Background
A Financing Company with a lending portfolio of more than 7000 loans is exposed to market risk through interest rate variability in its lending and borrowing portfolios.
The company rate-sensitive assets are medium-term, while the rate-sensitive liabilities are short to sub-medium term. The company had only hedged a fraction of its borrowing portfolio. As a result, market rate changes had adverse loss impacts on the company.
Within an asset liability management framework (ALM), Al Salam MSA Bahrain fund’s role was to assist the company enhance its governance of interest rate risk identification, evaluation, hedge performance monitoring, and ultimately improve its hedge decision-making that also pays attention to hedge accounting considerations as per IFRS9.
Our approach
We first evaluated the existing current interest rate exposure and outstanding hedging in place in light of the current market environment by looking at both sides of the balance sheet.
We then provided a clear summarization covering the outcome of the analysis, observations on the current hedging practices, and the optimal interest rate risk management strategy that is aligned with best practices and considerate of the company’s interest rate risk appetite and risk management objectives.
Such an approach enabled us to document the interest rate hedging policy and determine the parameters, controls, and KPIs. Moreover, to establish a hedging protocol that details the approved hedge counterparties, threshold limits, and methodology for allocation of hedging.
Outcome
Along with the company’s team, we managed to bridge the missing link in the company’s existing market risk policy, establishing the governance framework, limits, and triggers to consistently address the company interest rate risk by keeping its risk appetite and overall financial objectives into consideration.
Facilitate the establishment of a holistic approach to identify, measure, manage, report, and monitor exposure to interest rate risk during normal and adverse market conditions. Additionally, ensure that fluctuations in interest rates will not breach any regulatory, lender, or any other relevant covenants.
Support the company staff towards being self-sufficient and independent concerning the regular reviews and assessments required as part of the interest rate risk management exercise.
