Re-thinking risk management

Abhijit Duge is the Head of Solution Consulting, Treasury and Capital Markets, Middle East Africa at MisysA recent study conducted by Standard & Poor's Ratings showed that banks in Africa have emerged relatively unscathed and ahead of most of their international peers.

This has been largely due to the fact that financial institutions across Africa had limited exposures in relatively tightly controlled markets as well as sound and conservative risk-management practices followed. For instance, in February 2011, the Central Bank of Kenya announced that most institutions in the country now possessed independent risk management functions, splitting away from previous associations under internal audit. Two weeks later, Nigeria hosted its first international operational risk conference, attended by representatives from across the continent and beyond.

So, as the spotlight continues to shift to banks in emerging markets like Africa, risk management, is poised to assume a much larger and strategic role. Although risk management has been a key focus area for African banks in recent years following the introduction of regulations like the Basel II Accord or the Sarbanes-Oxley Act, it has assumed great urgency in the aftermath of the crisis. Indeed, banks have begun to recognise risk management as a strategic principle, and are now projecting that as their competitive advantage.

Thus, going forward as treasury is increasingly taking the role of strategic business unit, banking organisations must find a way to spot the opportunities presented by active risk-taking and integrate that knowledge into their larger business strategy. Clearly, risk management will then find itself at the epicentre of strategic decision making. The role of risk management has assumed even greater significance considering the recent volatility observed in the global financial markets. The exchange rate volatility observed in the East African countries has led banks to incur significant losses.

 

Weaknesses in risk management systems

Before this ideal can be realised across the board, banks will have to subject their risk management policies and systems to honest scrutiny and learn from the 2008 financial crisis. Banking risk and its management in Africa has been the subject of much attention in recent years. According to reports conducted on risk management systems, some of the gaps that still exist in some financial institutions include:

o   Lack of risk-orientation: Unfortunately, risk management does not play a central role in organizational strategy and decision making. The absence of risk-expertise at the highest levels and consequent lack of “top-down” communication has ensured that risk management remains in the background, like most other support functions.

o · Lapses in governance: Inadequate representation of risk professionals on the banks’ governing boards could lead to lapses in governance. So could the emphasis on short term profit and immediate growth, without due consideration of the associated risks. These lapses were obvious in the recent trading scandals that have rocked some of the global institutions.

o   Absence of metrics: More clarity is needed on how risk must be measured, and the risk-capabilities of business units must be assessed on the basis of key performance indicators. Banks’ systems must be designed in such a way that risk measurement can be integrated into regular business processes.

o   Inadequacies in data: Banks’ risk mitigation efforts are hampered by the unavailability of real-time, enterprise-wide data. Because of the strong links between lines of business, risks arising in one area can impact several others. Therefore, decision makers must have an enterprise-wide risk perspective in order to correctly assess the overall risk exposure and the organisations’ preparedness against it.

 

Clearly, risk management strategy must address each of these critical issues from a holistic perspective in order to be effective.

As banks in Africa set forth to foster risk culture, improve organisation-wide risk awareness and acquire risk management applications, they must ensure that establishing the right banking platform is part of the agenda. Only an integrated banking platform, based on open architecture has the vital capability to consolidate risk-data across channels, units or lines of business including the trading and banking book. The right banking platform can not only help banks manage their risks better, but also be leveraged to exploit new opportunities that present themselves when risks are properly recognised and managed.

Risk management is emerging as a critical business priority across the banking enterprise and is no longer the exclusive preserve of compliance teams. As banks in Africa continue to adopt stringent risk management tools, they are on the right track to making their business future-ready by laying a solid foundation for driving growth in an ever-changing global economy.

 

Abhijit Duge - Head of Solution Consulting, Treasury and Capital Markets, Middle East Africa at Misys

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