Activities in the banking sector have been dominated by political environment with its inherent uncertainties, Magnus Nnoka, new national president Risk Management Association of Nigeria (RIMAN) and Chief Risk Officer Coronation Merchant Bank, in this interview with Hope Moses-Ashike, speaks more on issues in the industry and the Association. Excerpt.
As a new president what changes are you bringing to the Association?
The focus of the Association is very clear, so it may be difficult or inappropriate for me as the new President to claim or desire to bring certain changes for the sake of change, or as we understand it in our environment when a new Leadership takes over, be it in public or private Institution. Having said this, let me quickly point out that I have been part of the leadership structure of the Association in the last one decade on different capacities, and played key roles in the strategic growth aspirations of the Association. For us, we are still on a journey; my tenure as the President, working with my executive council would focus on achieving and strengthening most of the initiatives my predecessors started given that they are well thought-out programs. Maybe when we have achieved most of the ear-marked programs, we can begin to talk about new one or changes. This is however not to say that where certain changes become immediately imperative, we would not respond accordingly.
What is your outlook for the banking sector?
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The business environment in Nigeria in the first six months would be dominated by political environment with its inherent apprehensions, uncertainty and short-term mind set in business considerations. Thus, the banking sector will face two halves of the year with different operating business environments. The first half would be marked by cautious business decisions, safety of investment will be the primary consideration. We have seen this in the portfolio of most banks which proportionately skewed towards risk free fixed income instruments.
The second half of the year is expected to witness increased risk-taking activities by Banks. This period would also see policy shifts no matter the political party that is in government and this would bear on key macroeconomic parameters that would present new risks and opportunities to the banking sector.
What have been the Association’s contributions towards the growth of the economy?
RIMAN has been in existence formally for the last two decades. Within this period, it has championed and remained steadfast with its primary goals of risk management advocacy and capacity building. We led the advocacy and created platform for the establishment of private credit bureaus as we have them today. Such Agencies are very vital to support sound credit judgement to enable credit creation activities in any economy. We have been at the forefront in building strong risk management environment beyond the financial services sector where we started through formal training programs and public workshop/seminars. In the last couple of years, we have extended our risk awareness and capacity building through separate certification and academic collaboration programs with The Chartered Institute of Bankers of Nigeria (CIBN) and The University of Lagos (UNILAG). We are currently holding discussions with other potential partners to reach most parts of the Country. The Association has also being working closely with the various regulatory Institutions in some policy formulation that support economic activities. In doing all these, we are clear that an economy can only grow where decision makers take risk informed decisions.
Banking sector NPLs are seen be rising, what is your take on this and what are the reasons for this?
It may appear too hasty to make this conclusion at this point in the New Year; however, we saw that the NPL ratio in the banking industry was on the upward trend for most part of last year-2018, even on the back of timid growth in the aggregate lending portfolio to the private sector. The question however is around what we should expect to see this year around NPL. My view is that we would likely see lower NPL ratio based on some expectations around some macroeconomic indices. But before we guess into the future, let us take a step back. Part of the reasons for huge NPL in the past few years could be traced to the challenges witnessed in two major sectors namely construction industry and energy sector and more specifically the downstream oil and gas sector and the impact of that loan portfolio in the books of banks. However some reprieve was seen when substantial stock of this portfolio was settled by the government via issuance of promissory note late last year, so banks with impaired loans in these sectors in their books began this year with lower figure of NPL.
Another favorable factor is optimism on further recovery of the economy. Although the national election has taken centre stage since the beginning of the year, I have the believe that in spite of any hiccups that may arise in the electoral process, the outcome will provide direction and some measure of predictability for investment decisions; therefore the second part of the year would witness high tempo of economic activities including increased demand for credit facilities by the businesses and consumers. Banks will certainly respond positively to the demand in order to post profit given my projection that it would become more attractive than fixed income trading. On overall, I expect lower NPL volume in the banking industry this year.
Lending in the sector is poor, how can this be enhanced?
Lending by the banking sector should be seen from two perspectives. Most times people tend to see the lending activities of banks from what goes to the private sector only, and recently this has led to a perception of thanks not doing enough lending. However, when we consider the huge funding the public sector has raised in the last few years, the narration should change. The argument rather in some circles is the negative impact of huge public sector borrowing in terms of crowding out the private sector. Having said this, we should appreciate that Banks are set up to facilitate financial intermediation hence they need to lend in order to make returns to investors. I think the challenge most banks face in lending is signing on quality credit or borrower’s ability in meeting the risk acceptance criteria for accessing loans. This is not also to rule out the challengers borrowers face in meeting certain lending conditions and of course relative cost of financing which can still be considered high particularly when you look at some economic sectors
I therefore think that some of the measures to enhance lending will require improving quality of Obligors.
Among issues to be addressed are encouraging strong corporate governance, transparent financial reporting on the part of borrowers as well as strengthening regulatory and judicial system for loan disputes settlement.
A culture of credit discipline, information asymmetry and self-disclosure are critical elements of any environment that seek to enhance credit creation activities
As the country is experiencing macro-economic challenges, which areas should risk managers focus on to forestall bank’s failure?
Bank’s failure can be precipitated from two principal sources – from outside, this reflects a bank’s failure or inability to respond effectively to a contagion effect of macro-economic challenges or financial meltdown. We witnessed this across the globe during the 2008-2009 financial crisis.
The second source this from within, and this often emanate from issues around poor decision making which could be borne out of capacity deficiency across board, lack of best practice risk management, absence of corporate governance and inordinate ambition to out-compete, amongst others.
Now, notwithstanding the source, banks must first see their role as going beyond financial intermediation; once this is done the two key areas risk managers should focus on to forestall bank failure are enthroning strong corporate governance and enabling appropriate risk culture.
Corporate governance defines a Bank’s resolve to protect the interest of all stakeholders, as hard as this may seem, the process ensures that the institution is standing on structures that can withstand different conditions including down times.
Related to corporate governance is the bank’s risk culture. Just as culture defines an ethnic group, a bank’s risk culture ensures all stakeholders are clear on the values, norms and artefacts that drive the institution. Sadly, some big corporates not just banks in Nigeria today cannot clearly say what artefacts represent their risk culture. In this sense, I am not speaking of existence of well packaged and documented frameworks that no one has bothered to read, rather, I am talking of the day to day reality that is expressed in decision making process, risk appetite, risk interpretation, authority, consequence management etc.
Show me a bank that pay lip service to corporate governance and risk culture, and I will point to you a bank that is on a road to failure.
What are the challenges risk managers face in discharge of their duties?
The challenges risk managers face on their duties significantly derive from the way key stake holders, namely the board and executive management see the role of risk management in the organization. I joined risk management role over two decades ago when it was seen as where you keep staff you want to ‘’punish’’ for any reason. Although this perception has significantly changed, however some institutions still see the role as purely a control function and in extreme cases business stoppers. Where this judgement exits, it makes the job of a risk manager more challenging than where they are seen as strategic partners or where strong risk management practices exit.
Overall, most risk managers contend with the challenge of being ahead of the business team in proactively identifying emerging risk issues and convincing decision makers to see the flip side of their actions, thus creating that risk-return balance in decision and achieving buy-in of relevant stakeholders who have other valid dominating drives could be a tuff task for any risk manager. My approach and advice is for Risk Managers to work from the point of demonstrating the benefits of risk management, and the easiest way to do this is to buttress these with facts and figures. Almost all benefits of effective risk management today can be quantified either from internal or external experience; in this way challenges on the job can be better managed.
Going forward, what should we expect from your Association?
As I said earlier, RIMAN as a professional Association shall continue to focus on three major areas namely: up-skilling risk management capacity to support the various economic sectors, risk management advocacy and creating a risk-aware society.
In the area of capacity building, today we are running a certification and educational program with the Chartered Institute of Bankers of Nigeria (CIBN) and the University of Lagos respectively. We are currently discussing with other partners to widen the opportunities across the country. We want to build a crop of young risk management professionals right from higher institutions and this would be a departure from what we have been used to seeing, where people only become aware of the discipline in the course of their career.
Going forward, we are making concerted efforts to increase the appreciation of risk management practices beyond the financial services. Currently corporate and individual membership of the Association cuts across all economic sectors, however we would want to see a strong entrenchment of risk management practices in public institutions and agencies. We are strong on establishment of a national risk management Agency in the public sector. Today fiscal and monetary policies as well as other aspects of public governance are prune to sub -optimization because of our silo approach in planning and execution. Some of the policies and actions of government agencies work at cross purposes. An enterprise risk management approach under the proposed body should enable us manage effectively the various risks we face as a country from a helicopter view point.
The Association is also working on few other initiatives which I would not want to share at this point in time, but one thing is certain, we are determined as a body to create the awareness and environment that either in our corporate or private lives should help us manage proactively on day-to day bases the various risks that challenge our existence and the achievement of set objectives.
