Benefits of Risk Management

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Nume Ekeghe reckons that applying risk management principles is essential for the growth of any business and the economy

Risk management is essential in financial institutions and other organisation. It helps to guard against bad loans, among other things.
Basically, risk management is the process of identifying, analysing/evaluating as well as providing mitigation strategies to curtail risks. To minimise losses and withstand internal and other environmental threats to business and corporate/national existence, individuals, corporations and nations need to imbibe risk management culture.

Today, the economic recession being experienced in Nigeria clearly shows the lack of appreciation of the concept of risk management at the level of the federal government.
Clearly, with the steady rise in inflation, exchange rate volatility and other structural challenges faced by the Nigerian economy, applying risk manager principles in the economy has become essential.

Risk Management in Nigeria
Speaking about how he would assess risk management in Nigeria, a board of trustee member of Risk Managers association of Nigeria (RIMAN), who is also a Partner and Head Risk Consulting Services, KPMG Mr. Olumide Olayinka said: “If we say risk management in Nigeria and if we look at Nigeria, we knew without a doubt that we are a mono-product economy and that was the risk we took and today it has crystallised into a recession.
“At that time, in other countries what they did when crude oil prices where over $100 per barrel, was that they saved. They had huge sovereign funds that they could use during this period. So again, these are the key principles risk management would teach you that there would always be ups and downs.

“We had the 2007/2008 financial crisis and the only reason we did not feel that much was because the oil rebounded very quickly. But this time around, oil is yet to rebound even in three years.
“We have not put things in place to diversify our foreign exchange income; because we only have one which is oil. What risk management tries to do is make sure it is not concentrated. Risk management would tell you that anything above 20 per cent of concentration is not very good for you.”

On his part, the president RIMAN, Mr. Jude Monye said: “On the side of the federal government and the public sector, what we should have as a nation is risk assessment centres. “This should be both federal parastatals, MDAs and every project that we undertake in this country, risk management and risk assessment should take place. In terms of reputational risk or in terms of any other forms of risk has to happen.”
For example, he said in oil companies after all they do, they also carry out risk assessment to ensure that with the project they want to embark on, they fully understood the risks and opportunities. However, in Nigeria we do not do this in or federal states and MDAs,” Monye added.

Effects on the economy
According to the experts, the effects of lack of risk management practice in the public sector have contributed to the situation in the country.
Adding to this, Money said: “The situation is painful for everyone but government is in the right path and we are beginning to see that the fundamentals are being put in place.

“The challenge we are having today is the drop in our earning capacity as a nation. We are an import-dependent country and once your earning capacity dwindles, then it bites even to the man in the village.
“However the economy is still very good for investments. If anything, this is the right time for anyone to invest when everything seems to be low. The fundamentals are there, agriculture, mining and many other areas of growth potential are available. It is true that statically our GDP has contracted but we are beginning to see signs of growth.”

Also, Olayinka noted that the adoption of risk management at the federal level had been slow, but he expressed optimism saying: “Risk management from a maturity perspective is not as matured as we want it to be. We are still at the early stage of risk management adoption if not we shouldn’t be where we are while some countries did the right thing. We didn’t even hedge our risk; some countries would have done some hedging techniques to help.”

Speaking on ways to tackle foreign exchange crisis in the country, Olayinka said: “We need to look at our foreign currency management to ensure that we build confidence because without confidence there would be a lot of issues.
“I would advise the federal government to build confidence in the foreign exchange market. Also we shouldn’t play lip service to agriculture. You have to do things that would engender investment in agriculture. You have to create an investment environment for people to put investment in agriculture and agro allied.

“Also we need to reduce our importation for example, if we refined all the crude oil we need that would reduce pressure on our foreign exchange.”
Furthermore he added: “Apart from banks and financial institutions that have very strong risk management framework, RIMAN is trying to take it beyond financial institutions and banks to food and beverage, agriculture, aviation, construction, and every sector of the economy to make sure that risk management becomes a practice in everything we do.”

Advice to Government

While advising the government on how best to approach risk management, Olayinka said: “One of the cardinals of this association is to increase advocacy and hopefully we have people that would listen and do the right thing.
“We need ensure that we diversify our foreign earnings. The economy is diversified but were we earn foreign earnings is not diversified.”

Also, Monye said: “As custodians of the public trust in terms of policy direction and regulation, the importance of risk management in the public sector cannot be overemphasised. “If we had not left everything to chance or otherwise taken deliberate steps to employ the technical expertise of risk managers, the recession in Nigeria would have been avoided or at worst minimised.
“While commending the private/corporate sector in Nigeria with respect to the practice of risk management, it is clear that the public sector has a lot of catching up to do.”