NAME:

SYED ALI AMJAD

REG NO:

L1Fo9MBBF2o45

SUBMITTED TO:

PROF- IDRIS

Q. What is credit risk? A. Credit Risk is the Risk of loss which is usually faced by the one who offers the
loan or provides anything on credit basis to anyone.

Credit risk could be on account of:

Default risk:

Obligor cannot service debt obligations.

Spread risk:

Because changes in credit quality of the obligor.

Now summary Comparison of two banks credit risk management,

So I have decided to choose two banks which are followings;

1. MCB BANK. 2. MEEZAN BANK LIMITED.

MCB BANK

So first of all I will discuss the credit risk management of MCB bank which is as under; MCBs credit risk management is using some techniques to avoid the credit risk in the MCB which are followings; 1. FINANCIAL ANALYSIS:

 In order to minimize credit risk, financial analysis is carried out to assess risk, repayment capacity, liquidity, leverage and debt to equity ratio. Financial Statements i.e. Balance Sheet, Income Statement, Cash Flow statement are the basis tools which are used to carry out financial analysis. Current Ratio which shows liquidity position of a certain business. Acid test ratio is used to ascertain the ultimate liquidity position of the business.

2. REPAYMENT CAPACITY: Timely payment of markup on quarterly basis and completion of other formalities of Bank shows repayment capacity. 3. FINANCIAL BACKGROUND: Financial background of a particular borrower helps in making credit decision in sanction credit. Credit Reports of the borrower can be obtained from other banks, CIB Report, Search Report etc. 4. MARKET REPUTATION AND GOODWILL:

Repayment behavior can also be assessed by market reputation and goodwill of a particular borrower. Financial Statements, CIB Report also shows borrower's behavior towards debt servicing behavior. For this purpose MCB using tools like CIB (Credit information Bureau) Report, Search Report from ICIL. 5. PRIMARY SECURITY: MCB secure lending by means of primary security i.e. hypothecation, pledge, lien etc. 6. SECONDARY SECURITY: MCB secure its financing by way of secondary security in shape of Mortgage i.e.; Registered Mortgage, token mortgage and Equitable mortgage in order to secure its loans. 7. LEGAL DOCUMENTATION: MCB is the pioneer in Basel II Implementation and Credit Risk Assessment of world class standard. MCB does not compromise on legal documentation.

These were points by which the credit risk management of MCB can control effectively the factor of credit risk.

Now here are some points in which the credit risk can be control by using Islamic method in Islamic banking systems as I choose the MEEZAN BANK So I will discuss these one by one.

MEEZAN BANK LIMITED

Risk: Existence of uncertainty about future outcomes Difference between expected and actual result

RISK MANAGEMENT:

Risk Management involves identification, measurement, and monitoring, reporting and controlling risks.

Credit Risk Mitigating Tools:

Pledge of assets as collateral Inventories, Shares, Sukuk, Units, etc.mean to say we can avoid the risk of credit if we take some asset of our customer as a pledge then in case if he is not able to pay back our loan then we can cover our loan by selling his asset are market value. Personal Guarantee Also the customer should asked to give the personal guarantee of any other person who is very well known in the society so in case if the customer is not able to pay back to loan then we can compensate our loan from the man who gave us guarantee on the behalf of our customer Personal Guarantee Promise Charge on deposits and assets Takaful Hamish Jiddiya Urbun Khiyar / Option Parallel contract, if permissible