Credit Risk

Credit risk is the possibility of a financial loss arising from a borrower's failure to repay a loan or meet contractual obligations. It’s a core consideration for banks, lenders, and businesses offering credit terms to customers.

Types:

• Individual Credit Risk: For personal loans, mortgages, credit cards.

• Corporate Credit Risk: For business loans, bonds, and trade credit.

• Sovereign Risk: Linked to government debt default risk.

Management:

• Credit scoring systems.

• Collateral requirements.

• Credit insurance.

• Diversification of credit exposure.

Example:

An exporter in Sharjah extending AED 250,000 in trade credit to an overseas distributor assesses credit risk by reviewing the distributor’s payment history, financial statements, and political risk in the buyer's country.