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Risk Management Framework

Finance department of APS


1. Definition

Financial risk is the possibility that shareholders or other financial stakeholders will lose

money when they invest in a company that has debt and the company's cash flow proves

inadequate to meet its financial obligations. In other words, financial risk is the type of

specific risk that encompasses many types of risks related to a company's capital

structure, financing and the finance industry.

2. Sources of financial risk

The finance department plays a critical role in the operation of APS. Therefore, the financial

risk can affect many departments and activities within APS and can result in decelerating the

performance of accomplishments. Financial risks can arise from internal and external sources,

such as:

• Interest rates

• Exchange rates

• Commodity prices

• Clients/Customers

• Suppliers

• Partners

• Market liquidity
• Cash flows

• Financing

3. Procedures

Considering the significant role of finance department, APS’s Managing Directorate is

required to have better strategies to manage and tackle the financial risk.

The procedure to manage financial risk is composed by following phases:

1. Risk Identification

2. Risk assessment

3. Risk measurement

4. Risk monitoring and reporting

5. Risk governance

1. Risk identification

Financial risk identification is the combined effort of identifying and analyzing potential

(future) events that may negatively impact individuals, assets, and making judgments. The

financial risk can include market risk, credit risk, and liquidity risk that can be illustrated as

follow:

1.1. Market risk:


Market risk involves the risk of changing conditions in the specific marketplace in which a company

competes for business. One example of market risk is the increasing tendency of consumers to shop online.

This aspect of market risk has presented significant challenges to traditional retail businesses. Companies

that have been able to make the necessary adaptations to serve an online shopping public have thrived and

seen substantial revenue growth, while companies that have been slow to adapt or made bad choices in

their reaction to the changing marketplace have fallen by the wayside.

1.2. Credit risk:

Credit Risk is the risk businesses incur by extending credit to customers. It can also refer to the company's

own credit risk with suppliers. A business takes a financial risk when it provides financing of purchases

to its customers, due to the possibility that a customer may default on payment.

A company must handle its own credit obligations by ensuring that it always has sufficient cash flow to

pay its accounts payable bills in a timely fashion. Otherwise, suppliers may either stop extending credit to

the company, or even stop doing business with the company altogether.

1.3. Liquidity risk:

Financial markets also face the problem of liquidity, or difficulty in being able to turn assets into cash.

This form of financial risk is caused by one or more financial market participants not having enough cash

to meet all financial obligations by the due dates of the accounts. The fear with this type of risk is that

failure of one financial market participant, such as a corporation, to meet its financial obligations may

expose larger financial problems in the market.


2. Risk Measurement

Finance department of APS is required to measure financial risks facing the company. In financial

section, risk measurement is used to determine the amount of an asset or set of assets to be kept in

reserve. The purpose of this reserve is to make the risks taken by APS.

3. Risk monitoring and reporting

Continuous monitoring and controlling of financial risks ensure that the risk response strategy and the

risk treatment action plan are implemented and progressed effectively. Thus, APS’s finance

department has prepared a procedure to control and monitor finance related risks. The process of

controlling and monitoring financial risks includes the following tools and techniques:

• Risk reassessment

• Risk audits

• Technical performance measurement

• Reserve analysis

• Status meetings.

The financial risk controlling and monitoring process results in generating revisions to the risk register

and supplementing with new action items for the risk treatment process.
4. Risk Governance:

Financial risk governance refers to the way a financial institution collects, manages, monitors and

controls financial information. Financial risk governance includes how finance department of

Afghanistan Payments System (APS) tracks financial transactions, manages performance and controls

data, compliance, operations, and disclosures. Financial governance in action are the policies and

procedures APS uses to manage business data and ensure that data is correct.

Financial risk governance includes:

• Internal controls

• Financial policies

• Internal and external audits

• Data security

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