 Billions. This unprecedented record is unique in the whole region as no other bank was able to achieve what Mashreq Bank can. Having a long term rating of BBB+ assigned by Standard & Poors and advances to deposit ratio of 89%, credit risk is definitely one of the most important aspects of management of the bank in long run and it is therefore important that an identification and assessment of critical success factors of credit risk management is properly explored and analyzed. Research Philosophy Research Philosophy is the consideration for the understanding and development of knowledge and how Researcher understands that knowledge. The development of knowledge therefore is the central theme in defining any research philosophy. Research philosophy generally can be described by using three different strands or aspects of Philosophy. These are: Epistemology Epistemology as a branch of philosophy studies knowledge and attempts to provide answers to questions like what separates true knowledge from the false knowledge. However, this issue, if considered from scientific knowledge, boils down to the formation of theories or models that is at least better than the existing theories and models of knowledge. (Saunders, Lewis & Thornhill, 2007) Ontology Ontology essentially deals with the overall nature of how different entities exist and how these entities can be understood i.e. how their reality and existence can be understood. The field of ontology therefore is the sub-branch of metaphysics and explores the nature of the relationship of different entities with each other. Ontology therefore indicates as to how things exist within different domains or may exist within existing and potential domains. Axiology Axiology deals with human values and ethics and helps us to identify our internal values and beliefs which invariably guide our perception and thinking about the nature and the world. Axiology therefore is a study of aesthetics and ethics and how and why we do things. The above discussion indicated that it is important for researchers to define a proper research philosophy in order to conduct the research in a particular framework. A balanced view of all the research positions therefore is important for the researcher in order to look into the solutions to the problems from different perspectives. Considering the above discussion, Researcher will attempt to discuss three important philosophical positions. These are: Positivitism Positivitism allow a Researcher not to be influenced by his own set of beliefs and values. Positivitism emerges from epistemological perspective of Philosophy and holds that the scientific method is the best method to uncover the truth. Positivitism therefore asserts that only authentic knowledge is one which senses can experience and which can subsequently be positively verified by the Researcher. Interpretivism This view holds that all knowledge is based on the interpretation and how one perceives and interprets it according to his or her own understanding. It is because of this reason that this position focuses more on people and indicates that external events do not determine the reality but reality is determined by the people. Interpretivism is therefore considered as the best approach to conduct research studies within the realm of business administration and finance as it is also viewed from the perspective of social interpretivism. Realism Realism and Positivism are closely related as both advocate the use of senses in understanding the reality. Realism indicates that the reality is not beyond the human mind. Realism can be divided into two distinct parts i.e. direct realism and indirect realism. Direct realism indicates that what we see is the actual reality and what one experiences is basically the portrayal of that reality. One approach therefore indicates that the world is not a constant place and it keeps on changing whereas another approach indicates that the world is stationary therefore the two conflicting philosophical views give birth to the need of having a unique and new theory which can model these conflicting views and define the reality in most appropriate manner. Considering the above discussion and the merits and de-merits of each approach, the researcher will therefore aim to consider realism as the dominant research approach for conducting this research and will form the philosophical foundations of this research on the basis of realism. Research Strategy Forming a coherent research strategy allows a researcher to clearly identify and outline the data collection methods and the analysis of the data. It is however, important to understand that the definite plan of action for research study depends upon the different factors and it is important that researcher must identify the inductive as well as deductive approaches to the research. Further the overall design of the research strategy is also largely influenced by the philosophical position undertaken by the researcher. Inductive approaches are often used in qualitative research because researcher attempt to generate or formulate theory from the data gathered. Deductive approaches are mostly used in quantitative studies where data proves any theory which has already been defined. This research study will however, comprises of both the approaches i.e. the qualitative as well as quantitative approaches. Case study approach is one of the most critical methods which is often used to investigate a fact within real life settings. Case study approach therefore always provides a critical insight into viewing the different aspects of reality. It is also important to note that case study approach may not be appropriate where researcher is faced with a smaller amount of data to deal with. Further, this is still an exploratory approach and chances are that it may offer relatively biased view based on the abilities of the researcher. Interview is another important mean through which a researcher can collect data with relatively higher degree of accuracy. It is because of this reason that interviews are considered as the most relevant tool to collect the primary data. (Moran,2010). Interviews can be either direct or indirect and can be based on the structured as well as semi-structured questions. Structured interviews are more suitable when the respondents have the time and ability to response to various questions in more detailed manner. It is the intended aim of the researcher to use case study as well as interviews as the primary data collection and analysis tools to perform the research. References 1. Principles for the Management of Credit Risk [online]. (1999) [Accessed 18th August 2010]. Available from: . 2. Moran, P. (2010) Research Methodology for MBA Students, Lecture Notes, The University of Bolton 3. Saunders, M. Lewis, P. Thornhill, A. (2007) Research methods for business students (4TH Edition), London: Financial Times Prentice Hall. Read More