Know Your Customer (KYC) Credit Risk Assessment: A Study of the PBZ Ikhlas – Zanzibar

Abstract

Risk cannot be avoided completely but its effect could be reduced where there is understanding on types of risks involved and setting mitigation measures. In financial institutions such as banks, the most common risk factor is Know Your Customer (KYC). How much information does the financial institution possess regarding new customers; what changes have occurred on existing customers. This study aims to find out what are the risk factors that cause the People’s Bank of Zanzibar (PBZ) Ikhlas branches to have Non-Performing Finance (NPF), in particular the KYC factor. The 5Cs – Character, Capacity, Collateral, Capital and Conditions – principle are applied, which are intended not to harm debtors who later commit defaults, such as NPF. This is a survey study of PBZ Bank Ikhlas for 2022 operations only and it involves data collection mainly from available reports. The survey was conducted through consultative meetings and by use of questionnaire covering ten officers at PBZ including Shariah Advisory Committee (SAC) and the management members. Data was subjected to a qualitative analysis delving into non-numerical data, open-ended responses and deeper insights. Though this study does not aim to bring about changes in running PBZ, the findings and suggestions could help in understanding the challenges and mitigate the risks. The findings show that there is most likely a lack of an in-depth due diligence on KYC and regular training to both SAC and the PBZ Bank Ikhlas (PBZ) staff. In order to reduce credit risk at PBZ and hence move forward financial stability, PBZ is advised to consider customer background while assessing character. The 5Cs should be made a priority in appraising customers and most importantly engage customers with transparency about the PBZ Ikhlas services and conditionality.