The main objective of Enterprise Risk Management framework in Unity Bank is to minimize losses, maximise efficiency and reduce earnings volatility. The framework runs on a platform of policies and processes that can proactively identify, measure, manage, control, monitor and report on enterprise risk exposures in the Bank on an integrated basis.
The Bank continued to carry on its implementation of risk management policies during the period under review. As the Central Bank of Nigeria pilots a focused but speedy deployment of electronic payments channels to address triple objectives of operational efficiency, financial inclusion and increased surveillance of funds flow for anti-money laundering war, information security risks was correspondingly escalated. Apart from successful certification to ISO 27001 Standards by the Bank prior year, the risk mitigation for this elevated risk was further strengthened with the Bank’s successful certification to the prestigious Payments Cards Industry Security Standards (PCIDSS) at the beginning of the second Quarter in 2013.
With respect to credit risk management, the Bank successfully deployed a workflow engine that was customised and being applied to objectively appraise loan applications to weed off applications that fall below set Risk Assets Acceptance Criteria. An internally developed rating system was incorporated in the workflow engine. Also, in line with the retail strategy of the Bank, certain retail products on both sides of the balance sheet were developed and deployed during the period.
GLOBAL AND LOCAL ECONOMIC ENVIRONMENT RISK OVERVIEW
The global economy continued its slow recovery in 2013 as it had yet to fully shake off the fallout from the crises of 2008-2009. Developed economies are still struggling to shake off the impacts of the crises largely as a result of massive stimuli pumped by the various monetary authorities in those climes. Emerging market economies and Sub-Sahara African countries continued to be the major beneficiaries of those stimuli to fuel their own better economic performance.
For example, the US export growth has been slow since the beginning of the year as global industrial production continued to trudge. Import growth has been slowed at about two percent below domestic demand: trade was a net drag on growth throughout the first-half of the year. Unemployment figures were at best improving rather slowly. The European economy remains in recession with positive signs in the near term. According to economic data, the Euro Area PMI was in contraction territory for the month of June, 2013.
The Chinese economy show significant recessing growth that could hurt exports from Europe, which is important for a recovery. Global conditions could dampen slowly regained confidence and delay investment and consumption decisions which could possibly postpone a European economic recovery. Uncertainty continues to loom with changing policy from the Federal Reserve making Europeans nervous about exports to the United States and the consequences of reduced liquidity on the global financial system. Domestic risks witnessed in the year include the continued Political and Security Risks. It has been a year characterised by terrorism activities, single-digit headline inflation influenced by the stoic posture of the Apex Bank at retaining the monetary policy stance.
Political Risks were elevated as preparations for 2015 Presidential elections commences in earnest: this reverberated in the polarisation of the Governors’ Forum as the Presidency moved to curtail the unfettered influence of the leadership of the forum by placing a seemingly neutral Leadership in place despite the outcome of the elections which was contrary. Terrorism activities led to the closure of some business locations to mitigate security risk. Major successes were recorded in the fight against terrorism with the modified state of emergency declared by the Federal Government.
The improvement in Electricity generation that was expected to positively impact on the economy became a course for concern as in electricity generation went down. The mitigant to this risk is the successful orderly privatisation of the Power Holding Company of Nigeria (PHCN). Currency Risk continues to be a major concern for the industry as the Apex Bank had to sustain its intervention strategy to avoid the local currency taking a free fall, relative to major International currencies.
The Bank carried out a major review of its strategy during the year. Risk of inappropriate or un-implementable strategy was mitigated through the strategy process. Thorough self review and environmental scanning spanning historical and futuristic perspectives vis-a-vis its current position was carried out in arriving at the current strategy. In implementing the strategy, it carried out some reorganisation to place its people based on demonstrated competence and talents. All were done to support the drive towards the achievement of its ambitious but realistic corporate strategy.
In line with its business plan to rev up the performance of the Bank towards improved operational profitability, project Polaris was launched to drive the successful implementation of the Bank’s revised strategic plan. The Strategy is being communicated effectively to the workforce. The project is expected to identify short comings in existing processes and fashion out processes that would give the workforce directions towards achieving the Bank’s strategic objective within a time frame.
COMPLIANCE AND LEGAL RISK
The Bank implemented both system-based and manual controls to ensure compliance with rules, regulations and laws governing operations of a financial institution in Nigeria. We have Zero-tolerance for non-compliance with Know-your-customer and Know-your-customers’ business regulations in the Bank. Officers are exposed to detail and regular training on anti-money laundering practices to acquire relevant capacity to manage these franchise risk issues. Expert opinions are obtained from internal and external solicitors to manage legal risks in all its key decision making processes. A consultant was hired to carry out detailed review of the Bank’s Compliance risk management policies and processes with a view to determining the existing gaps and proffering appropriate remediation for such identified gaps in the framework.
To demonstrate the Bank’s commitment towards a dramatic improvement in its loan portfolio, the Bank hired a Resident Consultant to provide guidance and help build internal capacity among the operating staff specifically in this risk area. Specialized lending area with particular reference to Agriculture finance amongst others received special attention. Also credit risk rating framework has been developed in the Bank which will be deployed subsequent to year-end. Efforts are intensified to ensure that the Bank sustains and improve on the quality of the loan books. While industry credit growth was generally towards public sector, Unity Bank sustained its focus on providing funding for the real sector including agriculture and manufacturing.
It is noted that the Bank’s risk assets portfolio suffered significant deterioration during the period due to a number of factors, key amongst which are harsh operating environment, some legacy and credits booked in the early days that were not sold to AMCON as they were not profitable for such sales but kept in the books with the understanding that the obligors will do the needful. This is with respect to honouring restructuring agreements; dwindling revenue of government which meant default with respect to government contracts amongst others. The Bank is taking decisive steps to arrest the deterioration. Such steps include the setting up of Credit Administration Division to strengthen proactive monitoring and remediation of such assets; the strengthening of Debt Recovery Department and review of their key performance indicators to include delivery on recovery and restructuring targets.
Minimisation of operational losses attributable to failed or inadequate processes, systems, people and external events are the focus of the Bank’s operational risk management practices. The results of these efforts were evidenced in the relatively low fraud rate and amount during the period which is far below industry average. Some fraud control measures including cheque processing and confirmation procedures were tightened during the period under review. Massive fraud awareness campaign which was commenced in previous financial year was concluded during the year.
The Information Technology system down-time and failure risk were isolated to be significant hence the Bank decided to increase investments in replacement and up-grading of its servers. In this respect, the Bank became the first to deploy Oracle 11G in the Nigerian banking industry. In line with this, it also introduced Citrix software to help optimize its network resources. Also in order to achieve higher level of customers’ satisfaction, the Bank deployed ‘BPM’ workflow engine to automate its credit process. Physical Security risk was also responded to with appropriate mitigation procedures by improved surveillance and caution in all the Bank’s business locations.
A full-fledged Division has been set up to drive service delivery standards under the Office of Executive Director, Services and Secretariat. Customers’ Care Centre has also been upgraded with adequate staffing to improve the response time to customers’ issue logging and resolution across the enterprise.
RISK MANAGEMENT OUTLOOK
Having successfully upgraded the Bank’s enterprise risk management policies and processes, the outlook portends higher level of risk management in the next financial year. This will certainly impact positively on the quantum and quality of earnings of the Bank in the years ahead.
The Board and Management of the Bank are committed to implementing robust risk management policies towards creating and preserving value for its numerous internal and external stakeholders. It is our belief that effective enterprise risk management framework is a sine qua non of a sustainable growth and survival of any enterprise especially during extreme conditions of stress. The Bank will leave no stone unturned to imbibe best practice in this direction and also ensure that the policies are embedded in the decision and operational levels of the Bank. In order to achieve this, the performance management system will incorporate risk capital allocation and risk-adjusted return on capital targets in no distant future. Also, automation of the Enterprise Risk Management process shall be implemented in due course. Much efforts would be geared towards improving the risk management culture across the enterprise.
Danlami Baba Abubakar,
Group Head, Enterprise Risk Management