Article 4: Credit Risk Oversight Functions and Roles

C 3/2024-STD Effective from 30/11/2024

4.1

The corresponding Article of the regulation outlines the main principles. Detailed requirements are presented below.

Credit Review Function

4.2

Each LFI must have a CCO supported by a Credit Review function or equivalent to fulfil the duties as defined below.

4.3

The CCO is required to review Obligors and associated exposures every year. For Wholesale Obligors, this review must take place at Obligor level. For Retail Obligors, this review must take place at portfolio level. This must include an updated risk rating of the Obligor(s) based on recent financials, at a minimum annually. LFIs must set the conditions triggering more frequent risk rating, and the conditions triggering technical amendments to a Facility.

4.4

The CCO’s key responsibilities are as follows:

Heading the credit review function which will review all credit proposals.

Ensure that all credit proposals are:

i.	Comprehensive and suitable to make a view on Credit Risk,
ii.	In compliance with the underwriting principles in these standards, and
iii.	In accordance with the Risk Appetite and underwriting standards of the LFI.

For approvals up to the authority level of the CCO, to review and approve each individual transaction either directly or in accordance with the LFIs approved delegation matrix.

For approvals required above the authority level of the CCO as per the delegation matrix, the CCO must submit credit proposals to the Credit Committee or its alternative.

Ensure that exceptions and their justifications are referred to the CRO for review.

The function responsible for underwriting Credit Risk must be independent of the business. Therefore, the CCO must not report to the head of a business line.

Credit Risk Management Function

4.5

In the context of credit acquisition, each LFI must have an independent Credit Risk Management Function within the Risk Management Function headed by the CRO.

4.6

The Credit Risk Management Function, must not have a decision-making role in the acquisition of Credit Risk.

4.7

The Credit Risk Management Function is responsible to safeguard the LFI from acquiring Credit Risk not consistent with the LFI’s Risk Appetite and/or policies, that may cause a threat to the LFI, in which case he must raise his concerns at the appropriate level.

4.8

The Credit Risk Management Function has the responsibility and authority to protect the LFI from Credit Risk, while maintaining an arms-length and independent oversight of Credit Risk acquisition. To perform this duty, the Credit Risk Management Function must have the following powers and responsibilities:

a.	To own the LFI’s Credit Risk policies. The Credit Risk Management Function must define policies, procedures, systems and controls to monitor and report Credit Risk upon commencement of any Credit Facility, and throughout the Credit Risk life-cycle.
b.	To ensure that the Credit Risk management framework, and/or any subsequent change is adequate to meet the aforementioned objectives.
c.	To ensure that Credit Risk is identified, measured, reported, mitigated, and remains within the LFI’s Risk Appetite. To ensure that, for material Facilities, the metrics pertaining to Credit Risk provision and capital are accurately reflecting the Risk Profile of these Facilities.
d.	To review material defaulted Credit Facilities and the associated rationale for provisioning based on appropriate discounted future cash flows and eligible collateral, in compliance with relevant regulations. For this purpose, materiality is defined by each LFI.
e.	To ensure that regular updates are provided to Senior Management and the Board or to a Board Committee as per a pre-established schedule, or more frequently when required. Such reporting must cover the portfolio Risk Profile, exceptions and early warning signals.
f.	The authority to attend credit committee meetings as a non-voting member. The right to be fully informed of all proposals, renewals, amendments to acquire or renew Credit Facilities.

4.9

The CRO has the following powers and responsibilities with regard to Credit Risk:

To ensure that the LFI has adequate resources and skilled employees dedicated to Credit Risk management.

To ensure that the approved Credit Facilities conform to the Board approved Risk Appetite of the LFI. For this purpose, the CRO must undertake prior reviews of all material credit applications and renewals in order to express and document independent views on their Risk Profile in the context of the LFI’s Risk Appetite and policies, and communicate these views to Senior Management and the Board.

The Board of the LFI must establish formal materiality thresholds (based on the total exposure amount) above which the CRO review must take place.

At a minimum, the materiality threshold must include the following principles.

i.	The CRO must review all Credit Facilities requiring approval from the Senior Management credit committee or equivalent, and above.
ii.	For Credit Facilities considered as higher risk (this must include at a minimum all Credit Facilities rated non-investment grade or equivalent) by the LFI, the materiality threshold for the CRO review must be set at 20% below the delegated authority of the Senior Management committee or equivalent, i.e. a delegated authority of AED 100 million means a threshold of AED 80 million and above for high-risk Facilities to be reviewed by the CRO.
iii.	For Wholesale Obligors, the review must take place at the Obligor level.
iv.	For Retail and SME Obligors, the review can be performed at portfolio level or individual level, provided that the LFI outlines its approach in its policy.

The power and the responsibility to veto credit proposals when necessary in accordance with his responsibilities. In the case of veto:

i.	If the observations are fully addressed and formally agreed to by the CRO, the transaction may be re-submitted to the relevant approvers.
ii.	If CRO’s concerns are not fully addressed, the proposal must not proceed without escalation to the Board for approval. The proposal should contain the reasons to support the transaction and include the rationale for the veto from the CRO.

4.10

In the case of LFIs offering Islamic Financial Services, the Credit Risk Management Function must discharge its responsibilities in compliance with the Shari’ah rules and principles.