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Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02

May 2013 ATBAS-10305028Asian Transactions 73

Effectiveness of Credit Risk Management of SaudiBanks in the Light of Global Financial Crisis:

A Qualitative StudyDr. Khalil Elian Abdelrahim

Associate Professor

Faculty of Administration & Financial Studies/ Economics SectionTaif University, KSA

Abstract: The study aims at investigating determinants,challenges and developing means of credit risk managements

at Saudi Banks. The methodology is descriptive and analytical

using"CAMEL"Model for analyzing performance of credit

risk management.The study concluded that liquidity has

significant strong positive impact beside bank size which has

significant strong negative impact on effectiveness of credit

risk management.While other variables of capital adequacy,asset quality, management soudness and earning have

insignificant impact on effectiveness of credit risk

management. The challenges facing effectiveness credit risk

management in sequent importance are: weak corporate

governance, low quality of assets, little credit diversification;

not conducting serious financial analysis; not charging risk

premium on risky loans, corruption of credit officers; priority

of profitability at expense of safety and priority of loan

guarantees at expense of capacity of repayment. Means of

developing effectiveness of credit risk management in sequent

importance are: training of credit officers; improving assets

quality; strengthening corporate governance; professional

analysis of customer's financial position and having access to

Credit Bureau's information. The study recommends anoverall strategy for effective credit risk management of Saudi

Banks based on enhancing capital adequacy, upgrading asset

quality, strenghthening management soundness, increasing

earnings, having adequate liquidity and reducing sensitivity to

market risk besides hedging credit risk; having adequate

provisions for doubtful credit; renegotiating loan terms,

transferring credit risk to a third party, extending credit

maturity and lowering interest rate on insolvent loan.

I ndex Term-- Credit Risk Management; Saudi Banks; Non-

performing Loans; Default Loans.

I. INTRODUCTION1.1 PrefaceIt is a fact that the Saudi economy is strongly connected to

international economy. Hence, it is natural that the Saudieconomy was affected by the financial crisis. The firstreverse impact of the global financial crisis on the Saudieconomy was in the financial market which has declined inlast few years. The global financial crisis revealed theimportance of banks' credit risk management in mitigatingcredit default risk as most banking problems worldwidehave been caused by weaknesses in credit risk managementthat include high credit concentration, inadequate credit riskmonitoring, ineffective credit risk measuring, poor creditrisk rating, insufficient lending procedures, vulnerability to

liquidity stresses and sensitivity to market fluctuations(http:www.bis.org/publ/bcbs54.htm.)

2- 1 Research Problem

In the era of global financial crisis, Saudi Banks aresuffering from rising credit default with its reverserepercussions on banks' performance which requiresincreasing the effectiveness of credit risk management.Hence, analyzing the effectiveness of credit risk

management of Saudi Banks becomes essential foridentifying its characteristics, determinants, challenges anddevelopment methods. The research problem can beexpressed in the following question: what are thedeterminants, challenges and development methods ofEffectiveness of credit risk Management of Saudi Banks?.

3-1 Research Objectives

The study objectives are:(1) To identify the characteristicsof credit risk management of Saudi Banks. (2) Toinvestigate the determinants of effectiveness of credit riskmanagement of Saudi Banks. (3) To find out the mostserious challenges facing the effectiveness of credit risk

management of Saudi Banks. (4) To explore thedevelopment methods of effectiveness of credit riskmanagement of Saudi Banks.

4-1Research Importance

This research comes in a critical time when most of theSaudi Banks suffer from the problem of high credit defaultrisk in the era of global financial crisis. No previousresearch has dealt so far with the determinants, challengesand development of the effectiveness of credit riskmanagement at Saudi Banks. Moreover, the conclusions andrecommendations of the study are to assist Saudi Banks inupgrading the effectiveness of credit risk management for

controlling and mitigating the credit default risk.

5-1Research Hypotheses

Based on research problem and objectives, the researchhypotheses are:H0 1: There is no statistically significant relation betweencapital adequacy and effectiveness of credit riskmanagement in Saudi Banks.H0 2: There is no statistically significant relation betweenasset quality and the effectiveness of credit riskmanagement in Saudi Banks.

H0 3:There is no statistically significant relation between

management soundness and effectiveness of credit riskmanagement in Saudi Banks.

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H0 4:There is no statistically significant relation betweenbank's earning and effectiveness of credit risk managementin Saudi Banks.

H0 5: There is no statistically significant relation betweenliquidity and the effectiveness of credit risk management inSaudi Banks.

H0 6:There is no statistically significant relation betweenbank Size and the effectiveness of credit risk managementin Saudi Banks.

6-1 Research MethodologyThe researcher followed a descriptive and analyticalapproach for collection and analysis of data using aquestionnaire to collect the primary data (see appendix 1), inaddition to secondary data that are collected from annualreports of Saudi Banks, Saudi Arab Monetary Agency andother references.Due to the absence of viable published lists of banks'managers and financial experts and due to the limited time

and resources, the researcher selected a purposive sample of100 respondents in the cities of Taif, Mecca, Jeddah andRiyadh to have their points of views on challenges anddeveloping methods of credit risk management of SaudiBanks.The purposive sample includes bank managers andfinancial experts of Saudi Banks of Al-Rajhi, Riyadh, Ahli,Al-Bilad, Al-Jazirah, Saudi Investment and Al-Inm'a. Banksof joint ownership of SAAB, Samba, Saudi Fransi, SaudiHollandi and Al-Arabi were excluded due to lack of timeand resources and they are left for further research by otherresearchers.The analysis of the characteristics of credit risk managementof Saudi Banks is based on secondary data. While the

determinants of effectiveness of credit risk management areinvestigated through using regression analysis for testing theresearch hypotheses.The questionnaire is used to collect

primary data on the challenges and developing methods ofeffectiveness of credit risk management of Saudi Banks.The questionnaire consists of two parts. Part I includes 6

paragraphs relating to personal information of respondents,while Part II includes 22 paragraphs relating to challengesfacing effectiveness of credit risk management of SaudiBanks (15 paragraphs) and methods of developing theeffectiveness of credit risk management of Saudi Banks (7

paragraphs). The researcher distributed the questionnaire toseveral referees to check the validity and accuracy of the

questionnaire, then tested the reliability of the questionnaireby Cronbach Alpha Coefficient which was (84%). Theresearcher found 85 completely filled questionnairesrepresenting 85% of the distributed questionnaires whichwere analyzed by using SPSS. The tools of analysis are:frequency distribution, mean, standard deviation fordescriptive analysis, besides the use of regression analysis totest research hypotheses and the use of t-statistics to detectdifferences in the answers of respondents.

7-1 Research Model

The research model is "CAMEL" which indicates therelationship between the independent variables of capitaladequacy, asset quality, management soundness, earning,

and liquidity, and the dependent variable of Effectivenessof credit risk management as in figure (1)

Fig. 1. Model ofDetermining Factors of Effectiveness of Credit RiskManagement

Source:Researcher Design Based on Literature Review

The specifics of the variables used by CAMEL Model are(FDIC Banking Review :2003):(1) Capital Adequacy: isreferred to by Basel Committee. Bank capital is absorbingthe unanticipated shocks and it is a signal that the bank

honors its obligations. It is measured by dividing capital torisk weighted asset and Basel Committee put the minimumcapital adequacy ratio at 8%. The expected relation betweencapital adequacy and effectiveness of credit riskmanagement is positive (Hakim& Neaiame:2002) (2)AssetQuality: determines the robustness of the financialinstitutions against loss of assets value as the deterioratingvalue of assets is the prime source of banking problems.Asset Quality may be measured by the growth of total loansas a proxy for the quality of bank's asset and the expectedrelation between asset quality and effectiveness of creditrisk management is negative as excessive loans increase theexposure to credit default of customers (Kwan &

Eisenbeis:1997,120).(3) Management Soundness: is aqualitative variable that expresses the control of board ofdirectors over the resources of the bank to protectshareholders interests. Management soundness could bemeasured by the asset turnover ratio, which is a proxy ofmanagement soundness that denotes bank efficiency inusing assets in generating revenue. The expected relation

between management soudness and effectiveness of creditrisk management is positive (Rani:2009). (4) Earning interms of credit facilities can be measured by return on creditas reflected by interest rate. The expected relation betweencredit earning and effectiveness of credit risk management is

positive (www.fdic.gov/analytical/banking/jul/footnote2.)

(5) Liquidity: refers to a situation where institutions canobtain sufficient funds, either by increasing liabilities or byconverting its assets quickly to cash at a reasonable cost.Liquidity is gauged by the ratio of credit facility to totaldeposits(Cole etal: 1995) Liqudity has positive relation witheffectiveness of credit risk management(Hakim&

Neaiame:2002) (6) Bank Size is measured in term of valueof total assets(Bodla & Verma :2009)

8-1 Limitation of the Study:Due to the limited time and resources of the researcher, the

scope of research

Independent Variables Dependent Variable

1.Capital Adequacy Ratio

(C)

2.Assets Quality (A)

3.Management Soundness

(M)

Effectiveness Of Credit

Risk Management4. Earnings of Credit

Facility (E)

5. Liquidity (L)

6.Bank Size(S)

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excludes foreign and joint ownership banks and is limitedto Saudi Banks where the ownership, management anddecision making process are execlusively Saudis. The studycollected cross section data on the variables of the studyexcluding the time series data due to their unavailability andtime constraint.

II. THEORETICAL FRAMEWORK OF CREDIT RISKMANAGEMENT AT BANKING INSTITUTIONS AND

PREVIOUS STUDIES.

1-2 Literature Review of Banking Credit Risk

ManagementIn the post era of the International Financial Crisis, bankinginstitutions worldwide including Saudi Banks are exposed toseveral risks including credit risk. Mostly, the main causesof the financial crisis are real estate bubble, severspeculations by investors, use of derivatives, besides creditdefaults of customers.

Basel Accords are international agreements among centralbanks members of the Bank of International Settlement(BIS). The purposes of the Basel Accords are (Coyle:

2000):(1)To promote safety and soundness of the financialsystem.(2) To ensure adequate level of capital to safeguardthe bank's deposits.(3)To enhance competitive equality.Basel Accords are classified into: Basel I, Basel II and BaselIII.

Basel Committee has adopted the following principles(Basel Committee:1999): (1)Board of directors should haveresponsibility for approving and reviewing the credit riskstrategy (2) Senior management should have responsibilityfor implementing the credit risk strategy, policies and

procedures for identifying, measuring, monitoring, andcontrolling credit risk.(3) Banks should identify and managecredit risk inherent in all products and activities.(4)Banksmust operate under sound, well-defined credit grantingcriteria. (5) Banks should establish overall credit limits atthe level of individual borrowers.(6) Banks should have aclearly-established process in place for approving newcredits as well as the extension of existing credit.(7) Creditsmust be monitored (8) Banks should have in place a systemfor the ongoing administration of various credit risk-bearing

portfolios.(9) Banks must have in place a system formonitoring the condition of individual credits includingdetermining the adequacy of provisions and reserves.(10)Banks should develop internal risk rating systems inmanaging credit risk.(11) Banks must have informationsystems and analytical techniques that enable managementto measure credit risk (12) Banks must have in place asystem for monitoring the overall composition and qualityof the credit portfolio.(13) Banks should consider potentialfuture changes in economic conditions when assessingindividual and portfolio credits (14) Credit risk could bedefined as the potential that a banks borrower will fail to

meet his obligations in accordance with agreed terms ofcredit and credit risk managementis defined as the processof identifying, measuring, Supervisors should require that

banks have an effective system to restrict bank exposures tosingle or groups of borrowers.Credit riskis defined as the potential that a bank's borrower

fails to meet his obligations in accordance with agreed termsof credit.Credit risk management is defined as the process ofidentifying, measuring, assessing, monitoring and

controlling credit risk (Basel Committee: 2000) Hence, theelements of credit risk management are:(1)Identifying thecredit risk (2) Measuring Risk.(3) Rating Credit risk. (4)Assessing credit risk deterioration. (5) Controlling levels ofcredit risk. (6) Recognizing unacceptable risk beforegranting lending (7) Pinpointing late payment (8) Treatingcredit default.

Measurement of Credit Risk includes estimating the creditscoring and the use of Altman Model for estimating creditdefault risks as follows (Coyle:2000):(1) Credit scoring is asystem of categorizing creditworthiness by awarding pointsaccording to certain key features of business to produce atotal credit score called Z-Score, which is derived from acorporate future prediction model using key financial ratiosof a bank financial statement.(2) Default Credit risk Model is based on Estimate of LinearRegression Model as follows:

PD= n j=1 B j=1X ij +errorWherePD = Probability of Default = Beta coefficientXij= Independent variables(3) Altman Discriminate function is a credit classificationmodel which provides indicator of borrowers credit risk asin the equation:

Z=1.2X1+ 1.4X2+3.3X3+0.6X4+1.0X5Where:Z= credit failure ratioX1= Working capital/ total assetX2=Retained earnings/total asset X3= Earnings beforeinterest and tax/ total assetX4=Market value of equity/book value of long terms debtX5= Sales / total asset ratio

A company is considered with no credit risk when the valueof its Z-Score is 2.99 or more, it is considered risky when itsZ-Score is less than 1.81 and it is considered with averagecredit risk when its Z-Score ranges between 1.81 and 2.99(Ashish: 2010).

Indicators of Credit risk deterioration include: (Coyle;2000): (1) Customer delay in payment. (2) Lack of capitaladequacy. (3) Lack of liquidity. (4) Bad report from theCredit Bureau. (5) Down rating by credit rating agencies. (6)Decline of profitability. (7) Decline in sales revenueturnover. (8) Paying high interest rate on its borrowed funds.(9) Insolvency of client. (10) Restriction of dividend or

unusual dividends.Credit risk management tackles credit default in thefollowing manner (Al-Zbadi: 2002):(1)Rescheduling ofcustomer debt .(2) Mitigating credit terms.(3)Extending thematurity of the credit debt. (4)Lowering interest rate.The overall approach to effective risk managementincludesthe tasks of identifying; measuring, assessing; monitoringand controlling credit risk (Basel Committee: 2000). Severalinstruments are used to make credit risk management moreeffective such as (Saunders & Cornett: 2008):(1) Hedgingcredit risk. (2) Credit risk premium. (3) More guarantees/collateral. (4) Limiting the loan amount. (5) Limiting theloan period.(6) Avoiding loan for risky client.(7) Monitoring

loan payment. (8) Negotiating loan when customers get intodifficulty. (9) Avoiding loans for risky customer. (10)

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Trading off between high risk and risk premium of intereston loans.(11) Diversifying Credit Portfolio.The CAMEL model is the most relevant to identifying thedeterminants of effectiveness of credit risk management(Cole, Cornyn and Gnter :1995). However, after 1997 theModel was amended as CAMELS by the addition of market

sensitivity (http://www.fdic.gov/bank). The CAMEL Model

rating is used by Federal Banking Supervisors and otherfinancial supervisory agencies in USA to provide aconvenient summary of bank conditions. Rating in theCAMEL Model is assigned to banks on a scale from 1 to 5where 1 and 2 are considered low rating, 3 is consideredmoderate rating and 4 and 5 are considered high rating.

2-2 Review of Previous Studies

(1) The Study of Asli Kunt &Enrica Detragiach (2010) on"Basel Core Principles and Bank Risk: Does ComplianceMatter?" used the Z-score estimates for calculating the bankrisk as in the following equation:

Zij=+b1X

1j+b

2X

2ij+b

3X

3j+

Where

Zij = country risk of a bank where Z=(Average return onassets+equity)/(Standard Deviation of return on Asset)X1j=is the Basel compliance score in a country j

X2ij=is a bank characteristics of bank size and costefficiencyX3j=country characteristics in terms of GDP growth. = random characteristicsThe study concluded that effective banking supervision isassociated with bank management soundness and found thatoverall index of compliance of Basel Accord is notassociated with bank risk Z-score.(2) The Study of Bodla & Verma (2009) on "Credit Risk

Management Framework at Banks in India" examined theimplementation of credit risk management in commercialbanks in India. The study concluded that authority ofapproval of credit risk vests with board of directors in 94%of public sector banks and 62.5% in private sector banks.Credit policy committee played significant role in theapproval of credit risk management. Most of the banks inIndia perform industry studies, periodic credit calls, periodic

plant visit, developing MIS for the customers' risk scoringand annual review of accounts. Indian banks are abstainingfrom the use of derivatives as a risk hedging tool; Indian

banks conduct credit risk management according to Basel IIAccord and to central bank guidelines; there is no statistical

difference in credit risk management between private andpublic banks. However, there is a significant statisticaldifference between small and large banks.(3) The Study of Espinoza, Raphae, Prosad,Ananthakrishnan and Oral Williams(2010) on "RegionalFinancial Integration of GCC" has concluded that thefinancial indicators of Saudi Banks have shown anincreasing ratio of nonperforming loans that ranged between5.4%-7.6%, increasing provision rates to cover doubtfulloan which ranged between 128%-153% and liquidity wasmoderate ranging between 28%-35% but capital adequacywas convenient ranging 16% to 20% and return on equity isreasonable ranging 22% to 25%, loan/deposit was high

(86.9%).(4) The Study of Rudra & Jayadev. M (2009)Are BanksStocks Sensitive to Risk Management?is an attempt to shed

lights on sensitivity of Indian banks stocks to risk

management by conducting regression analysis on indicatorsof risk management and return on stocks. The studyconcludes that stock return responded positively to riskmanagement and banks in India did not focus on increasingcapital adequacy to mitigate credit risk and considered riskmanagement is an important determinant of banks stockreturn. The study recommended that Indian banks shouldhave better risk management capabilities to reward stockholders.(5) The Study of Al-Tamimi & Al-Mazrooei (2007) on"Banks Risk Management:Comparison Study of UAE

National and Foreign Bank" examined the degree to whichthe UAE banks use risk management in dealing withdifferent types of risk besides comparing risk management

practices between national and foreign banks. It refers tothree risk mitigation strategies of simple business practices,transferring risk for other participants and managing risk atacceptable level. The study used a questionnaire forcollection of primary data concerning the aspects of creditrisk management, methods of risk identification and therisks facing the UAE banks. The findings are: the three mostimportant types of risks facing UAE commercial banks areforeign exchange risk followed by credit risk thenoperational risk; UAE banks suffer from loan default

problems; UAE banks are efficient in assessing, monitoringand identification of credit risk and the significant statisticaldifferences between UAE national and foreign banks.(6) The Study of Espinoza, Raphael and Prassad,Ananthakrishnan (2010) on "Nonperforming Loans in theGCC Banking System and their Macroeconomic Effects"has concluded that the nonperforming ratios of credit of theGCC banks have worsened from 7% to 15% during (1995-

2008) due to declining economic growth, increasing interestrates and risk aversion increase. Such a worsening ofnonperforming ratios(NPLs) has reverse effect on themacroeconomic of GCC countries with semi-elasticityaround 0.4 between NPLs and macroeconomics of GCC.(7) The Study of Rani (2009) on "CAMEL Frame Work of

Risk Management in Indian Banks" emphasized thefollowing determinants of efficiency of credit riskmanagement: enhancing capital adequacy; strengtheningassets quality; improving management soundness;increasing earnings, having adequate liquidity and reducingsensitivity to market risk. The study findings are:(1) Indian

banks have maintained a minimum capital to risk weighted

assets ratio of 9% compared to 8% of Basel II.(2) MostIndian banks have the best indicators of asset quality. (3)Indian banks have done remarkable job in containing non-

performing loans. (4) The asset turnover ratio, which is aproxy of management soundness, is increasing every year inIndian banks that denote bank efficiency in using assets ingenerating revenue.(5) Earning of the biggest three Indian

banks were fluctuating in the last five years. (6) There ishigh liquidity ratio in Indian banks to meet client cashwithdrawals. (7) Indian banks used internal control systemto strengthen the bank capacity to control financialoperations. (8) Technology is a key factor in banking

performance .

(8)The study of Salas & Saurina (2002) on "Credit Risk InTwo Institutional Regimes of Spanish Commercial andSaving Banks" examined credit risk in Spanish banks and
http://www.fdic.gov/bankhttp://www.fdic.gov/bankhttp://www.fdic.gov/bank

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used panel data to compare the determinants of loanproblem in Spanish banks in the period 1985-1997, usingmacroeconomic and individual banks variables to explaincredit risk. These variables are: GDP growth rate, familyand firm indebtness, rapid credit expansion, portfoliocomposition, bank size, net interest margin, capital ratio andmarket power. The study concludes the significance of earlywarning indicators, the advantage of merger of banks, therole of banking competition and the type of ownership indetermining credit risk.(9)The Study of Al-Tamimi (2002) "Risk ManagementPractices: An Empirical Analysis of The UAE CommercialBanks" investigated the degree to which UAE banks use riskmanagement techniques in dealing with a different types ofrisks. The study found that UAE banks were facing highcredit risk. Inspection by branch managers and financialstatement analysis were the main methods used in the riskidentification. Other techniques were: establishingstandards, credit scores, credit worthiness analysis, riskrating and collateral. The study shows willingness of UAE

banks to use sophisticated risk management techniques andrecommended the adaptation of conservative credit policy(10) The Study of Khambater & Bagdi (2003) on "Off-Balance Sheet Credit Risk of the Top Twenty JapaneseBanks examined off-balance sheet across the top twentyJapanese banks and concluded that banks in Japan usedfinancial derivatives to mitigate credit risk and thecommitment by the largest four top banks to credit riskmanagement. The study concluded that there is widedifferences among Japanese banks in using financialderivatives instruments as a percentage of their assets whichdenotes that Japanese banks are more conservative and riskaverse in general than the USA or European banks.

(11) The study of Al-Sarrayra (2009) on "Impact ofAdministrative and Financial Efficiency on ControllingCredit Default Loans: Applied Study on JordanianCommercial Banks" concluded that the lack of experienceof credit facility staff has negative impact on credit default;conducting serious financial analysis based on principles ofcredit facilities, has a substantial impact on credit default;diversification of credit portfolio has positive impact onmitigating credit risk; verifying the document supplied bythe client has a positive impact on credit default.(12) The study of Atier (2007) on "Jordanian banksCompliance With Basel II & Its Effect on Bank Capital andRisk Managing" examined the compliance of Jordanian

banks with Basel II and its impact on bank capital and riskmanagement. The study employed several periods of crosssectional data on Jordanian commercial banks insimultaneous equation to estimate the effect in changing ofthe risk on changes on capital and vice-versa. The studyconcluded that there is a relationship between riskmanagement limits and capital levels in a simultaneousmanner. The study denotes that majority of Jordanian banksdeal with the effect of increase in capital and assets asdeterminants of the effectiveness of credit risk management.The study recommended that Jordanian banks should adhereto Basel II capital adequacy requirement to reduce thedefault probability and portfolio risks.

(13) The Study of Al-Hasanin (1995) on "ContemporaryTrends in Financial Analysis: the Case of Jordan" examinedAltman Model to estimate the index of financial failurewhich is estimated according to the following equation:

M= 12 n1+ 0.014n2+ 0.033 n3+ 0.006N4+0.999 n5WhereM= Financial Failure Indexn1= percentage of (Net Working Capital/Total Assets)n2= percentage of (Retained Earning/Total Assets)n3=percentage of (Net profit before interest and taxes/TotalAssets)n4:percentage of (Stocks Market value/Total Debts)n5= Ratio of Asset Turn Over (Sales/Total Assets)The study concluded that the index of financial failure inseveral Jordanian financial institutions was more than 2.99which denotes financial success, while the financialinstitutions with failure index less than 1.81 are considerednot successful and are exposed to default.(14) The Study on Hakim & Neaime (2002) on

"Performance &Credit Risk in Banking: A ComparisonStudy for Egypt and Lebanon" investigates the impact ofliquidity, credit and capital on bank profitability in order toshed light on strength of risk management practices by usingthe a regression model of time series and cross section dataof banking institutions in Lebanon and Egypt during the

period (1993-1999).The study expressed the likelihood ofborrowers not repaying their loans as promised. Applyingright loan policies with good assessment of credit risk anddetermining appropriate amount of collateral with littleconcentration of loan and good training of credit officers are

part of good risk management. Liquidity has positiverelation with effectiveness of credit risk managementas asthe higher the liquidity ratio, the more the coverage of its

liabilities. Capital adequacy has a positive relation witheffectiveness of credit risk management.

3-2 Review of Previous Studies

It is noticed that the number of studies on credit riskmanagement of Arab banks was relatively small comparedto international banks and theywere mostly descriptive. This study is distinguished fromother studies by its empirical analysis of the effectiveness ofcredit risk management of Saudi Banks which is not tackled

by other studies.

III. CHARACTERISTICS OF CREDIT RISKMANAGEMENT OF SAUDI BANKS IN THE ERA OFGLOBAL FINANCIAL CRISIS.

The structureof the banking sector consists of Saudi ArabMonetary Agency (SAMA) at the head of banking System,followed by licensed banks operating in the Kingdom whichconsist of 20 banks including national banks, jointownership banks and foreign banks. These banks have 1600

branches in the Kingdom as in Table I:

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TABLE ISTRUCTURE OF SAUDI BANKING SYSTEM IN 2009

Saudi Arab Monetary Agency (SAMA)

Saudi Banks No.

Branche

s

Joint Ownership Bank No. of

Branche

s

Foreign Banks No. of

Branche

s

1- Ahli Bank 284 9-Saudi Hollandi Bank 42 14.Intern. Gulf

Bank

2

2-Al-Rajhi Bank 442 10- Saudi AmericanBank"Samba"

67 15-Emirate Bank 1

3-Riyad Bank 216 11- Saudi British

Bank"SABB"

72 16-B. NB Perbia

Bank

1

4- Albillad Bank 67 12- Saudi Fransi Bank 77 17-Morgan Bank 1

5-Al-Jazira Bank 48 13- Arab National Bank 139 18-National Kuwait

Bank

1

6- Alinma Bank 75 19-Bahrain Bank 1

7.Saudi

InvestmentBank

63 20-Masqat Bank 1

8-Saudi Credit

&Saving Bank

NA*

*NA:non-available

Source: SAMA(2010) Annual Report No. 46. Riyadh

The financial position of Saudi Banks shows poor sharemarket prices due to indirect implication of the financialcrisis. The debt provisions increased from SR2.7 billion in

2009 to SR3.4 billion in 2010 which reversely affectedprofits of Saudi Banks as in Table II:

TABLE IIPERFORMANCE INDIC ATORS OF SAUDI BANKS IN FIRST HALF OF 2009AND 2010

(MILLION SR)

Banks* Profit Revenue Gross Margin Debt Provisions

2009 2010 2009 2010 2009 2010 2009 2010

Alrajhi 3,502,72

9

3,462,70

5

5,641,28

7

5,830,93

7

62.09 59,39

Alriyad 1,3359,058

1,450,264

3,911,439

3,363,781

34,75 43,11

Saudi

Investment

428,416 42,638 1,211,90

5

1,076,59

5

35,35 3,96

AlJazirah 223,456 33,922 800,978 670,663 5,06 -81,8

Al-Bilad 49,200 85,417 457,739 548,193 10,75 15,58

Average SR2.7b SR3.4

b*Banks registered in Financial Market

Source:Yasin A.Al-Ja'afari(2010) A Look on Banking Sector(www.aleqt.com/2010/10/18 _6219).

The depositsof Saudi Banks increased from SR489387million in 2005 to SR 940548 million in 2009 at annualgrowth rate of 7.2% as in Table III

TABLE IIITOTAL DEPOSITS OF SAUDI BANKS (2005-2009)V ALUE IN SRMILLION

Year Total Deposits

2005 489387

2006 591259

2007 717564

2008 84648

2009 940548

Source: SAMA (2010) Annual Report No.46. Riyadh.

The global financial crisis has not reversely affected totaldeposit as total deposits in the year 2010 were higher than

2009 for 9 months with a growth rate of 2% in 2010 asshown in Table IV
http://www.aleqt.com/2010/10/18%20_6219http://www.aleqt.com/2010/10/18%20_6219http://www.aleqt.com/2010/10/18%20_6219http://www.aleqt.com/2010/10/18%20_6219

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TABLE IVTOTAL DEPOSITS OF SAUDI BANKS IN THE FINANCIAL MARKET FOR A PERIOD OF 9MONTHS IN 2009AND 2010 (IN MILLION RIYAL)

Deposits 2009 2010

First quarter 756.3 765.3

Second quarter 773.4 783.6

Third quarter 765.0 778.0

Fourth Quarter 776.7 N.A

Source: Tadawol Financial Magazine (2010) Saudi Economic Indicators. Riyadh. Issue no.27 of January 2, 2010

Nevertheless, the financial crisis has adversely affected thepercentage of

credit facilities to deposits as there is a decline in thispercentage from 86.8% in 2008 to 81.6% in 2009 as inTable V:

TABLE VPERCENTAGE OF CREDIT FACILITY TO DEPOSITS

Year Percentage of Credit Facility for Private Sector/ Banks' Deposit

2001 64.3%

2002 60.9%

2003 63.1%

2004 72.%

2005 89.1%2006 80.5%

2007 80.5%

2008 86.8%

2009 81.6%


Concerning Credit Facility, there is a growth of creditfacility during the period 2005-2008, but there was a decline

in credit facilities of Saudi Banks in 2009 as a result of theglobal financial crisis as in Table 6

TABLE VIDEVELOPMENT OF CREDIT FACILITY OF SAUDI BANKS DURING 2005-2009

Year Credit Facility (Value in million SR)

2005 4208282006 462103

2007 557405

2008 712737

2009 708769

Source: SAMA (2010) Annual Report no. 46. Riyadh

The growth rates of the types of credit have declined tounprecedented

levels in 2009 as in Table VII:

TABLE VIIANNUA L GROWTH RATE OF CREDIT FACILITIES OF SAUDI BANKS

Growth rate of

Credit for

Individuals

Growth Rate of

Credit Facilities for

GovernmentGrowth Rate of

Credit Facilities

for Private Sector

Growth Rate%

of Total Credit

Facilities

Year

51.4%10.3%8.6%8.3%200137%12%10%10.8%2002

36.2%8.7%11%13.6%2003

56.3%2.7%337.4%20.9%200456.1%12.9%38.9%21.6%20051.6%3.69.2%6.5%20062%17.%21.4%19.7%2007

2.2%45.6%27.1%28.6%2008N.A4.1%11.8%7.7%2009


The percentage of credit facilities to GDP has not beenaffected by the financial crisis as the percentage in 2009 hasincreased to 66.8% from 54.1% in 2008, The percentage of

personal loans to total credit has ranged between 12.6% in2001 to 18.8% % in 2009 which shows that about one fifthof the banks' credit goes to individual loans as in Table VIII:

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TABLE VIIICREDIT FACILITIES AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT(GDP)

Personal Loans\Total CreditCredit Facility\ GDPYear12.6%47.4%2001

15.6%50.9%2002

18.7%50.9%200324.2%52.7%2004

31.1%50.8%200529.6%47.9%200624.7%53.5%200718.8%54.1%2008

N/A 66.8%2009Source: Tadawol Financial Magazine (2010) Saudi Economic Indicators. Riyadh. Issue no.27 of January 2, 2010.

In relation to distribution of credit facility according toeconomic sectors, there is concentration in favor ofcommercial sector which denoted weak

diversification of credit facilities of Saudi Banks as in TableIX:

TABLE IXDISTRIBUTION OF CREDIT FACILITIES ACCORDING TO ECONOMIC SECTORS

Sector Amount in Million SR Percentage

Agriculture 8731 1,2%

Industry 75044 10.6%Mining 5337 0.8%

Electricity 13365 1.9%

Construction 44741 6.3%

Commerce 169220 23.9%

Transport & Communication 38415 5.4%

Finance 21258 3%

Services 46123 6.5%

Other Activities 286536 40.4%

Total 708770 100%

Source: SAMA (2010) Annual Report No. 46. Riyadh

The distribution of credit facilities according to maturityshows that short term loans has a dominant percentage of

61% followed by long term loans at 23% and finally middleterm loans at 16% which indicates high concentration infavor of short term loans as shown in Table X:

TABLE XDISTRIBUTION OF CREDIT FACILITIES ACCORDING TO MATURITY OF CREDIT LOANS

Maturity of Loans Amounts in billion SR Percentage

Short Term Loans 449 61%

Middle Term Loans 117.2 16%

Long Term Loans 170.1 23%

Total 736.3 100%


Credit facilities of Saudi Banks for the private sector

constitute the bulk of total credit facilities which is around

80%.The credit facilities for individual personal purposes

constitute 26% as in Table XI:

TABLE XIDISTRIBUTION OF CREDIT TO INDIVIDU AL CUSTOMERS IN 2009

Purpose Amount in Million SR

Housing 17860.1

Cars & Equipment 38134.5

Credit cards for Consumption 8621,2

Other purposes 123907.3

Total 188523.1


Liquidity of Saudi Banks stood at 36.5% in 2009 compared

to 33.5% in 2008 which is in adherence with liquidityrequirement of SAMA and Saudi Banks tried to strike a

balance between liquidity and profitability.

Capital Adequacy Ratioof Saudi Banks have maintained a

high percentage of capital adequacy in 2009 which denotesthat Saudi banks keep sufficient capital to face credit defaultrisk as in Table XII:

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TABLE XIIAVERAGE CAPITAL ADEQUACY RATIO OF SAUDI BANKS (2005-2009)

Year Capital Adequacy Ratio %*

2005 17.8%

2006 21.9%

2007 20.6%

2008 16%

2009 16.5%

Average 18%* Ratio of Capital to Risk Weighted Assets


Banks' reserves have increased simultaneously during(2005-2010). Banks' reserves as a percentage of depositsrange between 5.5% in 2005 to 17% in 2009. SAMAallowed legal reserves to decline from the 13% to 10% to

enable banks to have more liquidity to expand their creditfacilities. Banks' reserves constitute 86% of capital whichindicate the precautious approach of Saudi Banks as inTable XIII:

TABLE XIIIVALUE OF RESERVES AND RISK WEIGHTED ASSETS TO CAPITAL

(VALUE IN MILLION RIYAL)

2005 2006 2007 2008 2009 2010

Bank reserves 32061 52061 108614 97171 100118 131575

Ratio of Reserves toDeposit

5.5% 7.3% 12.8% 10.3% 17% 14.3%


Concerning Profitability of Saudi Banks, the total profitranged between SR 25611 billion in 2005 to SR 34665

billion in 2006. However, the profits declined to SR 26830million in 2009 as an indirect affect of global financial crisisas in Table XIV:

TABLE XIVPROFITABILITY OF SAUDI BANKS DURING (VALUE IN MILLION SR)

2005 2006 2007 2008 2009

Profits 25611 34665 302604 29928 26830


The profits of Saudi Banks for 9 months during 2010 hasdeclined by 12% in comparison with 2009 as in Table XV:TABLE XV

COMPARATIVE PROFITS OF SAUDI FOR 9MONTHS DURING 2009AND 2010(VALUE IN MILLION RIYAL)

Banks* 2009 2010 Change%

Alrajhi 5298.0 5103.0 -4%

Alriyad 2118.2 2061.0 -3%

Saudi Investment 631.2 192.0 -70%

AlJazirah 293.4 56.0 -81%

Al-Bilad 51.1 87.8 72%

Al-Inma'a 216.0 52.0 -124%

*Banks registered in Financial Market

Tadawol Bulletin on 9/10/2010. Saudi Financial Market. RiyadThe returns on banks' sharesranged from 4.97% to -0.71%which are low, in addition to low bank's share pricesas inTable XVI:

TABLE XVIRETURN AND PRICE OF SHARE OF SAUDI BANKS IN OCTOBER 2010

Banks* Return on Share% Share Price in SR

Alrajhi 4.48 76.50

Alriyad 2.08 28.20

Saudi Investment 0.30 22.10

AlJazirah -0.54 16.95

Al-Bilad -.71 19.05

Al-Inma'a -0.02 10.90

* Banks registered in F inancial MarketSource: Tadawol Bulletin (2010) Indicators of Stocks on 9/10/2010.

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In relation to Quality of Asset, not all Saudi Banks' assetsare of good quality particularly certain types of stocks and

bonds. The decline in asset value is the prime source ofbanks' losses as shown in Table XVII:

TABLE XVIICOMPARATIVE TOTAL ASSETS IN 2009AND 2010(VALUE IN BILLION SR)

Total Assets 2009 2010

First quarter 1049.5 1058.2

Second quarter 1055.9 1063.0Third quarter 1059.0 1057.0

Fourth Quarter 1056.5 N.A

Source: Tadawol Bulletin (2010) Indicators of Stocks on 9/10/2010.

Concerning the Extent of Credit Default in Saudi Banks,Nonperforming loans can be defined as unpaid loans that areat least 90 days past due.The non-performing loans have

deteriorated over the last four years reaching more than 10%as in Table XVIII:

TABLE XVIIINON-PERFORMING LOANS OF THE GULF BANKS DURING 2008-2009

Year KSA UAE Kuwait Qatar Oman Bahrain

2008 7.3% 9.6% 12.5% 11.5% 11.6% 14.8%

2009 10.6% 14.2% 20.4% 13.2% 14.4% 17.6%IMF (2010) Non-Performing Loans in Gulf Banks and their Macroeconomic Effects on Macro economies of Gulf

States. Washington

Non-performing loans, bad debts and their provisions ofSaudi banks for 9months in 2012 are shown in Table XIX

TABLE XIXNON-PERFORMING LOANS,BAD DEBTS AND THEIR PROVISIONS OF SAUDI BANKS IN 2012FOR 9MONTHS (VALUE IN MILLION SR)

Saudi Banks NPL Provision

for NPL

Percentage

of Provision

Coverage of

NPL

Bad Debts % Change in

Bad Debts

2011 2010Al-Rajhi 3534 4594 145% 1675.5 1485.5 -33%

Alriyad 2006 2421 117% 1129.7 556.6 103%

AlJazirah 1055 1346 126% 2.8 31.8 -91%

Al-Bilad 815 1094 150% 1.2 0.05 2731%

Al-Inma'a 12 255 193% 0.0 0.0 0%

Saudi Investment 1800 2436 134% 26.4 16.7 58%

Ahli bank =N/ASource:http//www.aleqt.com/a/721540_245937.Jpg

Table XIX shows that most of the bank have occurred non-performing loans in 2012 that ranged between SR12 millionfor Inma Bank to SR3534 million for Al-Rajhi banks andthe provison for NPL ranged between SR4594million forRajhi to SR 225 million for Al-Inma and most of the Saudi

banks had bad debts except for Al-Inma bank, that rangedbetween SR1675.5 million for Al-Rajhi to SR1.2 millionfor Al-Bilad bank.Such a result denotes that Saudi banks

were exposed to medium credit risks in terms of non-performing loans and bad debts on loans and the increasingbad loan debts in the year 2011 compared to 2010 is anindicator of weak effectiveness of credit risk management inmost Saudi banks.

Financial Indicators of National Suadi Banks are shown inTable XX:

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TABLE XXFINANCIAL INDICATO RS OF SUADI BANKS (2008-2009)

VALUE IN SRMILLION

Saudi Banks Revenue

(2008)

Assets

(2008)

Equity

(2008)

Net

Profit

(2008)

Capital

(2008)

Share

price

(2009)

Market

value

(2009)

Em

ploy

ees

Asset

turn

Over

Ahli 15703 221802 27535 2107 15000 N.A N/A 575

1

0.01

Al-Rajhi 11502 164930 27032 6525 15000 71 106500 7993

0.04

Alriyad 8321 159653 25690 2639 15000 25 37500 355

7

0.017

AlJazirah 1688 27520 4738 222 3000 21.85 6555 148

0

0.008

Al-Bilad 965 16052 3213 125 3000 23.05 6915 172

0

0.008

Al-Inma'a 68.7 18832 15691 70.2 15000 10.70 N/A N/A 0.004

Saudi

Investment

3453 53596 6609 530 2646 22.70 10215 820 0.01

Source:Al-Eqtisadia (2009) Report on Top 100 Saudi Companies. No. 5719 June. (http\\www.aleqt.com/2009/7/9_5719).

The consolidated balance sheet and income statement ofSaudi Banks show the financial position and earningcapacity as in Tables XXI and XXII:

TABLE XXICONSOLIDATED BALANCE SHEET OF SAUDI BANKING SECTOR ($ MILLION)

2005 2006 2007 2008 2009

Quarter1

Assets

Cash and reserves at SAMA

Loans

Securities

Fixed assets

Other assets

195,153

9,668

101,567

52,117

1,7111

30,089

221,183

14,456

110949

53,969

1,944

39,866

276,536

28512

134,578

68,755

2,180

42,610

340,876

25,740

174,514

75,572

2,437

62,608

341,222

33,159

165,180

73,455

2,312

67,115

Liabilities

Due to banks

Customers deposits and CD's

Bonds

Other liabilities

169,848

15,403

140,236

1,300

12907

190,263

12,277

161,367

3,457

13,162

240,329

25,415

195,509

3,506

15,899

294,376

28,333

245,730

4,101

16,212

295,810

25,794

251,344

4,079

14,593

Minority Interest

Paid up capital

Reserves

Retained Earning/Accumulated losses

Total Shareholders Equity

82

9473

9,945

2,467

25,224

15

12579

12,919

3,531

30,904

80

17,728

12,421

3,638

36,127

477

26,739

14,606

3,103

46,019

466

26,515

14,442

4,750

44,946

Total Liability &Shareholders Equity 195,153 221,183 276,536 340,872 341,222

Source: IMF (2010) The GCC Banking Sector:Topography and Analysis.Washington.

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TABLE XXIICONSOLIDATED INCOM E STATEMENT OF SAUDI BANKING SECTOR FOR THE PERIOD(2005-2009)VALUE IN $MILLION

2005 2006 2007 2008 2009

Quarter1

Gross Interest income

Cross Interest expense

Net Interest Income

9,679

-2,956

6,723

13,032

-5,027

8,005

14,919

-5,923

8,996

16,233

-5,890

10,343

4,388

-1,192

3,196

Banking Fees and Commissions 3,208 4,038 2,632 2,953 807

Other incomeIncome from Investment

Total Non interest income

356403

2,801

394971

3,911

580620

2,557

678-1,098

1,989

16667

516

Total operating income

Operating expenses

Provisions

6,572

-3,049

-535

8,461

-3,589

-617

7,709

-4,145

-656

7,721

-5,171

-893

2,021

-1,483

-467

Operating Profit 7,165 9,678 8,325 7,209 2,359

Net non-operating income(expenses)

Other Expenses

47

-29

2

-31

27

-44

120 -2

Net profit before taxes 4,378 5,769 4,716 4,604 1,182

Net profit after taxes 4,377 5,769 4,501 4,604 1,182

Net Income 7,183 9,441 8,059 7,023 2,276

Source: IMF (2010) The GCC Banking Sector:Topography and Analysis. Prepared by Abdullah Al-Hassan, MayKhamis and Nada Oulidi, No. WP\10\87. Washington

The Credit Risk Indicators in 2011 show that Saudi Bankshave achieved the 4

th rank in the Arab region while it

achieved the rank of 33 world-wide among 178 countrieswhich denotes moderate bank risk as the average was 46.5as shown in Table XXIII:

TABLE XXIIICREDIT RISK INDIC ATOR S IN 2011*

Arab Countries Arab rank International

Rank

World Average Arab

Average

Jordan 12 79 46.5 52.3

Qatar 1 24 46.5 52.3

Kuwait 2 30 46.5 52.3UAE 3 42 46.5 52.3

Tunisia 7 55 46.5 52.3

Saudi Arabia 4 33 46.5 52.3

Oman 5 37 46.5 52.3

Lybia 8 64 46.5 52.3

Morocco 9 65 46.5 52.3

*The indi cators show the defaul t probabi li ty of banks on the scale zero to 100.

Source: Institutional Investor(2011) Credit Risk Indicator. Annual Report

IV. ANALYSIS OF THE RESULTS OF THE EMPIRICALRESEARCH

4-1:Characteristics of the Study Sample

Characteristics of the respondents of the sample as in TableXIV:

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TABLE XIVANALY SIS OF CHARACTERISTICS OF SAMPLE

PercentageFrequencyCategoriesVariable70%.30%

100%

6025

85

Bank

Financial Institution

Total1-Types of

Enterprise31.7%29.4%21.2%17.7%100%

27

25

18

15

85

Employee

Head of Section

Manager

Professor

Total

2-Type of Job

17.6%

18.8%22.3%

21.2%

20.1%

100%

15

16

19

18

17

85

Secondary

DiplomaBachelor

Master

Doctorate

Total

3-Qualification

22.4%

%15.3%18.8%

16.4%

14.2%12.9%

100%

19

13

161412

12

85

Management

Finance

Accounting

EconomyStatistics

Other

Total

4-Major of Study

20.1%

24.7%22.4%17.6%15.2%

100%

17

21

191513

85

1-5

6-10

11-15

16-20

21 and more

Total

5-Years of

Experience

29.4%

24.7%27.1%18.8%100%

25

21

23

1685

Taif

Mecca

Jeddah

RiyadhTotal

6- Place

Source: Researcher Computation

Analysis of the "Type of Enterprise" shows that bankscomes first (60%), followed by other financial institutions(30%). In terms of "Type of Jobs", employees come first(31.7% ), followed by head of section (29.4%) then manager(21.2%) followed by professors (17.7%). In relation to"Qualification" Bachelor degree comes first (22.3%)followed by Master degree (21.3% ), then Doctorate degree(20.1%) followed by Diploma (18.8%) then SecondaryCertificate (17.6%). In relation to the "Major ofSpecialization" management comes first( 22.4%), followed

by accounting (18.8%), then economics ( 16.4%) followedby finance (15.3% ) then statistics (14.2%) followed byother specializations(12.9%). In terms of "Years of

Experience",respondents with 6-10 years come first (24.7%)followed by 11-15 years (22.4% ) then 1-5 years (20.1%)followed by 16-20 years (17.6%) then 21 and more years(15.2%).In relation to "Place of Respondent" Taif comesfirst (29.4% ) followed by Jeddah ( 27.1%) then Mecca(24.7% ) and finally Riyadh ( 18.8%).

4-2 Regression Analysis of Determinants of Effectiveness

of Credit Risk Management

NPL=0+1CAD +2AQ + 3Mgmt + 4E + 5 L+6S

+

0.098 -0.168 0.267 0.044 0.605 -0.0646

t (-.405) (0.350 ) (-1.026) (1.212) (0.228)

(2.291) (-2.903)

R2adjusted=0. 699; F=5.040* ; D.W=2.546

Where

NPL= is the dependent variable of nonperformance ratio asa proxy foreffectiveness of credit risk management.

= constant

1to

7= beta coefficients for the study variables

CAD=Capital adequacy ratioAQ=Asset Growth as a proxy of Quality of Asset.Mgmt = The asset turnover ratio is a proxy of managementsoundness.E= Ratio of Interest divided by total loans is a proxy of

profitability.L= Ratio of loans divided by deposits as a proxy forliquidityS= Bank Size which is measured by total assets.= error which represents the remaining exploratory factorsDescriptive Data of Regression Analysis are shown inTable XXV:

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TABLE XXVDESCRIPTIVE DATA OF REGRESSION ANALYSIS O F THE SAUDI BANKS

Variable Mean Maximum Minimum Standard Deviation

NPL 0.056 0.106 0.021 0.023

CAD 0.179 0.219 0.160 0.197

AQ 0.153 0.286 0.065 0.073

Mgmt 0.015 0.040 0.008 0.011

E 0.110 0.150 0.080 0.224

L 0.763 0.891 0.609 0.102Size 94626 221802 16052 33417

Source:Researcher's Calculation of Descriptive Regression Data

Regression coefficients of Saudi Banks are shown in Table26:

TABLE XXVIREGRESSION COEFFICIENTS OF SAUDI BANKS DEPENDENT VARIABLE (NPL)

Independent

Variables

eta t-statistics F-statistics R2Adjusted D.W (Durban- Watson)

Constant -0.405

CAD 0.098 0.350

AQ -0.186 -1.026

Mgmt 0.267 1.212

E 0.044 0.228L 0.605 2.291*

Size -0.646 -2.903*

5.040* 0.699 2.546

*significant at 5%

Source: Researcher calculation

The regression analysis shows that the adjusted R2 (0.699)

indicates that 69.9% of the change in the effectiveness ofcredit risk management is explained by the independentvariables, while 30.1% of change in effectiveness of creditrisk management is explained by other factors expressed by

the residual F- Statistics (F=5.040) indicates it issignificant at 5% and the regression equation explains thegood fitness of the regression model. While D.W (2.546)indicates that there is no problem of autocorrelation in theregression equation.The testing of null hypotheses is as follows : The first nullhypothesis was accepted that there is no significant relation

between capital adequacy and effectiveness of credit riskmanagement of Saudi Banks as in coefficient (t=0.350) and(=0.098) denotes low explainatory of the variable. Thesecond null hypothesis was accepted that there is nosignificant relation between asset quality and effectivenessof credit risk management of Saudi Banks as shown in

coeffficients (t=- 1.026) and (=-0.186). The third nullhypothesis was accepted that there is no significant relationbetween management soudness and effectiveness of creditrisk management of Saudi Banks as shown in coefficients(t=-1.212) and (=0.267). The fourth null hypothesis wasaccepted that there is no significant relation between earningand effectiveness of credit risk management of Saudi Banksas shown in coefficients(t=0.228) and (=(0.044).The fifthnull hypothesis was rejected and the alternative hypothesiswas accepted that there is significant relation betweenliquidity and effectiveness of credit risk management ofSaudi Banks as shown in coefficients (t=-2.291*) and(=0.012).The six null hypothesis was rejected and the

alternative hypothesis was accepted that there is a

significant relation between size of the bank andeffectiveness of credit risk management of Saudi Banks asshown in coefficients (t= -2.903*) and ((=-646) and therelation is negative, i.e, when bank size increases,effectiveness of credit risk management decreases.

4-3 Analysis of Challenges of Effectiveness of CreditRisk management

The gross mean of challenges (3.339) is above average 3 onLikert Scale which indicates that Saudi Banks have slightlyabove average challenges of effectiveness of credit riskmanagement. The challenge "Low Quality of Asset" comesfirst with a mean (3.523), followed by the challenge"Inadequate Training" with a mean (3.494), followed by thechallenge "Weak Corporate Governance" with a mean(3.486), then the challenge "Lack of Credit Diversification "with a mean (3.439), then the challenge " followed byGranting High Credit Ceiling Exceeding Customer

Capacity of Repayment" with a mean (3.435), followed by

the challenge "Absence of Risk Premium on Risky loans "with a mean (3.402), then challenge "Obtaining LoanGuarantees at Expense of Customer Capacity of

Repaymen"t with a mean (3.312), then the challenge"Absence of Serious Analysis of Customers Financial

Position" with a mean (3.297), followed by the challenge"Corruption of several Credit Officers" with a mean (3.290), then the challenge "Priority of Profit at Expense of CreditSafety" with a mean (3.286). The standard deviation ofchallenges ranges between 1.084 and 1.334 which aremedium deviations. Analysis of t-statistics shows that thecoefficients are significant at level 5% with exceptions ofthe variable "weak corporate governance" and the variable

"granting high credit ceiling" as shown in Table XXVII:

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TABLE XXVIICHALLENGES OF EFFECTIVENESS OF CREDIT RISK MANAGEMENT IN SAUDI BANKS

Sig.t-

Statistics

STDRankMeanChallenges of Effective Credit Risk Management

.06701.5531.23033.4861.Weak Corporate Governance

.02109.756*1.08413.5232.Low quality of asset.

.02314.303*1.33453.4393 Lack of Credit Diversification

.03508.610*1.184103.2974.Absence of analysis of Customers' financial position

.03053.624*73.4025. Absence of Risk Premium on Risky loans

.04702.529*1.263113.2906. Corruption of a number of credit officers

.017110.156*1.242123.2867. Priority of Profit at Expense of Credit safety

.02409.408*1.213

93.312

8. Priority of loan guarantees at expense of customer

capacity of repayment

.04652.957*1.19923.4949. Inadequate training of Credit Officers

.07801.0861.127

63.43510. Granting high credit ceiling exceedingcustomer capacity of repayment

3.339Gross MeanSource: Researcher Computation

4-4: Analysis of Development Methods of Effective

Credit Risk Management

The gross mean of Development Methods (3.260) is aboveaverage on Likert Scale, which indicates that Saudi Banksrequire slightly above average development methods. Themethod "Overall Strategy for Credit Risk Management"comes first with a mean (3.423 ) followed by "Mitigating

Methods for Alleviating Credit Default Risk" with a mean(3.375), then "Conducting Training of Credit Officers" witha mean (3.246), followed by "Exchange of Information withOther Banksand Credit Bureau on risky customers " with a

mean (3.187), then "Granting Incentives for Best CreditRisk Managers" with a mean (3.125 ). The standard

deviation of development methods ranges between 1.061and 1.215 which are medium deviations. Analysis of t-statistics shows that variables 1, 4, and 5 are significant at5%, which indicates that there are significant differencesamong respondents' while the other 3 variables are notsignificant with no significant differences amongrespondents' answers as in Table 28:

TABLE XXVIIIMETHODS OF DEVELOPING EFFECTIVENESS OF CREDIT RISK MANAGEMENT

Sig.

at 5%t-statisticsSTDRankMeanMethods of Developing Effectiveness of Credit RiskManagement0.0244

4.166*1.06143.2461-Conducting Training of Credit Officers on newtechniques of credit risk Management0.05411.680

1.00413.4232- Preparation of an Overall Strategy for Credit

Risk Management0.07061.388

1.19723.3753-Development Mitigating Methods for AlleviatingCredit Default risk according to best practices

0.01715.016*1.212

73.125

4- Granting Incentives for best credit risk

managers

0.02683.943*1.115

63.187

5- Submitting periodical Reports to Board of

Directors on Credit Risk Management

0.07461.3131.203

53.2286- Exchange of Information with other banks and

the Credit Bureau on risky customers3.260Gross Mean

*Significant at 5%

Source: Researcher Computation

V. CONCLUSIONS &RECOMMENDATIONSThe study aims at investigating determinants, challenges anddevelopment methods of effectiveness of credit riskmanagements of Saudi Banks. The methodology isdescriptive and analytical using "CAMEL" Model foranalyzing effectiveness of credit risk management.The findings on the determinants of effectiveness of creditrisk management of Saudi Banks are: liquidity has

significant strong positive impact on effectiveness of creditrisk management of Saudi Banks, besides the bank size

which has significant strong and negative impact oneffectiveness of credit risk management of SaudiBanks.While the other variables of capital dequacy, assetquality, management soudness and earning haveinsignificantimpact on effectiveness of credit risk management.The Study Findings on the challenges of effectiveness ofcredit risk management of Saudi Banks, in sequent

importance, are: low quality of assets; inadequate training;weak corporate governance; lack of credit diversification;

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granting a credit ceiling exceeding customer capacity ofrepayment; absence of risk premium on risky loans; priorityof loan guarantees at expense of customer repaymentcapacity; absence of serious analysis of customers' financial

position; corruption of some credit officers and priority ofprofit at expense of credit safety.The studyfindings on developing effectiveness of credit riskmanagement in Saudi Banks, in sequence importance, are:Having an overall strategy for credit risk management;adopting mitigating methods for alleviating credit defaultrisk; adopting Basel Committee principles; conductingtraining of credit officers; exchange of information withother banks on risky customers; submitting periodic reportsto board of directors and granting incentives for the bestcredit risk managers.The Study Recommendations are: (1) Saudi Banks shouldhave an overall comprehensive strategy of credit riskmanagement based on enhancing capital adequacy,upgrading asset quality, strenghthening managementsoundness, increasing earnings, having adequate liquidityand reducing sensitivity to market risk (2) Saudi Banksshould adopt sophisticated mitigating techniques of creditrisk that include hedging credit risk; having adequate

provisions for doubtful credit; renegotiating loan terms forinsolvent customers, transferring credit risk to a third party,rescheduling customer credit, extending credit maturity,lowering interest rate on credit and partial writes off defaultcredit. (3) Saudi Banks are advised to strengthen the role ofthe credit risk committee (4) Saudi Banks should be ready toimplement Basel III Accord by the year 2015.

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publishing.Kent.Uk.[12] Espinoza, Raphael and Prassad Ananthakrishnan (2010)

Nonperforming Loans in the GCC Banking System and their

Macroeconomic Effects, An IMF working paper no. WP/10/224[13] Espinoza Raphael, Prosad Ananthakrishnan and Oral Williams(2010)

Regional Financial Integration of GCC. A working paper of IMF No.

WP/10/90"[14] FDIC Banking Review (2003) failure prediction and CAMEL

predictionmodel.(http://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.html)

[15] Hakim, Sam & Neaime, Simon (2002) Performance &Credit Risk in[16] Banking: A Comparison Study for Egypt and Lebanon. Economic[17] Research Forum (www.erf.org.eg)[18] IMF (2010) Non-Performing Loans of Gulf Banks and Their

Reflections on Macro economies of Gulf States. Washington.http//:www.aleqt.com/2009/7/9_5719.

[19] IMF (2010) The GCC Banking Sector: Topography and Analysis.Prepared by Abdullah Al-Hassan, May Khamis and Nada Oulidi, No.

WP\10\87. Washington

[20] IMF (2009) "Recent Advances in Credit Risk Modeling" prepared by

C. Capuano, J. Chan-Lau, G. Gasha, C. Medeiros, A.Santos and.Souto.WP/09/162.

[21] Institutional Investor(2011) Credit Risk Indicator. Annual Report[22] Khambeter,D & Bagdi, R. R (2003) "Off-Balance Sheet Credit Risk

of Top Twenty. Japanese Banks". Journal of International Banking

Regulation.Vol.5.No.1.pp:57-71.

[23] Kwan, Simon & Eisenbeis Robert (1997) Bank Risk, Capitalizationand Operating Efficiency. Journal of Financial Services Researchno.12, Kluwer Academic Publishers.pp:117-131.

[24] Rani ,Poonam (2009) A Study of the Strengths of Using CAMELS

Frame work as a Tool of Performance Evaluation for Banking

Institutions. Regional Institute of Management and Technology atPunjab Technical University. Jalandhar.

[25] Rudra, Sensarma & Jayadev.M. M (2009) Are Banks Stocks Sensitiveto Risk Management?.The Journal of Risk Finance Vol.10 No.1 pp:7-22 Emerald Group Publishing LTD.

[26] Saudi Arab Monetary Agency. SAMA (2010)Annual Report No. 46.

[27] Saunders, Antony & Cornett, Marcia (2008) financial institutionsmanagement: a risk management approach Mc Graw Hill. New York.

[28] Salas, V & Surina .J (2002) Credit Risk In Two institutional Regime :Spanish Commercial and Saving Banks. Journal Of FinancialServices Resarch.Vol.22.No.3.pp203-216.

[29] Tadawol Bulletin (2010) Indicators of Stocks on 9/10/2010. SaudiFinancial Market.

[30] Tadawol Financial Magazine (2010) Saudi Economic Indicators.

Riyadh. Issue no.27 of January 2, 2010.[31] http\\:www.bis.org/publ/bcbs54.htm[32] http://www.fdic.gov/bank[33] http\\www.aleqt.com/2009/7/9_5719. Financial Indicators of Saudi

Top 100 Biggest Companies (2009), July 9.

[34] www.aleqt.com/a/721540_245937.JpgAPPENDIX 1:QUESTIONNAIRE

"Effectiveness of Credit Risk Management At Saudi

Banks in the Light of Global Financial Crisis: A

Qualitative Study"

Section1: Personal Information

Please check the right answer( ( 1.1: Type of Enterprise:OBank O Financial Institution O University1-2: Job:OEmployee O Manager O Head of Section O Professor

1-3:Education
http://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.htmlhttp://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.htmlhttp://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.htmlhttp://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.htmlhttp://www.erf.org.eg/http://www.erf.org.eg/http://www.erf.org.eg/http://www.fdic.gov/bankhttp://www.fdic.gov/bankhttp://www.fdic.gov/bankhttp://www.erf.org.eg/http://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.htmlhttp://www.fdic.gov/bank/analytical/banking/2003jul/footnotes2.html

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OSecondary O Diploma O Bachelor O MasterODoctorate1-4: Major Specialization:O Management O Finance O Statistics OEconomics OAccounting O Other (Specify)1-5: Experience in Years:

O 1-5 O6-10 O 11-15 O 16-20 21 and more1-6: PlaceOTaif OMecca OJeddah O Riyadh

Section2: Questionnaire Paragraphs

Part I: Challenges of Effectiveness of Credit Risk Management

Please check the right answer( ( on Likert ScaleVery High

5

High4

Medium3

Low

2

Very low

1

1. Is inadequate Capital Adequacy a challenge to the

Effectiveness of Credit Risk Management?

Very High5

High4

Medium3

Low

2

Very low

1

2. Is a weak Corporate Governance a Challenge to

the Effectiveness of Credit Risk Management?

Very High5

High4

Medium3

Low

2

Very low

1

3. Is low Quality of Assets a Challenge to the


Very High5High4Medium3Low2Very low14. Is Insufficient Liquidity a Challenge to the

Effectiveness of Credit Risk Management?Very High

5

High4

Medium3

Low

2

Very low

1

5. Is weak Economic Growth a Challenge to the


5

High4

Medium3

Low

2

Very low

1

6.Is Lack of Credit Diversification a Challenge to the


Very High5

High4

Medium3

Low

2

Very low

17. Is Ignoring Market Risk a Challenge to the


5

High4

Medium3

Low

2

Very low

1

8. Is absence of Serious Financial Analysis of

Customer constitute a Challenge to the Effectiveness

of Credit Risk Management?Very High

5

High4

Medium3

Low

2

Very low

1

9. Is Absence of Risk Premium on Risky Loans a

Challenge to the Effectiveness of Credit Risk

Management?Very High

5

High4

Medium3

Low

2

Very low

1

10. Is Corruption of Credit Officers a Challenge to

the Effectiveness of Credit Risk Management?

Very High5

High4

Medium3

Low

2

Very low

1

11 Is Profitability at the expense of Safety a



5

High4

Medium3

Low

2

Very low

1

12. Is Loan Guarantees at the expense of customer

capacity of repayment a Challenge to theEffectiveness of Credit Risk Management?

Very HighHighMediumLowVery low

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54321

13. Is Inadequate training of Credit Officers a


Management?

Very High5

High4

Medium3

Low

2

Very low

1

14. Is Extra Provisions of doubtful Credit Debt a



5

High4

Medium3

Low

2

Very low

1

15.Is granting high credit ceiling exceeding customer

capacity of repayment a challenge to Effectiveness of

Credit risk management?Part II: Development Methods of Effectiveness of Credit Risk Management

Please check the right answer( ( on Likert ScaleVery High

5

High4

Medium3

Low

2

Very low

1

16- Is Training of Credit Officers Promote the

Effectiveness of Credit Risk Management? Very High5

High4

Medium3

Low

2

Very low

1

17. Is an Overall Bank Strategy for Credit Risk

Management Promote the Effectiveness of Credit

Risk Management?Very High

5

High4

Medium3

Low

2

Very low

1

18- Are Mitigating Methods for Alleviating Credit

Default Promote the Effectiveness of Credit Risk

Management?

Very High5

High4

Medium3

Low

2

Very low

1

19-Is Adopting Basel Committee Principles helppromote the Effectiveness of Credit Risk

Management?

Very High5

High4

Medium3

Low

2

Very low

1

20. Does granting incentives for best credit officers

promote Effectiveness of Credit Risk ?Management?

Very High5

High4

Medium3

Low

2

Very low

1

21.Are Systematic Reports to the Board of Directors

on Credit Risk promote Effectiveness of Credit Risk


5High

4Medium

3Low2Very low1

22 Does Exchange of Credit Information with other

banks and the Credit Bureau promote Effectiveness

of Credit Risk Management?

./

. "" .

.

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