Nnoka: Businesses Facing Increased Risks


The President of the Risk Management Association of Nigeria, Mr. Magnus Nnoka, in his maiden interview since his election, expresses optimism that after the general elections, the economy will witness increased economic activities. Nume Ekeghe presents the excerpts:

There are reports that the level of non-performing loans (NPLs) in the banking sector is still high, how best do you think banks can address this challenge?


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 NPL this year.  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 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 center 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.


But generally, what is your outlook for the banking sector?

The business environment in Nigeria in the first six months would be dominated by the political environment with its inherent apprehension, uncertainty and short-term mindset 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 challenges do you envisage this election year and what strategies would you suggest tackling same?

 Nigeria has always gone through national elections, and it has always been preceded by tensions of all sorts. However, more remarkably, given the structure of our economy where heavy reliance is placed on capital inflows and portfolio investors, we have seen that these inflows are being delayed until the conclusion of the elections. Businesses are also facing increased risks due to insecurity in some locations and inability to reach timely decisions particularly with public sector counter parties. I am not sure silo-approach can effectively tackle these challenges rather most institutions are expected to take specific risk response that addresses specific challenges.


Lending in the sector appears to be on the decline, 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 challenges 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 the 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


Now that CBN has announced plans to introduce stiffer measures for banks, what will be the function of risk managers in various banks to ensure that this does not impact negatively on the bottom-line of their respective financial institutions?


First, I do not see the measures that CBN are introducing as stiffer measures, rather they are more or responses to emerging risks in the business environment. Let us not forget that globally, the banking industry is probably the most regulated economic sector. The risk management environment is very dynamic. The products and services as well as the channels the banks are deploying today to reach their customers have witnessed very significant transformation in Nigeria in the last one decade. These changes obviously introduce new risks which must be effectively managed hence the intervention of CBN through various regulations and policies. Risk managers at the banks have a responsibility to complement the efforts of the CBN in minimising impact of the various emerging risks. Thus, from strategic view point, whilst the CBN is focusing on minimising the impact of systemic risk issues that could adversely impact the economy, Risk managers in their respective institutions are expected within the risk universe to take similar measures to optimise alternatives in order to increase value of the institution.



As the country is experiencing macro-economic challenges, which areas should risk managers focus on to forestall banks’ 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 is 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, lack of 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 discharging their duties and what is the way forward?


The challenges risk managers face on their duties significantly derive from the way key stakeholders, namely the board and executive management see the role of risk management in the organisation. 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 tough 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 the 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 prone to sub-optimisation because of our silo approach in planning and execution. Some of the policies and actions of government agencies work are 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.  

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 earmarked 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 has been the association’s contribution 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 been 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.