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Financial Risk Management Policy






This policy was adopted by the Board of Directors of Armagh Credit Union
Limited



Signed:-

Position President



Position Treasurer




Date:








Overview

This policy covers the key high level financial risks that are faced by
Armagh Credit Union as a result of the nature of its business model and how
these risks are managed by the Board of Directors of the credit union.
These risks are largely influenced by external and macro-economic events
that are outside the control of the credit union. However, it is important
that the Board is aware of these risks and has a plan in place to mitigate
their effects on the internal operation of the credit union. The key areas
covered are as follows:

Interest Rate Risk - Loans & Investments

Counterparty Risk - Investments

Funding Risk - Savings

Funding Concentrations - Savings

Lending concentration risk and large lending exposures are covered in our
Loans Policy.

Interest Rate Risk

A rough breakdown of our Balance Sheet assets is as follows:

Loans to Members 33%

Deposits & Investments 63%

Other Assets 4%

The first two categories give rise to a potential interest rate risk.

Loans to Members - Armagh Credit Union charges an interest rate up to
12.68% per annum. This is the maximum amount that we can charge. The rate
is variable, so it can be reduced at the option of the Board. However, our
policy is to keep it at 12%. If market rates for personal loans were to
move significantly below this rate, the credit union could be exposed to
members transferring their loans to other financial institutions, thereby
reducing the credit union's overall income. To mitigate this risk, we can
do a combination of the following:

Reduce our interest rate (not our preferred option)

Pay a Rebate of Interest at year end. This option is dependent on the
credit union having an adequate surplus. The rate of rebate can be varied
in line with market requirements.

Emphasise the benefits of a credit union loan, including flexibility,
insurance benefits and the ability to repay the loan early without penalty.

Deposits & Investments - The return that we receive on our investments is
influenced by market rates and in particular by the Bank of England rate.
To mitigate the risk of unfavourable rate movements, we always hold a
proportion of our deposits and investments in fixed rate products.

Counterparty Risk

This risk can potentially arise due to the business failure of a
counterparty with which we have invested surplus funds. To mitigate this
risk, we ensure that our investment portfolio is spread over different
counterparties. We also ensure that our deposits and investments are held
in capital guaranteed products in institutions with as high a rating as
possible.



Funding Risk

Almost 85% of the credit union's funding is received by way of member
savings. The two key risks that we face in this area are:

Rate Risk - the risk that market rates for savings rise to the extent that
members transfer their savings to other financial institutions, and

Reputational Risk - the risk that the credit union (or the movement in
general) suffers reputational damage that leads to a significant withdrawal
of savings.

Rate Risk - There is a risk that market interest rates could rise to an
extent that would make credit union loans very attractive, but credit union
savings less so. This is because the cap on our loan interest rate of 12%
limits our income-earning potential and thereby indirectly caps our
potential dividend rate at around 5%. To mitigate this risk, we can do a
combination of the following:

Reduce our rebate of interest and allocate more of our surplus to dividend.


Emphasise the benefits of saving with the credit union loan, including
access to loans.

In addition, our savings cap (currently ё15,000) ensures that our average
savings are low and would be unlikely to be of interest to other financial
institutions offering high rates of interest.

Reputational Risk - There is always a risk that negative publicity relating
to this credit union or credit unions in general could cause reputational
damage that might result in a "run" on the credit union by savers. This may
or may not be within our control. To mitigate this risk, we can do a
combination of the following:

Ensure that we have adequate liquid funds to deal with withdrawal requests
(see Liquidity Policy).

Ensure that our front line officers are equipped with the knowledge and
interpersonal skills to reassure concerned members at the counter.

Contact the ILCU for assistance with communications with members and
dealing with media queries.

Remind our members that their savings are covered by the Financial Conduct
Compensation Scheme.

Funding Concentration

Source of Funds - This is the risk that our funding (savings) is sourced
from too few members. This risk is mitigated by the low monetary cap on
savings from an individual member of ё15,000. As a result, we currently
have approximately 8000 members with average savings of ё2,274.

Time / Maturity Profile - This is the risk that the maturity profile of our
liabilities (savings) is insufficiently spread, resulting in the risks
inherent in a large part of our funding maturing at the same time. In this
credit union, all of our savings are available "on demand", except for
those that are held as security against a loan. This equates to
approximately 78% of our savings. This risk is mitigated by a combination
of the following:

The loyalty of our members, most of whom have been members for many years.

Ensuring that we have adequate liquid funds to deal with withdrawal
requests.

Emphasising the benefits of saving with the credit union, including access
to loans and insurance benefits (which can be lost if savings are
withdrawn).