In brief:
The Central Bank of the UAE (CBUAE) has introduced Credit Risk Management Regulations and Guidelines, setting minimum standards for Licensed Financial Institutions (LFIs). These regulations comprise of articles and enforceable standards, aimed at strengthening governance, risk oversight, and operational resilience within the LFIs.
The objectives of the guideline are summarised below:
- Strong oversight mechanisms to promote accountability, transparency and provide assurance
- Align credit risk appetite to overall business and strategic objectives of the LFI
- Ensure consistency and standardisation of credit risk management
- Enable data-driven decision making
- Enhance credit monitoring and risk mitigation
- Establish clear perform
LFIs must align their credit risk strategies with these new regulatory requirements, ensuring compliance and long-term financial stability.
In detail:
The CBUAE Credit Risk Management Regulation establishes a comprehensive risk framework to enhance financial resilience in the UAE’s banking sector. It applies to all LFIs operating within the UAE, including foreign subsidiaries and affiliates.
We expect the impact of this regulation across four key themes:
- Governance, oversight & strategy - Aligns credit risk management with business goals, ensuring accountability, transparency, and regulatory compliance
- Framework, policies & procedures - Standardises and streamlines credit risk processes, enhancing operational efficiency and adaptability
- Data, analytics & infrastructure - Enables data-driven decisions and real-time risk monitoring, supporting scalability and competitive advantage
- People, culture & performance: Promotes skill development and a risk-aware culture, driving engagement and effective risk management
How can LFIs derive value?
- Governance, oversight & strategy
- Framework, policies & procedures
- Data, analytics and infrastructure
- People, culture and performance
Governance, oversight & strategy
- To enable informed decision-making through advanced data analytics and robust infrastructure.
- Effective data aggregation and analytics tools allow for enhanced monitoring of credit exposures and early identification of emerging risks.
- A strong data and infrastructure foundation supports the scalability of credit risk management practices.
- Leveraging cutting-edge analytics and technology provides a competitive edge by enabling more sophisticated risk management strategies.
Areas of potential quantitative and financial impact
The standard has set rules and guidelines that may affect LFIs differently, depending on their size, maturity, and operational complexity. LFIs must conduct a quantitative impact assessment and implement mitigation measures to reduce the impact.
- Risk Appetite link to Capital Strength: Larger LFIs with big ticket transactions and material capital level are expected to have more stringent risk appetite thresholds based on their capital strength.
- Accountable underwriting requirements: Underwriting standards mandate that LFIs should take responsibility for their underwriting decisions with incentive mechanism to compensate staff with good credit decisions. This requires changes to current incentive programs.
- Default Definition: LFIs whose default definition of retail and wholesale portfolio are currently relaxed as compared to the current measure of 90 DPD as well as triggers indicating unlikeliness to pay may witness material increase in their default
pool post implementation of the standards. - Significant Increase in Credit Risk (SICR): Revised SICR requirements such as multiple deferrals, use of internal ratings amongst others may lead to more stage 2 accounts where LFIs will have to maintain higher provisions.
- Provision Adequacy & Floors: Higher provision floor requirement compared to current levels will impact LFI’s profitability level and returns to shareholders.
- Approval of Material Loans: The Board and Board Committees need to be provided with adequate and sufficient information to make appropriate credit decisions on material loans that significantly impact the LFI’s solvency. Such loans should remain performing to maintaining good risk profile.
- More stringent credit risk mitigation standards: With more stringent requirement on credit risk mitigation, LFIs that do not step up their measurement and valuation procedures may miss the opportunity to reduce provisions through incorporation of mitigants’ effect
into the computation. - Climate Risk Management: LFIs will need to consider the climate related risk factors in credit exposures, and may shift their lending strategy to non-climate sensitive sectors and restructure the credit terms (shorter tenor, lower LTV, stringent covenants).
- Limitation in the use of Model Override: The standards discourage overrides where risk measurement and reporting will be driven mostly by model outputs. This will have significant impact on LFIs with lower model management maturity.
- Compliance with CBUAE MMS: Compliance with CBUAE model management standards is required LFIs and may lead to more volatility in model outputs compared to the current practices of LFIs who are yet to fully adopt model management standards.
Conclusion
To ensure compliance, LFIs need to revisit their operating model and key enablers of credit management across the following aspects:
- Governance and oversights: Improve the maturity of control functions and establish mechanisms to ensure smooth board and board committee approval of material credit decisions.
- Strategy and appetite: Enhance target market and risk acceptance criteria to address new risk areas and link credit risk appetite to the capital level.
- Policies and frameworks: All policies should be reviewed and enhanced to address all minimum requirements. Additional frameworks such as ESG, performance management, country risk, etc. needs to be formally operationalised.
- Credit process and operations: LFIs will need to improve the operational capabilities to ensure adequate control and compliance with the standards.
- Risk modelling: Overall maturity level of modelling is expected to increase given more reliance placed on models and less use of model overrides.
- Data and technology: Data infrastructure and robust internal or integration with external system will be required to support credit operations and risk modelling. More robust systems are required to improve the end-to-end credit lifecycle.
- Human resources and performance assessment: Adequate skills, performance and incentives management is crucial to fulfil the requirement of the standards. LFIs need to perform detailed assessment and planning of human resources and institute robust credit risk management framework to reap the benefits that comes with the revised regulation and standards.
The Credit Risk Standards that complements the regulation cover key technical articles listed below:
- Article 1: Definition
- Article 2: Credit Risk Governance
- Article 3: Credit Risk Management Framework
- Article 4: Credit Risk Oversight Functions & Roles
- Article 5: Credit Underwriting
- Article 6: Definition of Default
- Article 7 Significant Increase in Credit Risk
- Article 8: Restructuring
- Article 9: Classification & Provisioning
- Article 10: Credit Risk Mitigation
- Article 11: Portfolio Management and Internal Reporting
- Article 12: Non-Performing Assets and Write-Off
- Article 13: Credit Risk Models
How can we support?
PwC Middle East offers comprehensive advisory services to help LFIs assess gaps, implement risk frameworks, and enhance regulatory compliance. Key services include:
- Design and implementation of credit risk frameworks
- Gap assessments and quantitative impact analysis
- Credit risk measurement and modelling
- Technology implementation and infrastructure enhancement
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