Risk managers in the banking industry understand the importance of utilising appropriate financial and technological resources to manage risks in the constantly evolving environment.
During an interview with BusinessDay, Awele Ajibola, the Chief Risk Officer at FBNQuest Merchant Bank, shares insights on current issues related to risk management in the Financial Services Industry.
Excerpts:
What challenges do risk managers encounter while carrying out their responsibilities?
Risk Managers face several challenges while playing the crucial role of identifying, assessing, and mitigating risks within an organisation. Some of these challenges include:
- Risk Culture – An organisation’s culture plays a significant role in risk management. A culture that does not prioritise risk awareness and accountability can lead to risks being overlooked or not properly addressed. Also, getting the first line (business) to make the shift from regarding risk management as a bunch of unnecessary bottlenecks (at their most unsophisticated) or a necessary evil (especially when driven solely by regulation) to the more advanced/progressive view of business partners. Risk owners must understand that they are the actual risk managers and are primarily responsible for managing the risks within their space, while the risk management function performs a supporting role.
- Resistance to Change: Implementing risk management strategies often requires changes to organisational policies, processes, and practices. Resistance to change and/or poor adoption of these changes from employees or management can hinder the effectiveness of the risk management measures.
- Integration of Risk Management: Risk management should be integrated into the organisation’s strategic planning and decision-making processes. We want risk owners to incorporate risk considerations into every decision they make or activity they undertake on an ongoing basis. However, if risk management is treated as a separate or isolated function, it can lead to ineffective risk mitigation. The most effective approach that ensures the achievement of organisational goals is everyone collectively working together to manage all risks.
- Complexity & Interconnectedness of Risks: Modern businesses face a wide range of complex and interconnected risks. Risk managers must navigate this complexity and ensure a comprehensive understanding of all potential and related risks.
- Rapidly Changing Risk Landscape: The fast pace of changes in the business environment leading to a continuous expansion of the risk landscape and management of emerging risks from trends such as digitalisation, digital currencies, new technologies like artificial intelligence, environmental and social changes, rapidly changing regulatory requirements and the ever-evolving cyber risk space which traditional risk management methods are unable to adequately address. Risk managers must stay updated on these changes to ensure their risk management strategies remain relevant and effective.
- Digital Transformation: The ongoing digital transformation in the financial services industry will likely impact risk management practices. While digitalisation can bring efficiency gains, it also introduces new risks that must be carefully managed, such as technology-related operational risks and fraud.
- Balancing Risk and Business: Striking the right balance between risk and business is challenging. Avoiding all risks can limit opportunities for growth and innovation while taking excessive risks can lead to significant negative consequences. The Risk Manager is forever juggling balls to ensure the right balance within the risk appetite set by the organisation.
- Crisis Management: Despite robust risk management efforts, crises can still occur. Risk Managers must be prepared to respond effectively to unexpected events and manage the fallout to minimise any negative impact on the organisation’s objectives.
- Resource Constraints: Risk management requires investment in time, personnel, technology, and financial resources. Limited resources can hinder the implementation of robust risk management strategies and tools.
What are the biggest market and liquidity risks facing companies in Nigeria?
The continued uncertainty in macroeconomic developments will be the most significant market risk that eventually dovetails to liquidity risks faced by companies in Nigeria. Other factors such as political instability, FX devaluation, the unfolding dynamics in the policy environment and the resultant pass-through to domestic prices also have severe consequences for businesses operating in Nigeria. As monetary policy tightening progresses, the ability of Companies to access funding in Nigeria becomes more constrained by the higher interest rate requirement, limiting expansion opportunities, especially for smaller companies.
In addition, the increased level of cyberattacks experienced by companies in Nigeria due to their reliance on technology results in substantial financial losses and harm to their reputation. These challenges tend to have a high negative impact on their liquidity levels.
The Nigerian business environment is dynamic, and the risks companies face can change based on economic, political, and global factors. As a precaution, companies should be mindful of potential risks and implement measures to manage their impact. These measures may involve expanding their business activities, hedging their transactions, minimising their vulnerability to risk, and having robust financial reserves.
What is your opinion on the future of risk management in the financial services industry?
The future of risk management in Nigeria’s financial services industry is likely to be influenced by a combination of internal and external factors such as:
- Technology: The increased use of new technologies as the digitisation of financial services and the adoption of emerging technologies stand-out as the most influential trends over the next 5-10 years. In line with these trends, risk management practices must leverage technology to be effective. These technologies can provide more accurate risk assessments, early warning systems, and predictive modelling to identify potential issues.
- Data Analytics: The financial services industry globally is increasingly leveraging data analytics to enhance risk management processes. The adoption of advanced data analytics, artificial intelligence, and machine learning could help financial institutions better assess, monitor, and manage risks.
- Regulatory Compliance: Regulatory frameworks and requirements play a significant role in shaping risk management practices. Financial institutions will likely need to keep up with evolving regulations and standards. As the regulatory landscape continues to evolve, risk management practices must adapt to remain compliant and address emerging risks.
- Cybersecurity and Data Privacy: The increasing reliance on digital technologies and data sharing exposes financial institutions to cybersecurity threats and data breaches. The future of risk management in Nigeria’s financial services industry will focus on cybersecurity measures, data protection, and resilience against cyber threats.
- Operational Resilience: Ensuring operational resilience will become crucial. This involves building systems that can continue functioning even in the face of disruptions, whether caused by technology failures, natural disasters, or other unforeseen events.
- Customer-Centric Approach: The financial services landscape is becoming more customer-centric. As customer expectations evolve, risk management practices must balance delivering personalised services and ensuring that risks associated with these services are effectively managed.
- Collaboration and Partnerships: Collaboration within the industry and with technology providers can enhance risk management capabilities. Partnerships could include sharing best practices, insights, and technologies to address industry-wide challenges collectively.
- Talent and Skill Development: Developing a skilled workforce capable of understanding and managing complex risks will be critical. Training and development programs must address technical and soft skills related to risk communication and decision-making.
- Scenario Planning: Given the uncertainties in the business environment, scenario planning will become essential. Financial institutions must simulate various scenarios to assess the potential impact of different events and develop strategies to mitigate those risks.
Overall, the future of risk management in the financial services industry in Nigeria will be shaped by the interplay of technological advancements, regulatory changes, market dynamics, and the evolving needs of customers. Adapting to these changes and proactively managing emerging risks will be essential for financial institutions to remain competitive and resilient in the coming years.
Do you think there are any new technologies or trends that will have a big impact on the field?
Yes, I have observed a few emerging trends and technologies that will significantly impact how companies manage risks. Emerging trends include the growing use of data analytics and artificial intelligence, the increasing attention to sustainability environmental, social, and governance (ESG) risks, the rise of cyber threats, and the greater interconnectedness of the global economy. In addition, some technologies have the potential to revolutionise how organisations identify, assess, mitigate, and monitor risks. Here are some notable ones:
- Artificial Intelligence (AI) and Machine Learning: AI and machine learning are transforming risk management by enabling more accurate risk assessments, predictive analytics, and early warning systems. These technologies can process vast amounts of data to identify patterns, anomalies, and potential risks that might go unnoticed through traditional methods.
- Data Analytics and Big Data: The proliferation of data sources and the ability to process large datasets in real-time can provide valuable insights into risks. Analysing structured and unstructured data can help organisations identify emerging risks, customer behaviour trends, and operational inefficiencies.
- Cybersecurity Solutions: As cyber threats become increasingly sophisticated, advanced cybersecurity solutions are essential for protecting sensitive data and systems. Technologies like threat intelligence, behaviour analytics, and next-gen firewalls contribute to a more robust cybersecurity posture.
- Quantitative Risk Assessment Tools: Advanced quantitative methods and tools, such as stress testing, scenario analysis, and Monte Carlo simulations, are becoming more accessible. These tools provide a deeper understanding of potential risks and their impact on an organisation’s financial health.
- Robotic Process Automation (RPA): RPA automates routine and repetitive tasks, freeing human resources to focus on more strategic risk management activities. RPA can be employed in data entry, compliance checks, and report generation.
- Behavioral Analytics: Understanding human behaviour and decision-making can help identify internal risks, such as fraud and employee misconduct. Behavioural analytics use data to detect anomalies and patterns that might indicate unusual behaviour.
These technologies can potentially enhance the effectiveness and efficiency of risk management efforts across industries. However, it’s essential to consider the integration, data privacy, and ethical implications of adopting these technologies. As the landscape evolves, staying informed about these trends and their potential applications will be crucial for risk management professionals.
Technology has made modern businesses more efficient, but it also comes with its risk. How can companies mitigate these challenges?
While technology has brought numerous benefits to modern businesses, it also comes with its fair share of risks. Companies can tackle technology-related risks by implementing effective strategies such as:
- Conducting regular risk assessments and developing and implementing risk management strategies to address identified risks.
- Enforcing strong cybersecurity measures
- Complying with data protection and privacy regulations
- Understanding the dependence on third parties and the associated risks
- Employee training and awareness on an ongoing basis
- Business continuity planning and response protocols.
- Regular audits and assessments of technology infrastructure to identify potential vulnerabilities and areas for improvement.
By integrating these strategies into their business operations, companies can significantly reduce the risks associated with technology while continuing to harness its benefits for improved efficiency and growth.
How do you stay updated on emerging risks and regulatory changes in the financial services industry, and how do you incorporate them into your risk management strategy?
To remain proactive and informed on emerging trends, I rely on various external and internal sources. These include industry research and publications, regulatory updates and notifications, engagement with regulatory authorities, cross-functional meetings, internal risk assessments and scenario planning. Industry (peer) engagements also have assisted immensely in remaining current. These drive related risk dialogue, framework and policy reviews and updates, and risk mitigation measures.
In your opinion, what are the most critical risks facing Nigerian banks?
Regarding managing risks, it is essential to recognise that Nigerian Banks may face several significant risks in 2023. These risks include credit risk, operational risk, liquidity risk, foreign currency risk, regulatory and compliance risk, political risk, reputational risk, and other potential challenges.
Some of these risks are significantly heightened given recent macroeconomic challenges.
It is crucial to understand that the risk landscape for Nigerian Banks differs depending on their individual strategies, size, and market focus. As a Risk Manager, it’s essential to continuously monitor, stress test, and implement robust risk mitigation strategies to tackle these critical risks effectively.
How does your risk management strategy address those areas?
Banks must maintain strong corporate governance practices that ensure ethical behaviour, risk accountability, and transparency in decision-making. Also, integrating risk management practices across all levels of the organisation minimises operational, financial, and reputational risks.
Regarding some of the specific risk areas earlier identified, we adopt the highlighted strategies:
- Credit risk: We have strict credit assessment procedures in place, regularly monitoring our borrowers’ financial health and activities. In addition, we have established triggers that give us early warning signals on possible issues with our borrowers for timely intervention.
- Liquidity risk: We strive to maintain sufficient liquid assets with internal liquidity thresholds above regulatory requirements. We regularly conduct stress tests to assess liquidity under different scenarios and constantly seek to expand available lines for emergency funding should the need arise.
- Regulatory compliance risk: We have a zero-tolerance risk appetite for regulatory infractions and constantly cascade this across the organisation. We strive to stay informed about regulatory changes to ensure adherence to regulatory requirements.
Banks must regularly review and adapt these strategies as the risk landscape evolves and new challenges emerge. Additionally, fostering a culture of risk awareness and continuous improvement across the organisation is crucial to implement these strategies effectively.
In the light of recent economic disruptions and uncertainties, what steps can firms take to enhance resilience against market risks?
Enhancing resilience against market risks is crucial for organisations, especially during economic disruptions and uncertainties. The following strategies, like strategies discussed earlier, would help foster resilience:
- Strengthen governance and oversight.
- Keep a close eye on economic indicators.
- Engage in scenario planning and stress testing to foresee and prepare for risks.
- Leverage data analytics and technology to remain competitive and adapt to evolving market conditions.
It’s important to continuously assess and evolve these strategies to align with evolving market dynamics and emerging risks.
Could you please share some of the major obstacles you have encountered while pursuing your career as an African woman?
A prominent challenge has been striking a harmonious work-life balance throughout my career journey as a young African woman. The intricate interplay of professional aspirations and familial obligations can be particularly challenging. Another hurdle closely linked to this is the limited networking avenues that facilitate growth and career advancement.
I am fortunate to have been in the company of leaders and mentors who prioritise forward-looking approaches. Thanks to their guidance, I’ve been able to navigate my career path without encountering substantial discrimination or the gender bias that many other women often face.
I’ve consistently believed that the calibre of my work will serve as a testament to my abilities. This perspective is deeply rooted in my character and professional demeanour, and I am convinced that it has played a pivotal role in propelling my career forward up to this point.
