Bank credit is pivotal to large as well as small businesses that are seeking to grow. A huge number of individuals and entrepreneurs borrow from banks and other financial institutions when they require financial investment. This at times tends to be more than any other source of capital and financial investment. It is a fact that small business owners have often emphasized on increasing their capital through a wide variety of financial opportunities. However, a bank loan still seems to be more lucrative than a credit card loan. Al-Jazeera can certainly help potential entrepreneurs and business owners in this regard. It is a fact that small lenders, when compared to other big lenders, place more emphasis on credit ratings and financial statements when allotting loans to potential applicants and give high consideration to their character and relationships. Al-Jazeera’s policy of relying on a mixture of financial and non-financial factors allows potential investors from all financial backgrounds to apply for a potential loan. It is also evident from several research findings that small or medium sized financial institutions that lend to small businesses tend to remain stable even in adverse scenarios. Being a medium sized bank, Al-Jazeera has also adopted this strategy and has maintained its financial stability.
Being a recognized credit bank does have its advantages and Al-Jazeera has certainly capitalized on it to a great extent. Such banks do have certain advantages with regards to lending money to medium and small sized businesses. Moreover, their scope also allows them to offer cash management services, letters of credit for exporting and other financial services. Their size allows them to make loans that could be either asset-based or are on an accounts receivable basis. A strong point that has contributed to the success of Al-Jazeera Bank has been in developing a strong credit culture where loans are only granted to individuals when they can prove their repayment potential with adequate effectiveness. However, capability of repayment can certainly take various forms. Prior to approval of loans, the credit history of potential applicants is heavily scrutinized and the customers’ repayment capability is thoroughly evaluated.
There are some critical issues with regards to providing credit that Al-Jazeera has consistently taken into account. With the emergence of financial institutions, transaction costs are also likely to decline. It is believed that in comparison with the barter system, the financial institutions assist in collecting and processing information regarding investment opportunities much more efficiently and effectively. Therefore, with the existence of banks, it seems that the economies of scale are benefiting from this much more than before, as this has enabled them to reduce the cost of investment quite significantly. The issue in this regard is that low financial development not only reduces growth opportunities but it also increases the cost of financial transactions. It often happens that because of irregular exchange of information between the borrowers and lenders in the market, poor selection and moral vulnerability can occur in the market which eventually prevents the market adjustments regarding supply and demand through the price mechanism. Nevertheless, through screening and monitoring prospective customers, Al-Jazeera bank has been able to curtail these risks to quite an extent.
In order to allocate the capital, financial mediators engage themselves in information gathering and special contract design which eventually allows them to curtail the level of risk to quite an extent. Basically, the banks exploit the imperfect nature of the market in such a way that it facilitates them to determine to whom they should allocate the funds. This means that among many roles and activities of financial institutions, one of the roles is to act as an intermediary between the surplus and the deficit sectors of the economy. The availability of a credit facility not only enables the financial institutions to execute their intermediary role in this regard, but it is also quite imperative for the overall development of the economy as well.
Al-Jazeera has made strong and rigid policies with regards to providing credit and other financing schemes to potential clients. By formulating and executing suitable and effective strategies, procedures, and practices, credit risk can be curtailed to a major extent. It is imperative to ensure that the loan policies should be designed so that they not only support the mission and goals of the bank, but that they also uphold secure and sound lending activity. The policies and procedures in this regard should be such that they provide an outline for all the key credit decisions and actions, should cover all the major features of credit risk, and should also show the intricacy of the activities which a bank has to carry out. The bank then makes sure that all policies are aligned effectively.
By formulating and following effective loan policies and procedures, Al-Jazeera Bank can alleviate credit risk to a major extent, if the risk seems to be unavoidable. A bank’s board of directors has a major responsibility to outline the loan policies for the purpose of dealing with the inherent and residual risks in the lending business lines, therefore it is extremely imperative for banks to ensure that the loan policy should be descriptive and well-written. Moreover, after the loan policy is formulated, it is the responsibility of the senior management to ensure its effective implementation and monitoring and also the maintenance of procedures on a constant basis, so that it can be ensured that they are not only up to date but also pertinent to the existing risk profile.
It is evident from the facts above that bank credit is an important component of every financial institution and the same applies to Al-Jazeera Bank. It is highly likely that in the near future the bank would see consistent growth in its overall consumer base if it adheres to its credit policies. However, the bank analysts have to consistently pay close attention to the trends in bank lending as it is a pivotal driver for their growth and prosperity.
Latest posts by Istathmir (see all)
- Rents get more affordable in Dubai, surge in Abu Dhabi - September 28, 2016
- Real estate Revelations: Property Facts about Dubai - May 4, 2016
- The Brexit Reality: Will UK be leaving European Union? - May 4, 2016