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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 Saudi
Banks in the Light of Global Financial Crisis:
A Qualitative Study
Dr. Khalil Elian Abdelrahim
Associate Professor
Faculty of Administration & Financial Studies/ Economics Section
Taif 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 an
overall 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. INTRODUCTION
1.1 Preface
It is a fact that the Saudi economy is strongly connected to
international economy. Hence, it is natural that the Saudi
economy was affected by the financial crisis. The first
reverse impact of the global financial crisis on the Saudi
economy was in the financial market which has declined in
last few years. The global financial crisis revealed the
importance of banks' credit risk management in mitigating
credit default risk as most banking problems worldwide
have been caused by weaknesses in credit risk management
that include high credit concentration, inadequate credit risk
monitoring, ineffective credit risk measuring, poor credit
risk 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 are
suffering from rising credit default with its reverse
repercussions on banks' performance which requires
increasing the effectiveness of credit risk management.
Hence, analyzing the effectiveness of credit risk
management of Saudi Banks becomes essential for
identifying its characteristics, determinants, challenges and
development methods. The research problem can be
expressed in the following question: what are the
determinants, challenges and development methods of
Effectiveness of credit risk Management of Saudi Banks?.

3-1 Research Objectives
The study objectives are:(1) To identify the characteristics
of credit risk management of Saudi Banks. (2) To
investigate the determinants of effectiveness of credit risk
management of Saudi Banks. (3) To find out the most
serious challenges facing the effectiveness of credit risk
management of Saudi Banks. (4) To explore the
development methods of effectiveness of credit risk
management of Saudi Banks.

4-1Research Importance
This research comes in a critical time when most of the
Saudi Banks suffer from the problem of high credit default
risk in the era of global financial crisis. No previous
research has dealt so far with the determinants, challenges
and development of the effectiveness of credit risk
management at Saudi Banks. Moreover, the conclusions and
recommendations of the study are to assist Saudi Banks in
upgrading the effectiveness of credit risk management for
controlling and mitigating the credit default risk.

5-1Research Hypotheses
Based on research problem and objectives, the research
hypotheses are:
H
0
1: There is no statistically significant relation between
capital adequacy and effectiveness of credit risk
management in Saudi Banks.
H
0
2: There is no statistically significant relation between
asset quality and the effectiveness of credit risk
management in Saudi Banks.
H
0
3:There is no statistically significant relation between
management soundness and effectiveness of credit risk
management in Saudi Banks.
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 74
H
0
4:There is no statistically significant relation between
bank's earning and effectiveness of credit risk management
in Saudi Banks.
H
0
5: There is no statistically significant relation between
liquidity and the effectiveness of credit risk management in
Saudi Banks.
H0 6:There is no statistically significant relation between
bank Size and the effectiveness of credit risk management
in Saudi Banks.
6-1 Research Methodology
The researcher followed a descriptive and analytical
approach for collection and analysis of data using a
questionnaire to collect the primary data (see appendix 1), in
addition to secondary data that are collected from annual
reports of Saudi Banks, Saudi Arab Monetary Agency and
other 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 of
100 respondents in the cities of Taif, Mecca, Jeddah and
Riyadh to have their points of views on challenges and
developing methods of credit risk management of Saudi
Banks.The purposive sample includes bank managers and
financial experts of Saudi Banks of Al-Rajhi, Riyadh, Ahli,
Al-Bilad, Al-Jazirah, Saudi Investment and Al-Inm'a. Banks
of joint ownership of SAAB, Samba, Saudi Fransi, Saudi
Hollandi and Al-Arabi were excluded due to lack of time
and resources and they are left for further research by other
researchers.
The analysis of the characteristics of credit risk management
of Saudi Banks is based on secondary data. While the
determinants of effectiveness of credit risk management are
investigated through using regression analysis for testing the
research hypotheses.The questionnaire is used to collect
primary data on the challenges and developing methods of
effectiveness 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 challenges
facing effectiveness of credit risk management of Saudi
Banks (15 paragraphs) and methods of developing the
effectiveness of credit risk management of Saudi Banks (7
paragraphs). The researcher distributed the questionnaire to
several referees to check the validity and accuracy of the
questionnaire, then tested the reliability of the questionnaire
by Cronbach Alpha Coefficient which was (84%). The
researcher found 85 completely filled questionnaires
representing 85% of the distributed questionnaires which
were analyzed by using SPSS. The tools of analysis are:
frequency distribution, mean, standard deviation for
descriptive analysis, besides the use of regression analysis to
test research hypotheses and the use of t-statistics to detect
differences in the answers of respondents.


7-1 Research Model
The research model is "CAMEL" which indicates the
relationship between the independent variables of capital
adequacy, asset quality, management soundness, earning,
and liquidity, and the dependent variable of Effectiveness
of credit risk management as in figure (1)
Fig. 1. Model ofDetermining Factors of Effectiveness of Credit Risk
Management
Source:Researcher Design Based on Literature Review

The specifics of the variables used by CAMEL Model are
(FDIC Banking Review :2003):(1) Capital Adequacy: is
referred to by Basel Committee. Bank capital is absorbing
the unanticipated shocks and it is a signal that the bank
honors its obligations. It is measured by dividing capital to
risk weighted asset and Basel Committee put the minimum
capital adequacy ratio at 8%. The expected relation between
capital adequacy and effectiveness of credit risk
management is positive (Hakim& Neaiame:2002) (2) Asset
Quality: determines the robustness of the financial
institutions against loss of assets value as the deteriorating
value of assets is the prime source of banking problems.
Asset Quality may be measured by the growth of total loans
as a proxy for the quality of bank's asset and the expected
relation between asset quality and effectiveness of credit
risk management is negative as excessive loans increase the
exposure to credit default of customers (Kwan &
Eisenbeis:1997,120).(3) Management Soundness: is a
qualitative variable that expresses the control of board of
directors over the resources of the bank to protect
shareholders interests. Management soundness could be
measured by the asset turnover ratio, which is a proxy of
management soundness that denotes bank efficiency in
using assets in generating revenue. The expected relation
between management soudness and effectiveness of credit
risk management is positive (Rani:2009). (4) Earning in
terms of credit facilities can be measured by return on credit
as reflected by interest rate. The expected relation between
credit earning and effectiveness of credit risk management is
positive (www.fdic.gov/analytical/banking/jul/footnote2.)
(5) Liquidity: refers to a situation where institutions can
obtain sufficient funds, either by increasing liabilities or by
converting its assets quickly to cash at a reasonable cost.
Liquidity is gauged by the ratio of credit facility to total
deposits(Cole etal: 1995) Liqudity has positive relation with
effectiveness of credit risk management(Hakim&
Neaiame:2002) (6) Bank Size is measured in term of value
of 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 Management
4. Earnings of Credit
Facility (E)

5. Liquidity (L)
6.Bank Size(S)
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 75
excludes foreign and joint ownership banks and is limited
to Saudi Banks where the ownership, management and
decision making process are execlusively Saudis. The study
collected cross section data on the variables of the study
excluding the time series data due to their unavailability and
time constraint.
II. THEORETICAL FRAMEWORK OF CREDIT RISK
MANAGEMENT AT BANKING INSTITUTIONS AND
PREVIOUS STUDIES.
1-2 Literature Review of Banking Credit Risk
Management
In the post era of the International Financial Crisis, banking
institutions worldwide including Saudi Banks are exposed to
several risks including credit risk. Mostly, the main causes
of the financial crisis are real estate bubble, sever
speculations by investors, use of derivatives, besides credit
defaults of customers.
Basel Accords are international agreements among central
banks 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 financial
system.(2) To ensure adequate level of capital to safeguard
the bank's deposits.(3)To enhance competitive equality.
Basel Accords are classified into: Basel I, Basel II and Basel
III.
Basel Committee has adopted the following principles
(Basel Committee:1999): (1)Board of directors should have
responsibility for approving and reviewing the credit risk
strategy (2) Senior management should have responsibility
for implementing the credit risk strategy, policies and
procedures for identifying, measuring, monitoring, and
controlling credit risk.(3) Banks should identify and manage
credit risk inherent in all products and activities.(4)Banks
must operate under sound, well-defined credit granting
criteria. (5) Banks should establish overall credit limits at
the level of individual borrowers.(6) Banks should have a
clearly-established process in place for approving new
credits as well as the extension of existing credit.(7) Credits
must be monitored (8) Banks should have in place a system
for the ongoing administration of various credit risk-bearing
portfolios.(9) Banks must have in place a system for
monitoring the condition of individual credits including
determining the adequacy of provisions and reserves.(10)
Banks should develop internal risk rating systems in
managing credit risk.(11) Banks must have information
systems and analytical techniques that enable management
to measure credit risk (12) Banks must have in place a
system for monitoring the overall composition and quality
of the credit portfolio.(13) Banks should consider potential
future changes in economic conditions when assessing
individual and portfolio credits (14) Credit risk could be
defined as the potential that a banks borrower will fail to
meet his obligations in accordance with agreed terms of
credit and credit risk management is defined as the process
of identifying, measuring, Supervisors should require that
banks have an effective system to restrict bank exposures to
single or groups of borrowers.
Credit risk is defined as the potential that a bank's borrower
fails to meet his obligations in accordance with agreed terms
of credit.Credit risk management is defined as the process of
identifying, measuring, assessing, monitoring and
controlling credit risk (Basel Committee: 2000) Hence, the
elements of credit risk management are:(1)Identifying the
credit risk (2) Measuring Risk.(3) Rating Credit risk. (4)
Assessing credit risk deterioration. (5) Controlling levels of
credit risk. (6) Recognizing unacceptable risk before
granting lending (7) Pinpointing late payment (8) Treating
credit default.
Measurement of Credit Risk includes estimating the credit
scoring and the use of Altman Model for estimating credit
default risks as follows (Coyle:2000):(1) Credit scoring is a
system of categorizing creditworthiness by awarding points
according to certain key features of business to produce a
total credit score called Z-Score, which is derived from a
corporate future prediction model using key financial ratios
of a bank financial statement.
(2) Default Credit risk Model is based on Estimate of Linear
Regression Model as follows:
PD= n
j=1
B
j=1
X
ij
+error
Where
PD = Probability of Default
= Beta coefficient
X
ij
= Independent variables
(3) Altman Discriminate function is a credit classification
model which provides indicator of borrowers credit risk as
in the equation:
Z=1.2X
1
+ 1.4X
2
+3.3X
3
+0.6X
4
+1.0X
5

Where:
Z= credit failure ratio
X1= Working capital/ total asset
X2=Retained earnings/total asset X3= Earnings before
interest and tax/ total asset
X4=Market value of equity/book value of long terms debt
X5= Sales / total asset ratio

A company is considered with no credit risk when the value
of its Z-Score is 2.99 or more, it is considered risky when its
Z-Score is less than 1.81 and it is considered with average
credit 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 capital
adequacy. (3) Lack of liquidity. (4) Bad report from the
Credit Bureau. (5) Down rating by credit rating agencies. (6)
Decline of profitability. (7) Decline in sales revenue
turnover. (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 the
following manner (Al-Zbadi: 2002):(1)Rescheduling of
customer debt .(2) Mitigating credit terms.(3)Extending the
maturity of the credit debt. (4)Lowering interest rate.
The overall approach to effective risk management includes
the tasks of identifying; measuring, assessing; monitoring
and controlling credit risk (Basel Committee: 2000). Several
instruments are used to make credit risk management more
effective such as (Saunders & Cornett: 2008):(1) Hedging
credit risk. (2) Credit risk premium. (3) More guarantees/
collateral. (4) Limiting the loan amount. (5) Limiting the
loan period.(6) Avoiding loan for risky client.(7) Monitoring
loan payment. (8) Negotiating loan when customers get into
difficulty. (9) Avoiding loans for risky customer. (10)
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 76
Trading off between high risk and risk premium of interest
on loans.(11) Diversifying Credit Portfolio.
The CAMEL model is the most relevant to identifying the
determinants of effectiveness of credit risk management
(Cole, Cornyn and Gnter :1995). However, after 1997 the
Model 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 other
financial supervisory agencies in USA to provide a
convenient summary of bank conditions. Rating in the
CAMEL Model is assigned to banks on a scale from 1 to 5
where 1 and 2 are considered low rating, 3 is considered
moderate 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 Compliance
Matter?" used the Z-score estimates for calculating the bank
risk as in the following equation:
Z
ij
= +b
1
X

1
j
+b
2
X
2
ij
+b
3
X
3
j
+

Where
Z
ij
= country risk of a bank where Z=(Average return on
assets+equity)/(Standard Deviation of return on Asset)
X1
j
=is the Basel compliance score in a country j
X2
ij
=is a bank characteristics of bank size and cost
efficiency
X3
j
=country characteristics in terms of GDP growth.
= random characteristics
The study concluded that effective banking supervision is
associated with bank management soundness and found that
overall index of compliance of Basel Accord is not
associated with bank risk Z-score.
(2) The Study of Bodla & Verma (2009) on "Credit Risk
Management Framework at Banks in India" examined the
implementation of credit risk management in commercial
banks in India. The study concluded that authority of
approval 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 the
approval of credit risk management. Most of the banks in
India perform industry studies, periodic credit calls, periodic
plant visit, developing MIS for the customers' risk scoring
and annual review of accounts. Indian banks are abstaining
from the use of derivatives as a risk hedging tool; Indian
banks conduct credit risk management according to Basel II
Accord and to central bank guidelines; there is no statistical
difference in credit risk management between private and
public banks. However, there is a significant statistical
difference between small and large banks.
(3) The Study of Espinoza, Raphae, Prosad,
Ananthakrishnan and Oral Williams(2010) on "Regional
Financial Integration of GCC" has concluded that the
financial indicators of Saudi Banks have shown an
increasing ratio of nonperforming loans that ranged between
5.4%-7.6%, increasing provision rates to cover doubtful
loan which ranged between 128%-153% and liquidity was
moderate ranging between 28%-35% but capital adequacy
was convenient ranging 16% to 20% and return on equity is
reasonable ranging 22% to 25%, loan/deposit was high
(86.9%).
(4) The Study of Rudra & Jayadev. M (2009)Are Banks
Stocks Sensitive to Risk Management?is an attempt to shed
lights on sensitivity of Indian banks stocks to risk
management by conducting regression analysis on indicators
of risk management and return on stocks. The study
concludes that stock return responded positively to risk
management and banks in India did not focus on increasing
capital adequacy to mitigate credit risk and considered risk
management is an important determinant of banks stock
return. The study recommended that Indian banks should
have better risk management capabilities to reward stock
holders.
(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 which
the UAE banks use risk management in dealing with
different types of risk besides comparing risk management
practices between national and foreign banks. It refers to
three risk mitigation strategies of simple business practices,
transferring risk for other participants and managing risk at
acceptable level. The study used a questionnaire for
collection of primary data concerning the aspects of credit
risk management, methods of risk identification and the
risks facing the UAE banks. The findings are: the three most
important types of risks facing UAE commercial banks are
foreign exchange risk followed by credit risk then
operational risk; UAE banks suffer from loan default
problems; UAE banks are efficient in assessing, monitoring
and identification of credit risk and the significant statistical
differences between UAE national and foreign banks.
(6) The Study of Espinoza, Raphael and Prassad,
Ananthakrishnan (2010) on "Nonperforming Loans in the
GCC Banking System and their Macroeconomic Effects"
has concluded that the nonperforming ratios of credit of the
GCC banks have worsened from 7% to 15% during (1995-
2008) due to declining economic growth, increasing interest
rates and risk aversion increase. Such a worsening of
nonperforming ratios(NPLs) has reverse effect on the
macroeconomic of GCC countries with semi-elasticity
around 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 the
following determinants of efficiency of credit risk
management: enhancing capital adequacy; strengthening
assets quality; improving management soundness;
increasing earnings, having adequate liquidity and reducing
sensitivity 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) Most
Indian 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 a
proxy of management soundness, is increasing every year in
Indian banks that denote bank efficiency in using assets in
generating revenue.(5) Earning of the biggest three Indian
banks were fluctuating in the last five years. (6) There is
high liquidity ratio in Indian banks to meet client cash
withdrawals. (7) Indian banks used internal control system
to strengthen the bank capacity to control financial
operations. (8) Technology is a key factor in banking
performance .
(8) The study of Salas & Saurina (2002) on "Credit Risk In
Two Institutional Regimes of Spanish Commercial and
Saving Banks" examined credit risk in Spanish banks and
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 77
used panel data to compare the determinants of loan
problem in Spanish banks in the period 1985-1997, using
macroeconomic and individual banks variables to explain
credit risk. These variables are: GDP growth rate, family
and firm indebtness, rapid credit expansion, portfolio
composition, bank size, net interest margin, capital ratio and
market power. The study concludes the significance of early
warning indicators, the advantage of merger of banks, the
role of banking competition and the type of ownership in
determining credit risk.
(9)The Study of Al-Tamimi (2002) "Risk Management
Practices: An Empirical Analysis of The UAE Commercial
Banks" investigated the degree to which UAE banks use risk
management techniques in dealing with a different types of
risks. The study found that UAE banks were facing high
credit risk. Inspection by branch managers and financial
statement analysis were the main methods used in the risk
identification. Other techniques were: establishing
standards, credit scores, credit worthiness analysis, risk
rating and collateral. The study shows willingness of UAE
banks to use sophisticated risk management techniques and
recommended the adaptation of conservative credit policy
(10) The Study of Khambater & Bagdi (2003) on "Off-
Balance Sheet Credit Risk of the Top Twenty Japanese
Banks examined off-balance sheet across the top twenty
Japanese banks and concluded that banks in Japan used
financial derivatives to mitigate credit risk and the
commitment by the largest four top banks to credit risk
management. The study concluded that there is wide
differences among Japanese banks in using financial
derivatives instruments as a percentage of their assets which
denotes that Japanese banks are more conservative and risk
averse in general than the USA or European banks.
(11) The study of Al-Sarrayra (2009) on "Impact of
Administrative and Financial Efficiency on Controlling
Credit Default Loans: Applied Study on Jordanian
Commercial Banks" concluded that the lack of experience
of credit facility staff has negative impact on credit default;
conducting serious financial analysis based on principles of
credit facilities, has a substantial impact on credit default;
diversification of credit portfolio has positive impact on
mitigating credit risk; verifying the document supplied by
the client has a positive impact on credit default.
(12) The study of Atier (2007) on "Jordanian banks
Compliance With Basel II & Its Effect on Bank Capital and
Risk Managing" examined the compliance of Jordanian
banks with Basel II and its impact on bank capital and risk
management. The study employed several periods of cross
sectional data on Jordanian commercial banks in
simultaneous equation to estimate the effect in changing of
the risk on changes on capital and vice-versa. The study
concluded that there is a relationship between risk
management limits and capital levels in a simultaneous
manner. The study denotes that majority of Jordanian banks
deal with the effect of increase in capital and assets as
determinants of the effectiveness of credit risk management.
The study recommended that Jordanian banks should adhere
to Basel II capital adequacy requirement to reduce the
default probability and portfolio risks.
(13) The Study of Al-Hasanin (1995) on "Contemporary
Trends in Financial Analysis: the Case of Jordan" examined
Altman Model to estimate the index of financial failure
which is estimated according to the following equation:
M= 12 n
1
+ 0.014n
2
+ 0.033 n
3
+ 0.006N
4
+0.999 n
5

Where
M= Financial Failure Index
n
1
= percentage of (Net Working Capital/Total Assets)
n
2
= percentage of (Retained Earning/Total Assets)
n
3
=percentage of (Net profit before interest and taxes/Total
Assets)
n
4
:percentage of (Stocks Market value/Total Debts)
n
5
= Ratio of Asset Turn Over (Sales/Total Assets)
The study concluded that the index of financial failure in
several Jordanian financial institutions was more than 2.99
which denotes financial success, while the financial
institutions with failure index less than 1.81 are considered
not successful and are exposed to default.
(14) The Study on Hakim & Neaime (2002) on
"Performance &Credit Risk in Banking: A Comparison
Study for Egypt and Lebanon" investigates the impact of
liquidity, credit and capital on bank profitability in order to
shed light on strength of risk management practices by using
the a regression model of time series and cross section data
of banking institutions in Lebanon and Egypt during the
period (1993-1999).The study expressed the likelihood of
borrowers not repaying their loans as promised. Applying
right loan policies with good assessment of credit risk and
determining appropriate amount of collateral with little
concentration of loan and good training of credit officers are
part of good risk management. Liquidity has positive
relation with effectiveness of credit risk managementas as
the higher the liquidity ratio, the more the coverage of its
liabilities. Capital adequacy has a positive relation with
effectiveness of credit risk management.

3-2 Review of Previous Studies
It is noticed that the number of studies on credit risk
management of Arab banks was relatively small compared
to international banks and they
were mostly descriptive. This study is distinguished from
other studies by its empirical analysis of the effectiveness of
credit risk management of Saudi Banks which is not tackled
by other studies.

III. CHARACTERISTICS OF CREDIT RISK
MANAGEMENT OF SAUDI BANKS IN THE ERA OF
GLOBAL FINANCIAL CRISIS.
The structure of the banking sector consists of Saudi Arab
Monetary Agency (SAMA) at the head of banking System,
followed by licensed banks operating in the Kingdom which
consist of 20 banks including national banks, joint
ownership banks and foreign banks. These banks have 1600
branches in the Kingdom as in Table I:








Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 78
TABLE I
STRUCTURE 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 American
Bank"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 share
market prices due to indirect implication of the financial
crisis. The debt provisions increased from SR2.7 billion in


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


TABLE II
PERFORMANCE INDICATORS OF SAUDI BANKS IN FIRST HALF OF 2009 AND 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 1,3359,0
58
1,450,26
4
3,911,43
9
3,363,78
1
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 deposits of Saudi Banks increased from SR489387
million in 2005 to SR 940548 million in 2009 at annual
growth rate of 7.2% as in Table III
TABLE III
TOTAL DEPOSITS OF SAUDI BANKS (2005-2009)VALUE IN SR MILLION
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 total
deposit as total deposits in the year 2010 were higher than
2009 for 9 months with a growth rate of 2% in 2010 as
shown in Table IV





Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 79
TABLE IV
TOTAL DEPOSITS OF SAUDI BANKS IN THE FINANCIAL MARKET FOR A PERIOD OF 9 MONTHS IN 2009 AND 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 the
percentage of
credit facilities to deposits as there is a decline in this
percentage from 86.8% in 2008 to 81.6% in 2009 as in
Table V:







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

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

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

TABLE VI
DEVELOPMENT OF CREDIT FACILITY OF SAUDI BANKS DURING 2005-2009
Year Credit Facility (Value in million SR)
2005 420828
2006 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 to
unprecedented

levels in 2009 as in Table VII:
TABLE VII
ANNUAL GROWTH RATE OF CREDIT FACILITIES OF SAUDI BANKS
Growth rate of
Credit for
Individuals
Growth Rate of
Credit Facilities for
Government
Growth Rate of
Credit Facilities
for Private Sector
Growth Rate%
of Total Credit
Facilities
Year
51.4% 10.3% 8.6% 8.3% 2001
37% 12% 10% 10.8% 2002
36.2% 8.7% 11% 13.6% 2003
56.3% 2.7% 337.4% 20.9% 2004
56.1% 12.9% 38.9% 21.6% 2005
1.6% 3.6 9.2% 6.5% 2006
2% 17.% 21.4% 19.7% 2007
2.2% 45.6% 27.1% 28.6% 2008
N.A 4.1% 11.8% 7.7% 2009
Source: Tadawol Financial Magazine (2010) Saudi Economic Indicators. Riyadh. Issue no.27 of January 2, 2010
The percentage of credit facilities to GDP has not been
affected by the financial crisis as the percentage in 2009 has
increased to 66.8% from 54.1% in 2008, The percentage of
personal loans to total credit has ranged between 12.6% in
2001 to 18.8% % in 2009 which shows that about one fifth
of the banks' credit goes to individual loans as in Table VIII:
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 80
TABLE VIII
CREDIT FACILITIES AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT(GDP)
Personal Loans\Total Credit Credit Facility\ GDP Year
12.6% 47.4% 2001
15.6% 50.9% 2002
18.7% 50.9% 2003
24.2% 52.7% 2004
31.1% 50.8% 2005
29.6% 47.9% 2006
24.7% 53.5% 2007
18.8% 54.1% 2008
N/A 66.8% 2009
Source: Tadawol Financial Magazine (2010) Saudi Economic Indicators. Riyadh. Issue no.27 of January 2, 2010.
In relation to distribution of credit facility according to
economic sectors, there is concentration in favor of
commercial sector which denoted weak
diversification of credit facilities of Saudi Banks as in Table
IX:
TABLE IX
DISTRIBUTION 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 maturity
shows that short term loans has a dominant percentage of



61% followed by long term loans at 23% and finally middle
term loans at 16% which indicates high concentration in
favor of short term loans as shown in Table X:
TABLE X
DISTRIBUTION 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%
Source: SAMA (2010) Annual Report No. 46. Riyadh

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 XI
DISTRIBUTION OF CREDIT TO INDIVIDUAL 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
Source: SAMA (2010) Annual Report No. 46. Riyadh

Liquidity of Saudi Banks stood at 36.5% in 2009 compared
to 33.5% in 2008 which is in adherence with liquidity
requirement of SAMA and Saudi Banks tried to strike a
balance between liquidity and profitability.

Capital Adequacy Ratio of Saudi Banks have maintained a
high percentage of capital adequacy in 2009 which denotes
that Saudi banks keep sufficient capital to face credit default
risk as in Table XII:
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 81
TABLE XII
AVERAGE 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
Source: SAMA (2010) Annual Report No. 46. Riyadh
Banks' reserves have increased simultaneously during
(2005-2010). Banks' reserves as a percentage of deposits
range between 5.5% in 2005 to 17% in 2009. SAMA
allowed legal reserves to decline from the 13% to 10% to
enable banks to have more liquidity to expand their credit
facilities. Banks' reserves constitute 86% of capital which
indicate the precautious approach of Saudi Banks as in
Table XIII:
TABLE XIII
VALUE 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 to
Deposit
5.5% 7.3% 12.8% 10.3% 17% 14.3%
Source: SAMA (2010) Annual Report No. 46. Riyadh

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


billion in 2006. However, the profits declined to SR 26830
million in 2009 as an indirect affect of global financial crisis
as in Table XIV:
TABLE XIV
PROFITABILITY OF SAUDI BANKS DURING (VALUE IN MILLION SR)
2005 2006 2007 2008 2009
Profits 25611 34665 302604 29928 26830
Source: SAMA (2010) Annual Report No. 46. Riyadh
The profits of Saudi Banks for 9 months during 2010 has
declined by 12% in comparison with 2009 as in Table XV:
TABLE XV
COMPARATIVE PROFITS OF SAUDI FOR 9 MONTHS DURING 2009 AND 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. Riyad
The returns on banks' shares ranged from 4.97% to -0.71%
which are low, in addition to low bank's share prices as in
Table XVI:
TABLE XVI
RETURN 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 Financial Market
Source: Tadawol Bulletin (2010) Indicators of Stocks on 9/10/2010.
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 82
In relation to Quality of Asset, not all Saudi Banks' assets
are of good quality particularly certain types of stocks and
bonds. The decline in asset value is the prime source of
banks' losses as shown in Table XVII:

TABLE XVII
COMPARATIVE TOTAL ASSETS IN 2009 AND 2010 (VALUE IN BILLION SR)
Total Assets 2009 2010
First quarter 1049.5 1058.2
Second quarter 1055.9 1063.0
Third 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 are
at 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 XVIII
NON-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 of
Saudi banks for 9months in 2012 are shown in Table XIX


TABLE XIX
NON-PERFORMING LOANS, BAD DEBTS AND THEIR PROVISIONS OF SAUDI BANKS IN 2012 FOR 9 MONTHS (VALUE IN MILLION SR)
Saudi Banks NPL Provision
for NPL
Percentage
of Provision
Coverage of
NPL
Bad Debts % Change in
Bad Debts
2011 2010
Al-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/A
Source: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 million
for Inma Bank to SR3534 million for Al-Rajhi banks and
the provison for NPL ranged between SR4594million for
Rajhi to SR 225 million for Al-Inma and most of the Saudi
banks had bad debts except for Al-Inma bank, that ranged
between SR1675.5 million for Al-Rajhi to SR1.2 million
for 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 increasing
bad loan debts in the year 2011 compared to 2010 is an
indicator of weak effectiveness of credit risk management in
most Saudi banks.
Financial Indicators of National Suadi Banks are shown in
Table XX:














Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 83
TABLE XX
FINANCIAL INDICATORS OF SUADI BANKS (2008- 2009)
VALUE IN SR MILLION
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 799
3
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 of
Saudi Banks show the financial position and earning
capacity as in Tables XXI and XXII:

TABLE XXI
CONSOLIDATED 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.


















Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 84
TABLE XXII
CONSOLIDATED INCOME 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 income
Income from Investment
Total Non interest income
356
403
2,801
394
971
3,911
580
620
2,557
678
-1,098
1,989
166
67
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, May
Khamis and Nada Oulidi, No. WP\10\87. Washington

The Credit Risk Indicators in 2011 show that Saudi Banks
have achieved the 4
th
rank in the Arab region while it
achieved the rank of 33 world-wide among 178 countries
which denotes moderate bank risk as the average was 46.5
as shown in Table XXIII:

TABLE XXIII
CREDIT RISK INDICATORS 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 52.3
UAE 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 indicators show the default probability of banks on the scale zero to 100.
Source: Institutional Investor(2011) Credit Risk Indicator. Annual Report

IV. ANALYSIS OF THE RESULTS OF THE EMPIRICAL
RESEARCH
4-1:Characteristics of the Study Sample
Characteristics of the respondents of the sample as in Table
XIV:




















Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 85
TABLE XIV
ANALYSIS OF CHARACTERISTICS OF SAMPLE
Percentage Frequency Categories Variable
70%.
30%
100%
60
25
85
Bank
Financial Institution
Total
1-Types of
Enterprise
31.7%
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
Diploma
Bachelor
Master
Doctorate
Total
3-Qualification
22.4%
%15.3%
18.8%
16.4%
14.2%
12.9%
100%
19
13
16
14
12
12
85
Management
Finance
Accounting
Economy
Statistics
Other
Total
4-Major of Study
20.1%
24.7%
22.4%
17.6%
15.2%
100%
17
21
19
15
13
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
16
85
Taif
Mecca
Jeddah
Riyadh
Total
6- Place
Source: Researcher Computation
Analysis of the "Type of Enterprise" shows that banks
comes 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 Secondary
Certificate (17.6%). In relation to the "Major of
Specialization" management comes first( 22.4%), followed
by accounting (18.8%), then economics ( 16.4%) followed
by finance (15.3% ) then statistics (14.2%) followed by
other 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 comes
first (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
+
1
CAD +
2
AQ +
3
Mgmt +
4
E +
5
L+
6
S
+

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)
R
2
adjusted=0. 699; F=5.040* ; D.W=2.546
Where
NPL= is the dependent variable of nonperformance ratio as
a proxy for
effectiveness of credit risk management.
= constant

1
to
7
= beta coefficients for the study variables
CAD=Capital adequacy ratio
AQ=Asset Growth as a proxy of Quality of Asset.
Mgmt = The asset turnover ratio is a proxy of management
soundness.
E= Ratio of Interest divided by total loans is a proxy of
profitability.
L= Ratio of loans divided by deposits as a proxy for
liquidity
S= Bank Size which is measured by total assets.
= error which represents the remaining exploratory factors
Descriptive Data of Regression Analysis are shown in
Table XXV:



Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 86
TABLE XXV
DESCRIPTIVE DATA OF REGRESSION ANALYSIS OF 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 0.102
Size 94626 221802 16052 33417
Source:Researcher's Calculation of Descriptive Regression Data
Regression coefficients of Saudi Banks are shown in Table
26:
TABLE XXVI
REGRESSION COEFFICIENTS OF SAUDI BANKS DEPENDENT VARIABLE (NPL)
Independent
Variables
eta t-statistics F-statistics R
2
Adjusted 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 0.228
L 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 R
2
(0.699)
indicates that 69.9% of the change in the effectiveness of
credit risk management is explained by the independent
variables, while 30.1% of change in effectiveness of credit
risk management is explained by other factors expressed by
the residual F- Statistics (F=5.040) indicates it is
significant at 5% and the regression equation explains the
good fitness of the regression model. While D.W (2.546)
indicates that there is no problem of autocorrelation in the
regression equation.
The testing of null hypotheses is as follows : The first null
hypothesis was accepted that there is no significant relation
between capital adequacy and effectiveness of credit risk
management of Saudi Banks as in coefficient (t=0.350) and
(=0.098) denotes low explainatory of the variable. The
second null hypothesis was accepted that there is no
significant relation between asset quality and effectiveness
of credit risk management of Saudi Banks as shown in
coeffficients (t=- 1.026) and (=-0.186). The third null
hypothesis was accepted that there is no significant relation
between management soudness and effectiveness of credit
risk management of Saudi Banks as shown in coefficients(
t=-1.212) and (=0.267). The fourth null hypothesis was
accepted that there is no significant relation between earning
and effectiveness of credit risk management of Saudi Banks
as shown in coefficients(t=0.228) and (=(0.044).The fifth
null hypothesis was rejected and the alternative hypothesis
was accepted that there is significant relation between
liquidity and effectiveness of credit risk management of
Saudi 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 and
effectiveness of credit risk management of Saudi Banks as
shown in coefficients (t= -2.903*) and ((=-646) and the
relation is negative, i.e, when bank size increases,
effectiveness of credit risk management decreases.

4-3 Analysis of Challenges of Effectiveness of Credit
Risk management
The gross mean of challenges (3.339) is above average 3 on
Likert Scale which indicates that Saudi Banks have slightly
above average challenges of effectiveness of credit risk
management. The challenge " Low Quality of Asset " comes
first with a mean (3.523), followed by the challenge
"Inadequate Training" with a mean (3.494), followed by the
challenge "Weak Corporate Governance" with a mean
(3.486), then the challenge " Lack of Credit Diversification "
with a mean (3.439), then the challenge " followed by
Granting 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 Loan
Guarantees 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 Credit
Safety" with a mean (3.286). The standard deviation of
challenges ranges between 1.084 and 1.334 which are
medium deviations. Analysis of t-statistics shows that the
coefficients are significant at level 5% with exceptions of
the variable "weak corporate governance" and the variable
"granting high credit ceiling" as shown in Table XXVII:


Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 87
TABLE XXVII
CHALLENGES OF EFFECTIVENESS OF CREDIT RISK MANAGEMENT IN SAUDI BANKS
Sig.

t-
Statistics
STD Rank Mean Challenges of Effective Credit Risk Management
.0670 1.553 1.230 3 3.486 1.Weak Corporate Governance
.0210 9.756* 1.084 1 3.523 2.Low quality of asset.
.0231 4.303* 1.334 5 3.439 3 Lack of Credit Diversification
.0350 8.610* 1.184 10 3.297 4.Absence of analysis of Customers' financial position
.0305 3.624* 7 3.402 5. Absence of Risk Premium on Risky loans
.0470 2.529* 1.263 11 3.290 6. Corruption of a number of credit officers
.0171 10.156* 1.242 12 3.286 7. Priority of Profit at Expense of Credit safety
.0240 9.408*
1.213
9
3.312
8. Priority of loan guarantees at expense of customer
capacity of repayment
.0465 2.957* 1.199 2 3.494 9. Inadequate training of Credit Officers
.0780 1.086
1.127
6 3.435

10. Granting high credit ceiling exceeding
customer capacity of repayment
3.339 Gross Mean
Source: Researcher Computation
4-4: Analysis of Development Methods of Effective
Credit Risk Management
The gross mean of Development Methods (3.260) is above
average on Likert Scale, which indicates that Saudi Banks
require slightly above average development methods. The
method "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" with
a mean (3.246), followed by "Exchange of Information with
Other Banks and Credit Bureau on risky customers " with a
mean (3.187), then "Granting Incentives for Best Credit
Risk Managers" with a mean (3.125 ). The standard
deviation of development methods ranges between 1.061
and 1.215 which are medium deviations. Analysis of t-
statistics shows that variables 1, 4, and 5 are significant at
5%, which indicates that there are significant differences
among respondents' while the other 3 variables are not
significant with no significant differences among
respondents' answers as in Table 28:


TABLE XXVIII
METHODS OF DEVELOPING EFFECTIVENESS OF CREDIT RISK MANAGEMENT
Sig.
at 5%

t-statistics STD Ran
k
Mean Methods of Developing Effectiveness of Credit Risk
Management

0.0244
4.166*
1.061
4
3.246
1-Conducting Training of Credit Officers on new
techniques of credit risk Management
0.0541 1.680
1.004
1 3.423

2- Preparation of an Overall Strategy for Credit
Risk Management
0.0706 1.388
1.197
2
3.375

3-Development Mitigating Methods for Alleviating
Credit Default risk according to best practices
0.0171 5.016*
1.212
7
3.125
4- Granting Incentives for best credit risk
managers
0.0268 3.943*
1.115
6
3.187
5- Submitting periodical Reports to Board of
Directors on Credit Risk Management
0.0746 1.313
1.203
5 3.228

6- Exchange of Information with other banks and
the Credit Bureau on risky customers
3.260 Gross Mean
*Significant at 5%
Source: Researcher Computation

V. CONCLUSIONS & RECOMMENDATIONS
The study aims at investigating determinants, challenges and
development methods of effectiveness of credit risk
managements of Saudi Banks. The methodology is
descriptive and analytical using "CAMEL" Model for
analyzing effectiveness of credit risk management.
The findings on the determinants of effectiveness of credit
risk management of Saudi Banks are: liquidity has
significant strong positive impact on effectiveness of credit
risk management of Saudi Banks, besides the bank size

which has significant strong and negative impact on
effectiveness of credit risk management of Saudi
Banks.While the other variables of capital dequacy, asset
quality, management soudness and earning have
insignificant
impact on effectiveness of credit risk management.
The Study Findings on the challenges of effectiveness of
credit risk management of Saudi Banks, in sequent
importance, are: low quality of assets; inadequate training;
weak corporate governance; lack of credit diversification;
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 88
granting a credit ceiling exceeding customer capacity of
repayment; absence of risk premium on risky loans; priority
of loan guarantees at expense of customer repayment
capacity; absence of serious analysis of customers' financial
position; corruption of some credit officers and priority of
profit at expense of credit safety.
The study findings on developing effectiveness of credit risk
management in Saudi Banks, in sequence importance, are:
Having an overall strategy for credit risk management;
adopting mitigating methods for alleviating credit default
risk; adopting Basel Committee principles; conducting
training of credit officers; exchange of information with
other banks on risky customers; submitting periodic reports
to board of directors and granting incentives for the best
credit risk managers.
The Study Recommendations are: (1) Saudi Banks should
have an overall comprehensive strategy of credit risk
management based on enhancing capital adequacy,
upgrading asset quality, strenghthening management
soundness, increasing earnings, having adequate liquidity
and reducing sensitivity to market risk (2) Saudi Banks
should adopt sophisticated mitigating techniques of credit
risk that include hedging credit risk; having adequate
provisions for doubtful credit; renegotiating loan terms for
insolvent customers, transferring credit risk to a third party,
rescheduling customer credit, extending credit maturity,
lowering interest rate on credit and partial writes off default
credit. (3) Saudi Banks are advised to strengthen the role of
the credit risk committee (4) Saudi Banks should be ready to
implement Basel III Accord by the year 2015.

BIBLIOGRAPHY
)
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(www.aleqt.com/2010/10/18 number _6219)


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( 0991 . )

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(B) ENGLISH SOURCES
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Management A Comparison Study of UAE National and Foreign
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[3] Al- Sarrayra, Awwad. M (2009) Impact Of Administrative And
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Study on Jordanian Commercial Banks. A Dissertation. Arab
Academy For Banking. Amman
[4] Asli Kunt &Enrica Detragiach (2010) Basel Core Principles and
Bank Risk: Does Compliance Matter?, IMF Working Paper no.
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[5] Atier, Murad. A (2007) Jordanian Banks Compliance with Basel II &
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submitted to
[6] Arab Academy For Banking And Financial Sciences. Amman.
[7] Basel committee (2000) Principles for the Management of Credit
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[9] Bodla, B S ,Verma Richa (2009) Credit Risk Management Frame
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[11] Coyle, Brian(2000) Bank Finance. Financial world
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[13] Espinoza Raphael, Prosad Ananthakrishnan and Oral Williams(2010)
Regional Financial Integration of GCC. A working paper of IMF No.
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[14] FDIC Banking Review (2003) failure prediction and CAMEL
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model.(http://www.fdic.gov/bank/analytical/banking/2003jul/footnote
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[15] Hakim, Sam & Neaime, Simon (2002) Performance &Credit Risk in
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Prepared by Abdullah Al-Hassan, May Khamis and Nada Oulidi, No.
WP\10\87. Washington
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.Souto.WP/09/162.
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[34] www.aleqt.com/a/721540_245937.Jpg

APPENDIX 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:
O Bank O Financial Institution O University
1-2: Job:
O Employee O Manager O Head of Section O Professor
1-3:Education
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 89
O Secondary O Diploma O Bachelor O Master O
Doctorate
1-4: Major Specialization:
O Management O Finance O Statistics OEconomics O
Accounting O Other (Specify)
1-5: Experience in Years:
O 1-5 O 6-10 O 11-15 O 16-20 21 and more
1-6: Place
O Taif O Mecca O Jeddah O Riyadh

Section2: Questionnaire Paragraphs
Part I: Challenges of Effectiveness of Credit Risk Management
Please check the right answer( ( on Likert Scale
Very High
5
High
4
Medium
3
Low
2
Very low
1
1. Is inadequate Capital Adequacy a challenge to the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
2. Is a weak Corporate Governance a Challenge to
the Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
3. Is low Quality of Assets a Challenge to the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
4. Is Insufficient Liquidity a Challenge to the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
5. Is weak Economic Growth a Challenge to the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
6.Is Lack of Credit Diversification a Challenge to the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
7. Is Ignoring Market Risk a Challenge to the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
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
High
4
Medium
3
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
High
4
Medium
3
Low
2
Very low
1
10. Is Corruption of Credit Officers a Challenge to
the Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
11 Is Profitability at the expense of Safety a
Challenge to the Effectiveness of Credit Risk
Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
12. Is Loan Guarantees at the expense of customer
capacity of repayment a Challenge to the
Effectiveness of Credit Risk Management?
Very High High Medium Low Very low
Asian Transactions on Basic and Applied Sciences (ATBAS ISSN: 2221-4291) Volume 03 Issue 02
May 2013 ATBAS-10305028Asian Transactions 90
5 4 3 2 1
13. Is Inadequate training of Credit Officers a
Challenge to the Effectiveness of Credit Risk
Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
14. Is Extra Provisions of doubtful Credit Debt a
Challenge to the Effectiveness of Credit Risk
Management?
Very High
5
High
4
Medium
3
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 Scale
Very High
5
High
4
Medium
3
Low
2
Very low
1
16- Is Training of Credit Officers Promote the
Effectiveness of Credit Risk Management?
Very High
5
High
4
Medium
3
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
High
4
Medium
3
Low
2
Very low
1
18- Are Mitigating Methods for Alleviating Credit
Default Promote the Effectiveness of Credit Risk
Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
19-Is Adopting Basel Committee Principles help
promote the Effectiveness of Credit Risk
Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
20. Does granting incentives for best credit officers
promote Effectiveness of Credit Risk ?Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
21.Are Systematic Reports to the Board of Directors
on Credit Risk promote Effectiveness of Credit Risk
Management?
Very High
5
High
4
Medium
3
Low
2
Very low
1
22 Does Exchange of Credit Information with other
banks and the Credit Bureau promote Effectiveness
of Credit Risk Management?


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May 2013 ATBAS-10305028Asian Transactions 91



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