Page 147 - Capricorn IAR 2020

2020 INTEGRATED ANNUAL REPORT
NOTES TO THE CONSOLIDATED AND SEPARATE ANNUAL FINANCIAL STATEMENTS (continued)
for the year ended 30 June 2020
3. FINANCIAL RISK MANAGEMENT
Any business that requires a return on capital investment is exposed to financial risks. Managing these risks continues to play a pivotal role within the Group to ensure an appropriate balance is reached between risks and returns. The board of directors is ultimately responsible to manage risks that may either have a positive or negative impact on its financial performance, and which may ultimately have an adverse effect on the continued operations of the Group. However, it is the responsibility of management to identify risks, whether real or anticipated, within their business units, and take appropriate actions.
Management’s approach to risk management is to ensure all significant risks are identified and managed, and the returns are balanced with the risks taken. Compliance with a set of comprehensive risk management policies is an integral part of the Group’s day-to-day activities and systems of internal controls have been implemented to prevent and detect risks.
The key principles forming the foundation of the Group’s risk management process include:
• Adoption of a risk management framework which applies to all business units and risk types
• Risk assessment, measurement, monitoring and reporting
• Independent reviews and assessment
• Risk governance processes
The following subcommittees have been formed to assist the board audit, risk and compliance committee (BARC) to manage risks:
Board credit committee (BCC) and board lending committee (BLC)
One of the Group’s primary activities is lending to retail and commercial borrowers. The Group accepts deposits from customers or borrows money from investors at both fixed and floating rates, and for various periods, and seeks to earn above-average interest margins by investing these funds in quality assets. The BCC and BLC are tasked to ensure this objective is achieved through the sanctioning of credit and thereby ensuring credit exposures remain within an acceptable range of credit standing. Such exposures involve not just loans and advances reflected on the statement of financial position, but also guarantees and other commitments such as letters of credit.
Asset and liability committee (ALCO)
The primary responsibility of the ALCO is the management of market and liquidity risks within set risk capacity, appetite and tolerance thresholds while at the same time optimising the Group’s profitability and capital position. The ALCO reviews the macroeconomic environment, as well as historical financial and strategic performance as inputs in a strategy development process, which is supported by simulations and forecasting. The Group trades in financial instruments where it takes positions in traded instruments, including derivatives, to take advantage of, and hedge against adverse, short-term market movements in bonds and in foreign currency, interest rate and commodity prices. Among other responsibilities, ALCO is tasked to monitor the risks associated with these activities.
Risk management includes the setting of trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. In addition, with the exception of specific hedging arrangements, foreign exchange and interest rate exposures associated with these derivatives are normally offset by entering into counterbalancing positions, thereby controlling the variability in the net cash amounts required to liquidate market positions.
The ALCO also carries the primary responsibility of monitoring the Group’s liquidity position, as well as formulating the funding strategy. The interest rate subcommittee reviews the economic environment and recommends interest rate views to ALCO. ALCO activities are reported to the BARC.
Risk committee
In addition to the mentioned committees, the risk committee, comprising of members of the executive management team and reporting to the BARC, was established. Its primary responsibilities are to:
• Evaluate the risk management model employed by the Group in terms of effectiveness and efficient deployment of resources
(i.e. cost versus benefit)
• Discuss and identify gaps and weaknesses in the management information system to enable management to make the correct
decisions
• Discuss the findings and recommendations of the Group’s risk functions and evaluate whether appropriate action has been
taken when necessary
• Enhance general risk awareness within the Group
• Monitor the management of risks to ensure that the Group complies with the Bank of Namibia’s guidelines for effective risk
management
• Discuss in detail any identified, unidentified and potential risks that are material to the Group
145