During the past 10 years, there have been great changes in the Mauritian banking sector and this is a continuing process that will not stop here. This is mostly because of fast innovations in the financial markets and the internationalization of the financial flows. Other factors like technological development and deregulation have both triggered competitive pressures and also provided new opportunities among banks.
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But these opportunities are also subject to complex risks that challenge traditional approaches to banking risk management. These factors have influenced the financial world on the international level and the Mauritian banking sector has not been left unaffected.
The growth of international financial markets banks have been exposed to a wider access to funds. As a result of which banks have been developing new products, services and techniques. The receipt of deposits and granting of loans, being the traditional banking practice, is today only one part of a bank’s activities.
These new instruments have also drawn interest to areas where financial risks were earlier thought to be relatively unimportant. Hence banks are now exposed to a greater variety of risks and their ability to measure, monitor and steer risks accordingly is becoming a decisive parameter for their survival.
The aim of this project is to provide an overview of the management process of financial risks in our Mauritian banking sector as risk is the fundamental element that influences the financial behavior.
Banks are faced with a wide array of risks in their course of their operations, as illustrated in the figure below. In general, risks are categorised into three different parts: Financial Risks, Operational Risks and Business Risks.
Figure 1: Categories of Banking Risks
Financial RisksOperational Risks Business Risks
Source: Annual Report on Banking Supervision 2000 – BOM
Financial risk concern the effective management and control of the finances of an organisation and the effects of external factors such as availability of credit, foreign exchange rates, interest rate movement and liquidity risk. For this project only the financial side of Risk Management is going to be considered. Focus will be on the four main types of risks which are:
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