recently emerged the new president  of Risk Management Association of Nigeria (RIMAN).

The association, which has all the 24 banks as institutional members, is in an epochal phase of transition, given the recent global financial crisis and intervention by the Central Bank of Nigeria. Abolo has extensive experience cutting across the academia, as well as public and private sector organisations in the country.

He started his working career as a graduate assistant and later, associate lecturer at the University of Lagos where he obtained the B.Sc, M.Sc and Ph.D degrees in Economics (with specialisation in Econometrics & Public Finance).

 

He is a member of several professional organisations, including the Nigerian Economic Summit Group (NESG), Nigerian Institute of Management (NIM), Chartered Institute of Bankers of Nigeria (CIBN), Nigeria Economic Society (NES), among others. In this interview with BUKKY OLAJIDE, Abolo talks more about risk management, under the current dispensation in the country.

WHAT is your vision for RIMAN and how can you build on what your predecessors have been able to achieve?

 

The founding fathers of this great association, at inception in 1999, had a vision, which was “to be a dependable body in sustaining best practices and high professional competencies in management of risks in the financial industry”. The mission is “to facilitate the creation of a credible risk management environment through proactive advocacy, capacity building, knowledge sharing and promotion of high professional standards”.

 

A solid foundation has been laid and the good work done by these founding fathers has stood the test of time and I wholeheartedly pay my tribute to them all. I look back and I can see the achievement of my predecessors in office and what they have achieved. I look forward to see my responsibility to those of the future and I realise that my role, therefore, is a continuation and an enhancement of all that our vision and mission encompass.

 

It is with this in mind that in the two years my focus would be all about the goals of attainment of actualisation of dreams, articulation of policy initiatives, including broadening the scope and content of the association; and adequate representation in all policy matters.

 

As a team, we would work together to provide a befitting library for risk professionals in the country with best-in-fit technology; provide a befitting secretariat for the association through government and private sector support, develop constructive working relationship with similar organisations around the world, create awareness on risks across sectors and industries, embed sound risk management practices across all organisations in the country and develop healthy relationship with other professional bodies both within and without, expand the membership of the association to cover all sectors, promote and ensure that risk management is taught in our tertiary institutions, provide consultancy and training support to institutions and organisations; and contribute meaningfully to policy matters through provision of input into both domestic and international matters.  Our approach would be holistic representation through effective interactions.

 

What would you consider to be the key risks facing the financial sector and what role can AMCON play, taking into consideration the implications of risk for the stability of the financial system?

 

There is no question that credit and liquidity risks issues still remain in the banking sector. These problems did not emerge overnight and would, therefore, take some time to sort-out.  I would say that several independent on the challenges facing the financial sector reports, to a large extent, adequately capture the enormity of the problems.

 

Having said that, it is important to realise that banking is a very sensitive business and a reputation once damaged takes quite some time to rebuild. AMCON would help but would not address all the problems.

 

But let me say that a crucial impediment to the efficient functioning of the financial sector is that of asymmetric information when shocks to the financial system interfere with information flows so that the financial system can no longer do its job of channelling funds to those with productive investment opportunities. Without access to these funds, individuals and firms cut their spending, resulting in contraction of economic activity, which can sometimes be very severe. These factors, amongst others, interact to propagate financial instability, increase in interest rates, deterioration in banks’ balance sheet, stock market decline, increase in uncertainty, adverse selection and moral hazard problems worsen, economic activity declines, and so on.

 

Let me also mention that the aftermath of a financial crisis is often a sorting out of insolvent firms from healthy ones. Once this sorting out is complete, uncertainty in financial markets declines, the stock market undergoes a recovery, and interest rates fall. The outcome would be a dinumition in adverse selection and moral hazard problems and the financial crisis would subside.

 

So, financial stability in the sector can only occur if all the factors in the propagation process are addressed to restore some measure of certainty.

How would you assess the banking reform under the present CBN governor?

 

The current financial sector reforms embarked upon by the CBN under Mallam Sanusi Lamido Sanusi as governor deserves our commendation and can be said to be Pareto Optimal.  That is my humble assessment. The IMF too has thrown its weight behind the reforms. We are beginning to see signs of stability in the system and there is, indeed, rays of hope in the horizon. But this does not mean that like every other change reforms, some would not loose but I think the broader picture of growing the economy is more important and critical. Some key concerns remain through.

 

The main areas that particularly excite me in the current reforms are: entrenchment of good corporate governance, institutionalisation of sound risk management practices; and reform of existing disclosure requirements.

 

The Central Bank of Nigeria working in collaboration with other relevant agencies should sustain the reform efforts.

Don’t you think the failure of risk management in the banks is the failure of RIMAN?

 

I do not think so and I do not think RIMAN has failed. RIMAN as an association of risk professionals has played an excellent role in drawing attention to the dangers of lax risk management in financial institutions prior to the “burst”. We would continue to play this role with greater zeal and determination.

 

RIMAN is not on the boards of banks.  RIMAN does not recruit staff for banks. Our objectives include: Encouraging, promoting and maintaining standard of conduct and professionalism within the industry through advocacy, research and provision of platform for members to interact regularly.

 

But coming down to the issue of failures in risk management, it is important to admit that there were several short-comings one of which is the over-reliance of institutions on mathematical models at the expense of business judgement, which was hardly a fair trade. Most models, if you would agree, are not calibrated to capture extreme events. We must also admit that regulators also let their guard down. My view is that regulators would need to regulate all financial entities and perform more macro-analysis to be able to understand more fully contagion effects.

 

The 1980s and 90s witnessed rising non-performing credit portfolios in banks. Surprisingly, this trend continued till 2010. What concrete step is RIMAN taking to forestall this in the future?

 

RIMAN is an association of risk professionals and not a law enforcement agency that can by fiat, forestall the emergence of non-performing loans in banks.

 

By the very nature of their businesses, banks expose themselves to risks of default from borrowers.  Proper credit risk assessment and creation of adequate provision for bad and doubtful debts can cushion the risks if they do crystallise. From my experience, the problem of NPLs is widespread and are mainly caused by an inevitable number of wrong economic decisions by individuals and plain bad luck. The other problem is moral hazard: the adverse incentive for bank owners to adopt imprudent lending strategies, in particular insider-lending and lending at high interest rates to borrowers in the most risky segments of the credit markets.

 

So what can we do as an association? Work with other stakeholders to promote good corporate governance, create the necessary awareness about the dangers of poor risk management and train risk management professionals across sectors.

 

The board and management of each bank have a lot to do with success or failure of banks because they must ensure that adequate policies are put in place to manage adverse effects of all risk elements in a bank’s operation. Do you think they  have done well in this area?

 

I read an interesting report by Proshare published in 2009 and authored by Olufemi Awoyemi on “Corporate Governance: Financial Crisis and the Nigerian Leadership Meltdown” and a major conclusion of this impressive effort was that “many of them (the banks) that lacked good corporate governance codes or those that only have the codes for the sake of it suffered near otiose syndromes. Based on that bitter experience, many financial institutions will endeavour to put in place and comply with good codes of corporate governance”.

 

So, I would say that some of the boards and management of the troubled banks failed to live up to expectation not so much because of lack of capacity but more of greed and the propensity for unethical behaviour. This much the CBN audit report also highlighted.

 

How do you think the risk management unit of banks could be further empowered to achieve better results?

 

I am convinced more than ever before that banks need to set up committees to oversee macro-economic issues and extreme or systemic risk.  The risk function should also become more integrated with the business and be well involved in key decision processes, which, of course, would require radical changes in governance.

 

More than that, risk managers should become less isolated and more collaborative by taking on a more business-oriented, advisory role.

 

I also think that accurate risk information is key; many institutions will need to make significant investments in people and technology to ensure that their risk functions can provide the type of leverage to drive the business.

 

Banks’ credit strategy should be able to determine its risk appetite. Do you think banks are leveraging well enough on this?

 

There is increasing recognition of the need for banks to define clearly their risk appetite, which translates risk metrics and methods into business decisions. It also defines the boundaries that set the link between strategy, target setting and risk management. To be sure, different stakeholders have different perspectives about risk appetite, which makes it a complex exercise, especially as one attempt to reconcile disparate views.

 

So I would say that banks have not been quite successful in this effort, especially as the definition involves both quantitative and judgemental factors. Naturally, if some elements of risk appetite are difficult to craft, it poses great challenge for management.

 

My take is that banks should appreciate the important role of risk appetite definition across risk functions as they shape their risk management strategy. KPMG puts this more powerfully in one of their work on risk appetite: “When risk appetite is properly understood and clearly defined, it becomes a powerful tool, not only for managing risk, but also for enhancing overall business performance”.

 

Many lenders in the financial sector were said not to have prioritised appropriately by focusing too much on short term profits to the detriment of risk management. To what extent did this aggravate the situation?

 

The so-called troubled banks faced several challenges, which eventually brought them to their knees. The astronomical growth of the banking sector post-consolidation created perverse incentives for risk taking without the appropriate architecture to manage them.

 

The global financial crisis was the last straw that broke the spinal cord of these banks. To be sure, the challenges can be characterised into four: One was the glaring failures in corporate governance: I do not see corporate governance simply in terms of aspiring to meet the demands of regulators in one form or the other; that would be missing the mark.

 

The results of the Central Bank of Nigeria audit/stress test on banks showed that many banks in 2009 were neck-deep in unethical and fraudulent practices that became a way of life. The result also revealed that some board members failed to play their statutory roles and were, in some cases, rendered ineffective or dormant. There were also several cases of insider abuse.

 

Second, there was the lack of transparency and inadequate disclosure by these banks. This posed serious data quality and integrity.  Many engaged in the “cooking” of their books that misled stakeholders.

 

In which area do you think the banks need direct government intervention to enthrone desired low interest rate regime?

 

A major indicator of banking sector efficiency is interest rate spreads, which has been found to be quite high in African countries, including Nigeria.

 

Part of the problem is the level of inflation and overhead cost due to poor infrastructure. Until we resolve the issue of power and other infrastructural problems, many banks would find it a major challenge to reduce lending rates. Having said that, I am aware that the CBN has directed banks to come up with their respective risk-based pricing model, which, hopefully, would align lending rates to the level of risk of an obligor.

 

With 50 years of the country’s independence, the state of infrastructure, among others, is bad despite huge oil earnings at the government’s disposal. What’s your current assessment of situation?

 

It is very easy to assess Nigeria at 50. There are several agencies that assess countries globally on several parameters. The M.O. Ibrahim Foundation classified Nigeria in 2009 as one of the poorly governed states in the region, ranking it 35th out of 53 African countries. The collaborative report on Doing Business ranks Nigeria 72nd out of 183 countries in 2010.  The Global Competitiveness Report 2009 – 2010 ranked Nigeria 99th out of 133 economies in the world. In terms of corruption perception index, Nigeria is 130 out of 180 countries.  In terms of global peace index, Nigeria is number 137 out 149!

 

So, what more can I say: Nigeria is still struggling to be on her feet. It is not so much the wealth that a country has that matters.  In fact, there is a positive correlation between wealth (natural endowment) and poverty.  Nigeria’s oil wealth appears to be her undoing!

 

What would you consider as the main lessons of the global financial crisis for risk management?

The events of 2007–2009 (the global financial crisis period) demonstrated on a large scale the vulnerabilities of firms whose business models depended heavily on uninterrupted access to secured financial markets.

 

Many firms relied too heavily on short-term wholesale financing of long-term illiquid assets, in many cases on a cross-border basis, a practice that made it extremely difficult for the institutions to withstand market stresses.

 

Borrowers had taken advantage of the opportunity the market afforded to obtain short-term (often overnight) financing for assets that should more appropriately have been funded with long-term, stable funding. Some firm’s business models also relied on excessive leverage.

 

So for me, the lessons are clear complex corporate structures hinder effective contingency funding; weaknesses in governance, incentives and infrastructure undermine effectiveness of risk controls; passive involvement of the board on setting risk appetite and the overall risk management processes could spell doom for an organisation; the stature and influence of revenue producers should be carefully balanced with those of risk management and control functions.

 

The authority on the risk management function should be enhanced and increased resources devoted to IT. Infrastructures should be more adequate to support the broad management of financial risk; and most firms lacked the ability to perform regular and robust firm-wide stress tests easily.

 

You are also the Group Head in charge of Market Risk at Access Bank.  How significant is this risk and how do you assess its evolving role in financial institutions?

It is true that many ordinary people are not aware that the market risk function is in existence in many financial institutions. Everyone seems to know a lot about credit risk.  Yet it is hard to imagine these days that a bank anywhere in the globe does not have a market risk function of one sort or another. So, market risk is quite significant, especially for trading institutions.

 

Let me admit that market risk as a distinct risk function is fairly new. It appeared for the first time on Wall Street in the 1980s. Their initial mandate was to prevent trading losses by setting and policing risk and exposure limits.

 

Today, the life of a market risk manager has become much more demanding. The complexity of instruments, products and trading strategies has increased to the extent that simple position limits are often insufficient. You need to employ sophisticated models, which require numerous quantitative analysts with strong technical skills.

 

As banks seek to make more money through innovative products such as derivatives, there is the increasing pressure on the market risk manager to model and price these products speedily. So you would say that part of the role of market risk manager includes product development and contribute to business critical processes.

 

Given the evolving role of the market risk function, it has to be set up in such a way that it has up-to-date and fit-for-the purpose strategy. The pace of innovation is producing backlogs of new products that need validated models.

 

Banks need to respond appropriately to the intellectual “fire power” required to function in this risk area through recruitment of more quantitative analysts in what is clearly a very competitive market.They also have to be adequately compensated to reduce cross-institution migration, including adequate training.

Source: Guardian

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