Risk Management And The Banks

CBN GOVERNOR, LAMIDO SANUSI.

As the dust settles on the recent Central Bank of Nigeria's cleansing exercise, we can deduce that poor risk management practices, lack of professional diligence and poor corporate governance practice of bank executives led to the poor condition of the affected banks. Amidst the N620 billion bailout, erosion of shareholders funds and plummeting share prices, the paramount question is: what can be done to ensure that this situation never repeats itself?

Without mincing words, the enormous losses recorded by our banks stemmed from a failure of one of the core functions of banks: Risk Management. If our banks are to succeed and not just survive in the face of a recessive global economic climate, it is imperative that they adopt and maintain effective risk management practices. The banks will need to develop and institute a strong risk management culture which will emphasize strict adherence to limits and skilful management of risk exposure.

In banking, risk communication is very important. First, an adequate understanding of risk and other financial matters enhances the ability of shareholders and investors to take fully informed decisions about their investments, thereby reducing the possibility of investors taking on blind risks in their investment options. Secondly, where banks make full disclosures on their financial statements, it helps to build trust in the financial system as alarming surprises are not sprung on the investors who in turn panic and create crisis in the financial system.

Good corporate governance curtails banks' risk taking and enhances overall bank performance thus sound corporate governance cannot be over-emphasised. Going forward, therefore, boards of banks need to ensure that a compliance-oriented culture prevails throughout the banks. One way to achieving this would be to organize awareness-raising programmes on compliance functions for bank employees. Bank employees should also be promoted, remunerated or reprimanded in accordance with their conformity with the bank's objectives, policies and values as one of the key elements of personnel evaluation.

Our present corporate governance codes also need to be reviewed to incorporate the best corporate governance practices around the world. International regulations such as the U.S. Sarbanes Oxley Act 2002 and Basel Committee's Guidance - Enhancing Corporate Governance for Banking Organizations (Basel CG Guidance) should be considered in drawing out international best practices which will help improve our laws on corporate governance.

Credit risk is a fundamental risk that banks face and can be effectively managed by the establishment of credit bureaus. Credit bureaus are institutions that collect information from creditors and available public sources on borrowers' credit history. They compile this information and create comprehensive credit records which may be sold to lending institutions and other authorized users. With such information available, banks are in a better position to appraise the repayment capabilities of customers seeking new or additional credit facilities from them thereby promoting responsible lending practices.

On the other hand, borrowers are also discouraged from defaulting on their loans which in turn strengthens market discipline and social responsibility. Presently, the CBN operates a credit registry called the Credit Registry Management System (CRMS) in addition to XDS Credit Bureau Limited, which is Nigeria's first licensed operational private credit bureau. However, these two credit agencies are not functional or sufficient to meet the needs of the Nigerian banking and financial services sector. It is therefore important that more credit bureaus be established.

The nation still lacks qualified risk management experts who possess the requisite training and skills to effectively identify and manage risks in the banking industry. In this regard, the CBN has started off on the right track by appointing Kingsley Chiedu Moghalu, an experienced risk manager as the new deputy governor of the CBN, thereby sending positive signals that it would no longer be business as usual in the banking industry. Our banks will need to upgrade their credit assessment and risk management skills, retrain staff, develop a cadre of specialists and introduce technology driven management information systems.

The CBN has been battling with deep supervisory deficiencies over the years and this was further exemplified in the recent banking crisis where the CBN's supervisory team failed to discover the discrepancies between the accounts submitted by the banks and the reality on ground. In view of this, I believe that it is time for the CBN to divest itself of some of its supervisory responsibilities so as to better enable it carry out its other statutory duties. It is my opinion that an autonomous supervisory agency should be created solely for the purpose of bank supervision, as it will devote greater attention to the fulfillment of its role than the CBN which also has responsibilities for managing the nation's monetary policy. A successful example of this arrangement is the United Kingdom; where the Bank of England shares its supervisory responsibility with the Financial Services Authority. This arrangement has clearly worked, as prior to the recession; the UK enjoyed a relatively stable financial system. Maybe its time we followed in their footsteps.

Many lessons have been learnt from the upheaval in the banking sector, which has brought to fore the tragic consequences risk management failures can bring. More so, the negligent bank executives have seen that their individual powers cannot supersede the need to safeguard our economy from bankruptcy or collapse. However, a lot remains to be done. To ensure the long-term success of our financial sector, we must consciously and consistently increase our risk management appetite in Nigeria.

Ms. Adesola Bamishile, a legal practitioner wrote from Lagos.