My seminar

Faculty of Business & Economics
"Finance and Banking Department”
Seminar Title:
Credit Risk of Commercial Banks in Palestine-
Ramallah
Prepared by :Razan Shahwan
Student Number: 21211365
Supervisor: Dr. Mohammed Bayyoud
2nd Semster
2016
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TABLE OF CONTENTS
CHAPTERONE:Introduction…………………………………………….4
1.1. Introduction…………………………………………………………………………...5
1.2. Problem Statement…………………………………………………………………....6
1.3. Objectives of the Study……………………………………………………………….6
1.4. Questions of the Study .………………………………………………………………6
1.5. Methodology of the Study…………………………………………………………….6
CHAPTERTWO: LiteratureReview & Theoretical Framework…………7
2.1 Literature Review…………………………………………………………………….8
2.2 Theoretical Framework………………………………………………………………20
-Credit Risk……………………………………………………………………………...20
-The Causes of Credit Risk……………………………………………………………...21
-The Granting of Credit Risk Criteria…………………………………………………...22
-Factors Affecting the Decision Making Credit………………………………………...26
-Methods to avoid or Control Credit Risk in Commercials Banks……………………..28
-Credit Risk Management……………………………………………………………….29
-International Laws for the Management of Credit Risk “Basel II”………………...….30
CHAPTERTHREE:Methodology………………………………………...32
3.1. The study population and sample……………………………………………………..33
3.2. Method and tool collection study…………………………………………………….33
3.3. The Design of The questionnaires………………………………………………….....33
3.4. Statistics Distributions of the Questionnaires………………………………………...34
CHAPTERFOUR:QuestionnairesAnalysis……………………………..……36
CHAPTERFIVE:Conclusionsand Recommendations………………….64
Conclusions……………………………………………………………………………….65
Recommendations………………………………………………………………………...67
CHAPTERSIX:References………………………………………………………..68
APPENDEC:Questionnaire……………………………………………………….71
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Abstract:
This study aims to recognize the credit risk management methodology in the commercial banks in
Palestine, to clarify the criteria for the granting of credit, and to find out the relationship between
credit risk management and financial performance of commercial banks. In this research the
descriptive analytical method has been used, and the search population was formed of banks
operating in Palestine. A questionnaire has been distributed on the research sample to gather the
primary data, while the secondary data has been collected from books, journals, articles, web sites
and annual report. After the analysis of the questionnaire, several conclusions were found. First,
the banks depend primarily on collateral and guarantees. Secondly, the lack of capital adequacy is
the most important challenge that affects the effectiveness of credit risk management. Therefore,
based on the importance of credit risk management in increasing financial performance of a bank,
it has been concluded that there is a positive relationship between credit risk management and the
bank’s profitability. Depending on these conclusions it is recommended for banks to pay more
attention to the purpose of providing credit facilities to the clients and to the client’s ability to
repay the loan and its interest. Thus, they should not only rely on collaterals or guarantees
provided, but pay more attention to training credit facilities department staff so they can do their
job effectively. Since the role of the credit facility in the development of effective credit risk
management is notable in leading the bank to increase its profitability and achieve its goal.
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1.1. Introduction
Banks today are the largest financial institutions around the world, with branches throughout
everyone’s life. There are differentiations between types of banks. And much of this differentiation
rests in the products and services that banks offer. For instance, commercial banks hold deposits,
gathering them together as loans (granting credit), operating payments mechanism, etc. Through
these services, the bank is exposed to different types of risks which affect the performance and
activity of these banks. As we know that the primary goal of the banking management is to
maximize the shareholders’ wealth, so in achieving this goal banks’ managers should assess the
cash flows and the assumed risks as a result of directing its financial resources in different areas.
There is no doubt that the process of granting credit is one of the most important service provided
by the banks and that because of their importance to the improvement of profitability indicators
and the ability to achieve the goals of the banks, therefore banks keen to encourage grants credit,
but there are several variables lead to make the process of granting credit accompanied by risks,
and not the Palestinian environment apart from this risk, on the contrary, that political and
economic conditions have worked and declining development indicators to make grants credit
process associated risks from all sides and parties like through the risks associated with client’s or
through the risks associated with the conditions and the external environment.
In order for banks to overcome and manage the risks surrounding them effectively, they need to
study these risks and have the knowledge to address their different types, such as: credit risk,
interest rate risk, liquidity risk, market risk and foreign exchange risk.
Credit risk is one of the most significant risks that banks face, considering that granting credit is
one of the main sources of income in commercial banks. Therefore, the management of the risk
related to that credit affects the profitability of the banks. 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 process of credit risk management comprises the fundamental steps of risk identification, risk
analysis and assessment, risk audit monitoring, and risk treatment or control. The effective
management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking organization.
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1.2. Problem Statement:

On one hand, this study examines the criteria and factors for the granting of credit of commercial
banks in Palestine. On the other hand, it explains the challenges that face those banks when
implementing the policies and regulations issued by the Palestinian Monetary Authority and study
the methods which will be develop credit risk management in the commercial banks.
1.3. Objectivesof the study:
 To recognize the credit risk management methodology in the commercial banks in
Palestine.
 To clarify the criteria for the granting of credit.
 To explain the policies and strategies adopted by banks to face credit risk.
 To identify the impact of international conventions like “Basel II” in credit risk
management.
 To find out problems faced by credit risk managers.
 To find out the relationship between credit risk management and financial performance of
commercial banks.
1.4. Questionsof the study:
 What are the factors affecting the decision-making credit?
 What affects the development of credit risk management?
 Does the credit risk management effect on banks’ financial performance?
 What is the role of the regulatory authority in the banks required to provide a framework
for credit risk management, and evaluation of policies and procedures of banks?
1.5. Methodology of the study:
In this research the descriptive analytical method has been used, in addition to a questionnaire
that has been distributed on the commercial banks operating in the Palestinian territories to
gather primary data. As for the secondary data, books, journals, articles, web sites and annual
reports formed the ground for this study.
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Chapter Two
Literature Review & Theoretical Framework
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Literature review:
1. The study of Khaled Kahlout and EssamBuhaisi (2007) on “Factors influencing the extent
of thecredit officials reliance on financial analysis in the rationalization of credit decision:
An Empirical Study on banks operating in Palestine” aimed to identify the extent to which
the commercial banks operating in Palestine depend on financial analysis as a tool to
rationalize the credit decision, to acknowledge the factors that affect it,and to create a plan
to resolve the problems when using financial analysis in decision-making credit. The
researcher used descriptive analysis model in this study, to describe the relationship
between the information available, using the financial analysis, and the use of this
information when deciding the granting of credit. The researcher found through this study
that the majority of credit analysts have not received training courses in the field of
financial analysis, which leads to weakness evident in the decision to grant credit, and
evident in the degree of reliance on the financial analysis as it increases once the credits
audited, as the attached financial information of the report of the auditor proves. The
researcher recommended the need for increased attention to financial analysis by increasing
the capacity of the staff of credit through continuous training, the need to rely on financial
analysis in the first instance, and not to focus on collateral when making a credit decision.
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2. The study of Muffeed Al-Thaher, Islam Abdel-Jawad and Burhan Omar (2007) of
“Troubled Credit Determinants at the Palestinian Banks” aimed to find out the main
reasons that lead to debt trouble in the Palestinian banks. The researcher used the
descriptive approach, where a questionnaire was designed and distributed to a random
sample of department facilities officials in banks operating in Palestine, and a group of
customers who are facing the situation of troubling. In order for the researcher to analyze
the results, SPSS program was used. The study showed that inadequate credit study, the
lack of information, and low customer follow-up after the grant of the facilities are the
main causes of default on credit policy. The researcher recommended banks working in the
territory of the Palestinian Authority to increase their interest credit studies and rely on
accurate and reliable information.
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3. The study of Ali Sahin and Bahia Sabah (2011) of “The impact of risk management on the
degree of security in the Palestinian banking system” aimed to find out the role of financial
analysis to predict the degree of safety in commercial banks operating in Palestine, and of
the risks facing the performance of banks operating in Palestine. The study sample consists
of 12 banks which published its financial statements for the financial period from 1997 to
2008. The researcher showed that providing the necessary liquidity for banks rates is one
of the basic goals of the bank management to be able to meet its financial obligations when
due, and that of the most important factors leading to bank failures is high risk rates in the
credit facilities, troubled by banks to their customers. The researcher recommended the
need for an integrated and effective risk management framework in each bank, so that it
covers all risks that might be exposed to the need for the bank to deal with the
administration to develop banking risk management.
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4. The study of Felix Sabeza, Jaya Shukla and Gaurav Bajpai (2015) on “Assessing Credit
Risk Management Practices and Performance of Commercial Banks in Rwanda (2011-
2013)” aimed to find out the relationship between credit risk management and financial
performance of BPR Ltd, to examine whether credit risk management is applied by BPR
Ltd and to find out problems faced by credit risk managers of BPR Ltd in Managing credit
risk. The source of data for this study comprised both primary and secondary sources of
information. Primary were collected using the various data collecting tools such as
questionnaires, and interviews. As for secondary data, the researcher explored the available
sources such as books, journals, and the internet. The data required is both qualitative and
quantitative. The findings showed that there is a relationship between credit risk
management and profitability of commercial banks in Rwanda specifically BPR Ltd. It was
also concluded that although credit risk management is a major determinant of banks’
profitability, there are many other factors which have a direct influence on BPR Ltd’s
financial performance, so BPR Ltd must put measure to deal with them. The research
recommended that BPR Ltd should review and improve its credit policy, and adjust it to
Rwandan market and context and BPR Ltd should provide continuous training and updates
to its staffs.
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5. The study of Kosmas Njanike (2009) on “The impact of effective credit risk management
on bank survival” aimed to find out how did the failure of effectively managing credit risk
lead to banks’ failure in the Zimbabwe Banking crisis of 2004, what other factors led to
bank failures in Zimbabwe, and what are the components of an effective credit risk
management system. The researcher chose the survey as the appropriate research design
for the study, and as such, questionnaires and interviews were used as research instruments.
A sample of 10 commercial banks randomly chosen was used in this analysis. The results
obtained from the research clearly support that poor credit risk management contributed to
a greater extent to the bank failures in Zimbabwe. Therefore effective credit risk
management is important in banks and allows them to improve their performance and
prevent bank distress.
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6. The study of RaadMozibLalon (2015) on “Credit Risk Management (CRM) Practices in
Commercial Banks of Bangladesh: “A Study on Basic Bank Ltd.” aimed to examine how
bank of Bangladesh especially “Basic Bank Ltd” is efficient in practicing credit risk
management throughout its operation. The study is a descriptive research that requires
some analysis on the efficient management of bank’s credit risk as well as the concepts on
how the CRM affect banks profitability. The researcher use secondary source of
information based on official website, and annual report of Basic bank. The researcher
conducted the relevant analysis of data consisting of both statistical analysis, and financial
analysis. The results of the study showed that the importance of credit risk management
for banking is huge because banks and other financial institutions make profit from their
credit spending. Therefore, it is very important for banks and other financial institution to
manage credit risk because effective CRM helps to increase the present and future financial
performance of a bank.
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7. The study of Ms. Sujeewa Kodithuwakku (2015) “Impact of Credit Risk Management on
the Performance of Commercial Banks in Sri Lanka” aimed to identify the impact of credit
risk management on the performance of the commercial banks in Sri Lanka. For this study
the researcher used both primary and secondary data to investigate the impact of credit risk
management on performance of Commercial Banks. The primary data was mainly
collected through an interview. The relevant authorities were interviewed personally in
order to have their thoughts on the problems and solutions. The secondary data was
obtained from various sources such as Annual Reports of the selected commercial banks,
relevant articles, books, and magazines…etc. The panel data of a five year period from
2009 to 2013 from the selected banks were used to examine the relationship between credit
risk and performances. The results verify the objective of the study, which claims that
better credit risk management results in better bank performances. The research findings
indicate that the banks should ensure the establishment of an efficient credit risk
management framework. Therefore, the study recommended the banks to implement
effective tools and techniques to reduce the credit risk.
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8. The study of Ravi Poudel (2012) “The impact of credit risk management on financial
performance of commercial banks in Nepal” aimed to establish the impact of credit risk
management on financial performance of banks in Nepal, and to establish impact of default
rate on bank financial performance. The research design used for the study was a
descriptive research design. The population of interest was the thirty one banks that operate
in Nepal, as the study covered the period from 2001 to 2011. Secondary data was used for
the study, as the data was analyzed by calculating the profitability for each year within the
period of study using the profitability. Further, the ratio was analyzed using SPSS program.
The result of the study showed that credit risk management is an important predictor of
bank financial performance. Thus success of bank performance depends on risk
management. Among the risk management indicators, default rate management is the
single most important predictor of the bank performance. The researcher advised to put
more emphasis on risk management in order to reduce risk on loans and achieve maximum
performance, the banks need to allocate more funds to default rate management, and to try
maintaining optimum level of capital adequacy only.
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9. The study of Proshenjit Ghosh and Md. Ariful Islam (2014) “Credit Risk Management: An
Empirical Study on BRAC Bank Ltd” aimed to find out areas which are required to
minimize risks associated with each lending process. The research’s problem is to examine
the relationship of credit risk with credit monitoring, reliability and assurance factor in
context of BRAC Bank in Bangladesh. For the purpose of the research, the researcher
designed a descriptive co-relational study to assess whether there is any correlation among
the variables. Further information used to prepare this report was collected from both
primary and secondary sources. Primary data collected from the employees through
personal interviews conducted using questionnaires and Informal discussion with the banks
staff. On the other hand, the secondary sources were taken from Annual report of BBL,
Auditors report of BBL and different publications and journals regarding banking activities
and policies. Based on findings of the study, there is a significant relationship of credit risk
with credit monitoring, reliability and assurance factor in context of BRAC Bank in
Bangladesh.
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10. The study of Sam Hakim and Simon Neaime (1998) “Performance and credit risk in
banking: A comparative study for Egypt and Lebanon” aimed to investigate the
performance and risk in two countries, Egypt and Lebanon. The study data consists of
annual observations on 43 Lebanese banks and 62 Egyptian Banks between 1993 and 1999.
For Lebanon, the data was obtained from Bilan Banques. In the case of Egypt, the data was
provided from the Egyptian Central Bank. A panel data estimation technique is adopted;
which allowed the researcher to perform statistical analysis. The results show that return
on equity in banking is a direct and an increasing function of the bank’s lending activities
of Lebanon and Egypt. Regarding country specific effects, the researcher finds a strong
link between capital adequacy and commercial bank return. The study findings are
expected to help countries in the MENA region set better performance targets, and enable
bank managers to allocate capital more efficiently across their business units.
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11. The study of Dua’ Zaydeh (2006) “Non-performing credit facilities in the Palestinian
banking system "An Empirical Study on national banks operating in the Gaza" aimed to
identify the most important factors affecting the increase in non-performing credit and its
causes. It also aimed to identify the measures necessary to reduce this problem as much as
possible, and to order the factors affecting the increase of bad credits according to their
importance from the viewpoint of credit analysts in the study sample. The researcher used
in the study primary and secondary sources to gather information. Primary sources were to
design a questionnaire, and secondary sources were represented in books and reports. The
researcher concluded several conclusions, including that the banks do not visit projects
funded by granting loans to customers, which is reflecting the unreal image of the client
and financial situation. Another thing is that the banks do not take into account the purpose
of the provision of facilities and this demonstrates the importance of security that is the
first line of defense in the case of the client defaults. The researcher recommended the need
of visiting projects financed by the granting of loans to customers and that the banks should
pay more attention to the purpose of providing credit facilities to the customer.
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12. The study of Mervat Abu Kamal (2007) “Modern management to credit risk in the banks
in accordance with international standards “Basel II” “applied study on banks operating
in Palestine” aimed to develop a credit risk management methodology in banks operating
in Palestine according to modern banking risk management and assessment of the credit
risk management strategies adopted by banks operating in Palestine. The researcher use
descriptive analytical method. The research population is made up of banks operating in
Palestine; a questionnaire was distributed to the research population to gather primary data.
The researcher showed that each bank depends on the management of credit risk strategy,
which includes credit policy, determining credit risk, methods of measurement and control
these risks. Also the board of directors doing appropriate adjustments to ensure that policies
are compatible with the changes in the internal and external bank environment. The
researcher recommended that the banks should working to improve the banking risk
management and banks must ensure the existence of a specialized department to manage
credit risk, working to identify, measure, and control credit risk.
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Theoretical Framework:
 Credit risk

Despite the different nature of credit in its size and interest rates, the date of maturity and the
type required from the client security, however the danger always exists. As it is one of the most
important risks for the activity of banks, credit risk arises; the bank provides loans or credit to
members of different economic sectors with no ability to pay the rights of the loan principal and
interest, and for this reason it may be caused by the inability of the borrower to meet the loan
principal and interest on the maturity exact date, or that he has the ability to pay but does not wish
to do so for one reason or another. Therefore credit risks are represented in losses that could be
incurred by the bank due to the customer's ability or lack of faith to repay the loan principal and
interest.
Based on that, the researchers identified credit risk as “the risk of loss principal from a
borrower's failure to repay a loan or meet a contractual obligation.” Credit risk arises whenever a
borrower is expecting to use future cash flows to pay a current debt. This risk is one of the most
risks attached by the banks because of their impact on the quality of the types of assets; private
banks with high indebtedness cannot afford a risk that exceeds 3-2% of the value of its assets.
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 The causes of the credit risk
There are several reasons for credit risk, which can be divided as the following:
A. General risks:
The risk caused by external factors, which are difficult to control, like the political and
economic situations of the country, in addition to natural factors such as floods, earthquakes…etc.
B. Special risks:
It is the most widespread, frequent and most difficult to control, because of the many causes
that lead to non-payment. It can be divided into several risks: financial risk, risk management, and
market risk.
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 The granting of credit criteria
When credit management is making a credit decision, it tries to take risks that would be
inflicted upon the granting of credit, like the inability of a customer's desire to repay the loans and
interest, or their inability to provide an adequate income for the purpose of the loan. So there must
be a set of criteria and conditions that motivate and drive the institution to fund and trust the
individual or organization and granting the loan, where it begins to judge the borrower and its
ability to repay and his biography, and then judge the appropriate funds required size and move it
then to study whether the project generates sufficient income to meet the loan’s obligations or not.
The Five C's of Credit known as the most important criteria when evaluating credit, where it’s
analyzes and studies different aspects of the client. The following is an explanation of these
aspects:
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1. Character
It is one of the most important factors in decision-making to grant credit, and it is the most
influential in the risk to commercial banks. Therefore, the most important goal, pursued by the
credit management when making credit analysis, is to determine the client's personality accurately.
Client’s character defines the extent of its ability to meet its obligations and his/her desire to
do so. The character as an institution is defined by management that is reflected the company's
ability to comply with its obligations to the banks through their conducted business achievement
ability and achieving the goals.
Character evaluation is not an easy process, it is difficult and complicated because the
character cannot be evaluated financially. To overcome these difficulties through data information
on the client, the standard of living, the financial resources, the financial problems experienced by
the client need to be examined, in addition to the social level, their work carried out, and their past
with the bank and with others. This is done by contacting the institution and the staff, and banks
that previously proposed for the client to deal with.
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2. Capacity

Capacity is one of the most important criteria that influences the amount of risk to
credit management. It determines the repayment ability of the customer to re-borrow from
the bank's standard. To measure this standard, the bank should conduct a study to identify
the financial position of the client details, as well as previous bank dealings, both with the
same bank or any other banks.
3. Capital
Capital is one of the most important elements and the granting of credit standards, as quality
and value of the capital affect the customer's ability to repay the credit. Capital defined as how
much are the client’s owned assets such as stocks and bonds and other fixed property.
4. Collateral
It means the amount of security that is owned by the customer of current or fixed assets.
Security may be a person with a qualified financial efficiency and reputation to rely on credit
management to ensure the payment of credit. And security can be owned by someone else and
agreed to be a guarantor for the client.
Banks aim to get the guarantees to achieve a balance between the credit facilities and the
corresponding guarantees so credit facilities granted to customers must be met by adequate
guarantees to pay for facilities.
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5. Conditions
Condition represents the client's economic conditions and changes that have exposed such as
market share, the form of competition, the product life cycle…etc.
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 Factors affecting the decision-making credit
After studying the criteria of the granting of credit, it can be concluded that there is a set of
factors that affects the decision making credit in any bank, as some of them are linked to the client,
others are associated with the bank, and others are associated with the credit itself
1. Client factors
Factors relating to each of the character, capacity, capital, collateral and conditions, where
the whole factors are used to assessing the validity of the client to get the desired credit, and
determine the amount of credit risk. Therefore, the process of analyzing information and data
on the potential client case will establish capacity of credit management that has been taken on
a credit decision.
2. Bank factors
These factors are as the following:
A. The degree of liquidity enjoyed by the bank: The size of the cash is flowing about the need
for the bank at the moment.
B. The strategy pursued by the bank to take credit decision: The strategies pursued by the
bank to take credit decision affect the willingness to grant or not to grant credit.
C. The overall objective of the bank: The main objective of the banks make a profit, but there
are other set of objectives pursued by banks such as liquidity, stability and economic
development.
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D. Bank's share in the banking market: Banks seeking to increase its market share through
transactions provided.
E. The potential of the human and material bank: includes managerial competencies and
experiences based on the granting of credit, the more the bank's physical and human
potentials are the greater the possibility of whether or not to give them credit.
3. Granting of credit factors
There is a range of factors related to the same credit, and that includes:
1. The purpose of the facilities granted to customers: The purpose of the loan may be required
for the purpose of working capital financing "short-term loans", or for the purpose of
achieving a balance in the financial structure "long-term loans".
2. For the facility: what is the length required by the client to obtain a loan?
3. The source and method of payment: Will there be payment at once or in the form of
periodic payments? And whether commensurate with the potential of both the client and
the bank at the same time?
4. The type and amount of the required facilities: The loan amount is very important in credit
analysis, because the greater the size of the loan the greater required study by the Bank.
The bank must specify where the facility is required and is consistent, or inconsistent, with
the general policy of credit at the bank, and is it appropriate for the purpose and activity
that will be funded by it.
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 Methods to avoid or control credit risk in commercial banks:
1. Diversification: This is done through the diversity of types of credit granted to customers
such as personal loans, mortgage loans, agricultural loans … etc
2. Guarantees: Such as bail or mortgaging the property of the client to the bank...etc
3. Credit Insurance: Type of insurance policy purchased by a borrower that covers the risk
of non-payment up to a specified amount.
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 Credit Risk Management
The credit risk management in banks is conducted by the following basic principles:
 Each bank has its independent panel that’s called “Risk Management Committee”, which
is responsible of preparing policies. The specialized risk management administration is
responsible for the implementation of those policies, and monitors the risks and measures
on a regular basis.
 Each bank’s employee has an “official risk”, with enough experience in the banking field
for each type of major risks.
 A specific system for measuring and monitoring risks in each bank to determine the credit
and the liquidity.
 Evaluation of bank assets as a basic principle for measuring risk and profitability.
 The use of modern information systems for risk management.
 The need for an internal audit unit: independent banks follow the Bank's Board of Directors
that is responsible of reviewing the entire bank's business including risk management.
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 International laws for the management of credit risk “Basel II”

 The definition of the Basel Committee
Capital Bank is considered one of the most sources for protection from risks as it is effective
and controlled due to the ability to apply capital standards uniformly on it and to apply various
institutions and legislations. Therefore, the required capital has a role in the face of risk assets and
the stability of banks and buildings’stiffness, especially in the case of actual or potential crises. In
this sense, the Basel Committee on Banking Supervision was established at the end of 1974 as the
technical advisory committee that is not based on any international convention. It was established
by the Governors of the central banks; they are made up of senior representatives of banks and
countries supervisory of industrial authorities. The Committee is composed of 13 countries:
Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United
Kingdom, United States of America, then Spain and Luxembourg joined; their usual meeting
happens four times a year.
The purpose of the Basel Committee is to improve banking supervision between the banks.
That levels in three aspects:
 Open area of the dialogue between the central banks to deal with the problems of banking
supervision.
 Coordination between the various regulatory authorities.
 Help stimulate the standard regulatory system to achieve security for depositors and
investors of the banking system, and to achieve stability in the global financial markets.
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 Basel II

The Basel Committee on Banking Supervision has issued decisions on the application of a
uniform standard for the capital, which covers credit risks faced by banks. The central bank
governors of industrialized nations had agreed to these decisions through June 1988 “Basel I”. The
Commission also issued during June 1999 new proposals for the development of the calculation
of capital adequacy standard method called “Basel II”.
New proposals have been given to broaden the base and the capital adequacy framework that
ensures the achievement of the following objectives:
 Increase the security and safety of the global financial system.
 The achievement of justice in an international competition among banks.
 To provide a more comprehensive system to address the credit risk.
 Encourage banks to adopt comprehensive practices to manage risk, in particular credit risk.
31

3.1. The study population, and sample
 Population:
The audiences of this research will be the directors of risk management department and the
managers of credit facilities department in commercial banks operating in the Palestinian
Authority areas- Ramallah.
 Sample:
The sample of this study will be workers in the Department of risk management in the
banking staff and the staff working at credit facilities department. They will be chosen in a simple
random sample method that is formed of53 questionnaires.
3.2. Method and toolcollectionstudy
 Method collection study:
According to the research data, it will be collected using two ways:
A- Primary data: Such as a survey questionnaire.
B- Secondary data: Such as books, journals, articles, web sites and annual report.
 Tool of data analyses and statistical analyses:
 Tool of data: The study relies on the questionnaire as a tool to conduct the study.
 Statistical analyses: The study depends on SPSS program to analyze the data and
obtain the mean, the frequency, and the percentage for each statement that’s used
in questionnaire.
3.3. The designof the questionnaire:
The questionnaire includes four sections:
1. Factors that affect the decision-making credit (contains client factors and granting
of credit factors).
2. Credit risk instruments used to avoid or control these risks.
3. Challenges affecting the effectiveness of credit risk management.
4. Ways to develop effective credit risk management.
33

3.4. Statistics distribution of questionnaires
Number Percentage
Number of distributed questionnaires 62 100%
Number of questionnaires recovered 53 88.3%
Number of questionnaires not recovered 9 11.7%
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Chapter Four
Questionnaires Analysis
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Section One: Factors that affect the decision-making credit
Q1: What is the extent of reliance on the following factors when making a credit
decision?

1.1. Client's personality and his ability to manage activity
Frequency Percent Valid Percent Cumulative Percent
Valid Low 1 1.9 1.9 1.9
medium 6 11.3 11.3 13.2
High 22 41.5 41.5 54.7
very high 24 45.3 45.3 100.0
Total 53 100.0 100.0
The question has five different answers: Very high, high, medium, low and very low. The
answers were 45.28% very high, 41.51% high, 11.32% medium and 1.89% low.
37
1.2. Capital which is owned by the client

Valid low 3 5.7 5.7 5.7
medium 16 30.2 30.2 35.8
high 16 30.2 30.2 66.0
very high 18 34.0 34.0 100.0
Total 53 100.0 100.0
38
1.3. Guarantees provided by the borrower client

Valid medium 6 11.3 11.3 11.3
high 11 20.8 20.8 32.1
very high 36 67.9 67.9 100.0
Total 53 100.0 100.0
answers were 67.92% very high, 20.75% high and 11.32% medium.
39

1.4. The client's ability to repay the loan and interest payments
Valid low 1 1.9 1.9 1.9
medium 11 20.8 20.8 22.6
high 15 28.3 28.3 50.9
very high 26 49.1 49.1 100.0
Total 53 100.0 100.0
40

1.5. The problems facedby the client
Valid medium 8 15.1 15.1 15.1
High 23 43.4 43.4 58.5
very high 22 41.5 41.5 100.0
Total 53 100.0 100.0
41

1.6. The purpose of the loan application
Valid low 2 3.8 3.8 3.8
medium 5 9.4 9.4 13.2
high 15 28.3 28.3 41.5
very high 31 58.5 58.5 100.0
Total 53 100.0 100.0
42

1.7. The term of the loan and the repayment date
Valid medium 5 9.4 9.4 9.4
high 19 35.8 35.8 45.3
very high 29 54.7 54.7 100.0
Total 53 100.0 100.0
43

1.8. Source of repayment
Valid low 2 3.8 3.8 3.8
high 11 20.8 20.8 24.5
very high 40 75.5 75.5 100.0
Total 53 100.0 100.0
answers were 75.47% very high, 20.75% high and 3.77% low.
44

1.9. Requestedloan type and its compatibility with the general policy of the lending in
the bank
high 10 18.9 18.9 24.5
very high 40 75.5 75.5 100.0
Total 53 100.0 100.0
45

1.10. The amount of the loan
Valid low 1 1.9 1.9 1.9
medium 9 17.0 17.0 18.9
high 20 37.7 37.7 56.6
very high 23 43.4 43.4 100.0
Total 53 100.0 100.0
46

Section Two:Creditrisk instrumentsused to avoid credit risks
2. Can it be used as credit risk-mentioned tools to avoid credit risk?
2.1. Diversification
Valid disagree 1 1.9 1.9 1.9
neutral 14 26.4 26.4 28.3
agree 25 47.2 47.2 75.5
strongly agree 13 24.5 24.5 100.0
Total 53 100.0 100.0
The question has five different answers: Strongly agree, agree, neutral, disagree and strongly
disagree. The answers were 24.53% strongly agree, 47.17% agree, 26.42% neutral and 1.89%
disagree.
47

2.2. Take guarantees
Valid neutral 9 17.0 17.0 17.0
agree 24 45.3 45.3 62.3
strongly agree 20 37.7 37.7 100.0
Total 53 100.0 100.0
disagree. The answers were 37.74% strongly agree, 45.28% agree and 16.98% neutral.
48

2.3. Credit Insurance
Valid neutral 8 15.1 15.1 15.1
agree 28 52.8 52.8 67.9
strongly agree 17 32.1 32.1 100.0
Total 53 100.0 100.0
disagree. The answers were 32.08% strongly agree, 52.83% agree and 15.09% neutral.
49

Section Three: challengesaffecting the effectiveness of credit risk management
3. What is the impact of the challenges mentioned on the effectiveness of credit
risk management?
3.1. Lack of capital adequacy
Valid low 1 1.9 1.9 1.9
medium 3 5.7 5.7 7.5
high 33 62.3 62.3 69.8
very high 16 30.2 30.2 100.0
Total 53 100.0 100.0
50

3.2. Low quality assets
Valid low 1 1.9 1.9 1.9
medium 15 28.3 28.3 30.2
high 28 52.8 52.8 83.0
very high 9 17.0 17.0 100.0
Total 53 100.0 100.0
51

3.3. Liquidity is adequate
Valid medium 11 20.8 20.8 20.8
high 20 37.7 37.7 58.5
very high 22 41.5 41.5 100.0
Total 53 100.0 100.0
52

3.4. Weak economic growth
Valid medium 14 26.4 26.4 26.4
high 31 58.5 58.5 84.9
very high 8 15.1 15.1 100.0
Total 53 100.0 100.0
53

3.5. Ignore marketrisk
Valid Low 1 1.9 1.9 1.9
medium 16 30.2 30.2 32.1
High 24 45.3 45.3 77.4
very high 12 22.6 22.6 100.0
Total 53 100.0 100.0
54

3.6. Corruption
Valid Low 1 1.9 1.9 1.9
medium 17 32.1 32.1 34.0
High 18 34.0 34.0 67.9
very high 17 32.1 32.1 100.0
Total 53 100.0 100.0
55

3.7. Poorgovernance ofbanks
Valid very low 1 1.9 1.9 1.9
medium 18 34.0 34.0 35.8
high 20 37.7 37.7 73.6
very high 14 26.4 26.4 100.0
Total 53 100.0 100.0
56

3.8. Absence of financial analysis
Valid low 2 3.8 3.8 3.8
medium 15 28.3 28.3 32.1
high 20 37.7 37.7 69.8
very high 16 30.2 30.2 100.0
Total 53 100.0 100.0
57

3.9. Absence of the risk premium on loans
low 2 3.8 3.8 5.7
medium 19 35.8 35.8 41.5
high 23 43.4 43.4 84.9
very high 8 15.1 15.1 100.0
Total 53 100.0 100.0
answers were 15.09% very high, 43.40% high, 35.85% medium, 3.77% low and 1.89% very
low.
58

Section Four: Ways to develop effective credit risk management
4. What is the extent of using the methods mentioned in the development of
effective credit risk management?
4.1. Training department credit facilities staff
high 25 47.2 47.2 52.8
very high 25 47.2 47.2 100.0
Total 53 100.0 100.0
59

4.2. The overallBank's strategyfor the management of credit risk
Valid medium 11 20.8 20.8 20.8
high 27 50.9 50.9 71.7
very high 15 28.3 28.3 100.0
Total 53 100.0 100.0
60

4.3. The principles of the BaselCommittee
Valid low 2 3.8 3.8 3.8
medium 16 30.2 30.2 34.0
high 26 49.1 49.1 83.0
very high 9 17.0 17.0 100.0
Total 53 100.0 100.0
61

4.4. Regularreports to the Boardwith respectto credit risk
Valid low 3 5.7 5.7 5.7
medium 15 28.3 28.3 34.0
high 21 39.6 39.6 73.6
very high 14 26.4 26.4 100.0
Total 53 100.0 100.0
62

4.5. Granting incentives to the staff of the Department of credit facilities
low 13 24.5 24.5 30.2
medium 15 28.3 28.3 58.5
high 18 34.0 34.0 92.5
very high 4 7.5 7.5 100.0
Total 53 100.0 100.0
answers were 7.55% very high, 33.96% high, 28.30% medium, 24.53% low and 5.66% very
low.
63

Chapter Five
Conclusions and Recommendations
64

 Conclusion:
The findings of the questionnaires analysis:
1. For the granting of credit criteria “Five C’s”, banks rely primarily on collateral by 88.67%,
then rely on conditions by 84.9%, then character by 83.79%, then capacity by 77.36% and
finally the capital by 64.15%. This explain that commercial banks rely on collateral
“guarantees” primarily when making a credit decision because it is considered the first line
of defense when the case of the client's inability to pay the debt to banks and this in
agreement with the study by Dua’ Zyadeh which reached to same findings in her study.
2. For the factors related to the granting of credit, banks depends primarily on the source of
repayment by 96.22%, then the type of loan and its compatibility with the general policy
of the lending in the bank by 94.34%, then the term of the loan and the repayment date by
93.57%, then the amount of the loan rate by 81.14% and finally the purpose of the loan
application by 67.92%. This explain that banks depend primarily on the source of
repayment until they are sure that the client is able to repay the loan through source, also
depends on the type of loan and its compatibility with the general policy of the lending
because the general policy of the bank has a risk management strategies and facilities.
3. For the credit risk instruments used to avoid credit risk, show that taking credit guarantees
and credit insurance are the most important tools to avoid credit risk where the percentage
of those who agree to both of 83.02% and 84.91%, respectively, while diversification was
71.7%. This result emphasizes the importance of the guarantees for the bank in case the
client does not pay for the credit.
65

4. For the challenges that affect the effectiveness of credit risk management, found that the
lack of capital adequacy of the most important challenges that affect the effectiveness of
credit risk management at a rate of 92.45%. This result explains the importance of capital
adequacy to face credit risk.
5. For the ways that work on the development of effective credit risk management, found that
training the staff of the Department of credit facilities is the most important ways that work
on the development of credit risk management by 94.34%. This shows a positive
relationship between the training of the staff of the Department of credit facilities and the
effectiveness of credit risk management and this in agreement with the study by Khaled
Kahlout and Essam Buhaisi which reach to same finding in their study.
6. The importance of credit risk management for banking is large because Banks make profit
from their credit service. So it is very important for bank to manage credit risk properly.
7. Effective credit risk management helps to increase the present and future financial
performance of a bank, so it can be said that the relationship between credit risk
management and banks profitability is positive.
8. Banks ensuring the effectiveness and the ability of early warning system on an ongoing
basis to identify and detect potential risks.
9. The Monetary Authority control of banks and receipt of the semi-annual reports with regard
to the capital adequacy of each bank and review of credit risk department reports to ensure
the safety and stability of the bank.
66

 Recommendations:
1. Banks should pay more attention to the purpose of providing credit facilities to the clients
and the client’s ability to repay the loan and interest, not only rely on collateral or guarantee
provided.
2. Banks should pay more attention on training credit facilities department staff so they can
do their job effectively, because of its role in the development of effective credit risk
management.
3. Credit policies of banks must compatible with changes in economic conditions, whether
global or local changes; especially as the economic environment in Palestine is
characterized by political and economic fluctuations.
4. Banks should make courses for the staff of the banks especially credit facilities department
about “Basel II” because of its importance to the effectiveness of credit risk management.
5. Banks should be keen on having a specialized department to manage credit risk, working
to identify, measure and monitor credit risk, and to be sure of the efficiency of the risks
tools to treatment and face of these risks in order to ensure the continuation of the bank
for as long as possible.
6. Banks must make sure on the existence of an internal strategy for maintaining capital
adequacy because of its important of maintaining the security and stability of the bank.
7. Bank’s management should provide modern techniques for measuring credit risk and going
to rely on financial analysis in decision-making credit.
67

 References:
1. Abu Kamal, M. (2007). “Modern management to credit risk in banks, in accordance with
international standards (Basel II), An Empirical Study on banks operating in Palestine”.
2. Al-Thaher, M. Abdel-Jawad, I. & Omar, B. (2007) “Troubled Credit Determinants at the
Palestinian Banks”. Najah University Research Journal, Vol. 21, Issue. 2.
3. Buhaisi, E. & Kahlout, Kh. (2006). “Factors influencing the extent of the credit official’s
reliance on financial analysis in the rationalization of credit decision: An Empirical Study
on banks operating in Palestine”. Islamic University Magazine, Vol. 15, Issue. 2.
4. Hakim, S. & Neaime, S. (1998). “Performance and credit risk in banking: A comparative
study for Egypt and Lebanon”. Economic research forum.
5. Ghosh, P. Islam, A. & Hasan, M. (2014). “Credit Risk Management: An Empirical Study
on BRAC Bank Ltd”. Business Management and Strategy, Vol. 5, Issue. 1.
6. Kodithuwakku, S. (2015). “Impact of Credit Risk Management on the Performance of
Commercial Banks in Sri Lanka”. International Journal of Scientific Research and Innovative
Technology, Vol. 2, Issue. 7.
7. Lalon, R. (2015). “Credit Risk Management (CRM) Practices in Commercial Banks of
Bangladesh”. International Journal of Economics, Finance and Management Sciences,
Vol. 3, Issue. 2, pp. 78-90.
8. Njanike, K. (2009). “The impact of effective credit risk management on bank survival”.
Annals of the University of Petroşani, Vol. 9, Issue. 2, pp. 173-184.
9. Poudel, R. (2012). “The impact of credit risk management on financial performance of
commercial banks in Nepal”. International Journal of Arts and Commerce, Vol. 1, Issue.
5.
10. Sabeza, F. Shukla, j. & Bajpai, G. (2015). “Assessing Credit Risk Management Practices
and Performance of Commercial Banks in Rwanda”. International Journal of Social
Science and Humanities Research, Vol. 3, Issue. 1, pp. 323-33.
11. Shaheen, A. & Sabah, B. (2011). “The impact of risk management on the degree of
security in the Palestinian banking system”. Al-Aqsa University Magazine, Vol. 15, Issue.
1, pp. 1-29.
69

12. Zaydeh, D. (2006). “Non-performing credit facilities in the Palestinian banking system,
"An Empirical Study on national banks operating in the Gaza".
 Monetary Authority laws :
13. Rules and best practices for corporate governance of banks in Palestine Directory.
14. Decision-Law No. (9) for the year 2010 on the banks
 Website:
15. www.pma.ps
70

‫بجامعة‬ ‫والمصرفية‬ ‫المالية‬ ‫العلوم‬ ‫دائرة‬ ‫في‬ ‫طالبة‬ ‫أنا‬‫القدس‬–‫ديس‬ ‫أبو‬–" ‫عنوان‬ ‫تحت‬ ‫تخرجي‬ ‫مشروع‬ ‫بعمل‬ ‫أقوم‬‫مخاطر‬
‫التجارية‬ ‫البنوك‬ ‫في‬ ‫االئتمان‬‫درجة‬ ‫على‬ ‫للحصول‬ ‫دراستي‬ ‫اتمام‬ ‫في‬ ‫مساعدتي‬ ‫حضرتكم‬ ‫من‬ ‫أطلب‬ ‫ذلك‬ ‫على‬ ً‫ء‬‫وبنا‬ ."
.‫األكاديمي‬ ‫بحثي‬ ‫نتائج‬ ‫ستساند‬ ‫بدروها‬ ‫والتي‬ ،‫التالية‬ ‫االستبانة‬ ‫تعبئة‬ ‫طريق‬ ‫عن‬ ‫البكالورويس‬
:‫أقسام‬ ‫اربعة‬ ‫على‬ ‫االستبانة‬ ‫هذه‬ ‫تحتوي‬
:‫األول‬ ‫القسم‬‫(عو‬ ‫االئتمان‬ ‫قرار‬ ‫اتخاذ‬ ‫على‬ ‫تؤثر‬ ‫التي‬ ‫العوامل‬)‫االئتمان‬ ‫منح‬ ‫عوامل‬ ،‫العمالء‬ ‫امل‬
‫االئتمان؟‬ ‫قرار‬ ‫اتخاذ‬ ‫عند‬ ‫التالية‬ ‫العوامل‬ ‫على‬ ‫االعتماد‬ ‫يتم‬ ‫درجة‬ ‫ألي‬
ً‫ا‬‫جد‬ ‫عالي‬ ‫عالي‬ ‫متوسط‬ ‫قليل‬
‫على‬ ‫وقدرته‬ ‫العميل‬ ‫شخصية‬
‫ما‬ ‫مشروع‬ ‫ادارة‬
‫يملكه‬ ‫الذي‬ ‫المال‬ ‫رأس‬
‫العميل‬
‫العميل‬ ‫يقدمها‬ ‫التي‬ ‫الضمانات‬
‫المقترض‬
‫قدرة‬‫دفع‬ ‫على‬ ‫العميل‬
‫وفائدته‬ ‫القرض‬
‫العميل‬ ‫يواجهها‬ ‫التي‬ ‫المشاكل‬
‫االقراض‬ ‫طلب‬ ‫من‬ ‫الهدف‬
‫سداده‬ ‫وتاريخ‬ ‫القرض‬ ‫مدة‬
‫القرض‬ ‫سداد‬ ‫مصدر‬
‫ومدى‬ ‫المطلوب‬ ‫القرض‬ ‫نوع‬
‫االقراض‬ ‫سياسة‬ ‫مع‬ ‫تماشيه‬
‫البنك‬ ‫في‬
‫القرض‬ ‫قيمة‬
71

:‫الثاني‬ ‫القسم‬‫المستخدمة‬ ‫االساليب‬‫االئتمان‬ ‫مخاطر‬ ‫لتجنب‬
‫االئتمان؟‬ ‫مخاطر‬ ‫لتجنب‬ ‫المذكورة‬ ‫االساليب‬ ‫استخدام‬ ‫نستطيع‬ ‫هل‬
‫ّة‬‫د‬‫بش‬ ‫أوافق‬ ‫أوافق‬ ‫محايد‬ ‫أوافق‬ ‫ال‬
‫التنويع‬
‫الضمانات‬ ‫اخذ‬
‫االئتمان‬ ‫تأمين‬
:‫الثالث‬ ‫القسم‬‫االئتمان‬ ‫مخاطر‬ ‫ادارة‬ ‫فعالية‬ ‫على‬ ‫تؤثر‬ ‫التي‬ ‫التحديات‬
‫المذكورة‬ ‫التحديات‬ ‫أثر‬ ‫ما‬‫االئتمان؟‬ ‫مخاطر‬ ‫ادارة‬ ‫فعالية‬ ‫على‬
ً‫ا‬‫جد‬ ‫عالي‬ ‫عالي‬ ‫متوسط‬ ‫قليل‬ ً‫ا‬‫جد‬ ‫قليل‬
‫المال‬ ‫رأس‬ ‫كفاية‬ ‫عدم‬
‫ضعيفة‬ ‫جودة‬ ‫ذات‬ ‫أصول‬
‫كافية‬ ‫سيولة‬
‫االقتصادي‬ ‫النمو‬ ‫ضعف‬
‫السوق‬ ‫مخاطر‬ ‫تجاهل‬
‫الفساد‬
‫البنوك‬ ‫ادارة‬ ‫في‬ ‫ضعف‬
‫المالي‬ ‫التحليل‬ ‫غياب‬
‫المخاطرة‬ ‫عالوة‬ ‫غياب‬
‫القرض‬ ‫من‬
:‫الرابع‬ ‫القسم‬‫الة‬ّ‫ع‬‫ف‬ ‫ائتمان‬ ‫مخاطر‬ ‫ادارة‬ ‫تطوير‬ ‫طرق‬
‫الة؟‬ّ‫ع‬‫ف‬ ‫ائتمان‬ ‫مخاطر‬ ‫ادارة‬ ‫تطوير‬ ‫في‬ ‫المذكورة‬ ‫الطرق‬ ‫استخدام‬ ‫يتم‬ ‫مدى‬ ‫أي‬ ‫الى‬
ً‫ا‬‫جد‬ ‫عالي‬ ‫عالي‬ ‫متوسط‬ ‫قليل‬
‫االئتمان‬ ‫دائرة‬ ‫طاقم‬ ‫تدريب‬
‫العامة‬ ‫البنك‬ ‫استراتيجية‬
‫االئتمان‬ ‫لمخاطر‬
"‫الـ"بازل‬ ‫ومبادئ‬ ‫قواعد‬
‫تعنى‬ ‫التي‬ ‫المنتظمة‬ ‫التقارير‬
‫االئتمان‬ ‫بمخاطر‬
‫لطاقم‬ ‫تمنح‬ ‫التي‬ ‫المكافآت‬
‫االئتمان‬ ‫دائرة‬
72

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