Managing risk for developing nations

Once touted by economists the world over as the last green patch of economic freedom, Africa and indeed its nearest neighbour, the Middle East, are thriving entities for investment and development.

But while money is pouring into these regions through investment and trade, the countries have to deal with the element of business risk on a day-to-day basis accompanied by compliance requirements.

For a company, or a country for that matter, to be able to successfully integrate into the global marketplace requires that risk be well managed and pose as small a threat as possible to the international organisation. Countries outside of our region live under the preconceived notion that business deals in developing countries are 'shady', business officials are corrupt and systems are just unable to cope with rigorous international requirements and standards.

But new winds are blowing across the continents and countries earmarked as developing nations and regions are now the biggest growing consumer markets around the globe. However, with the stigma of underhandedness comes the need to prove better management of enterprise risk. Enterprise risk management, or ERM, is a phenomenon still considered a challenge for companies in the financial services sector globally - not in developing countries. Not so, it is a constant challenge that faces all companies that are accountable for their actions outside of the ivory tower.

ERM is not merely a means by which to promote trade with other countries, or ensure business audits and health checks come clean at the end of each financial year. A mature and committed ERM programme can improve business performance and generate greater financial rewards, all the while ensuring transparency with the organisation and its publics, internal and external.

Companies need to assess the risk in their organisation before leaping head first into a risk programme. In the instance of a financial services organisation, government regulatory compliance and credit risk are possibly the two main areas that need to be drilled down into and established as a baseline. No matter the industry, enterprise-wide risk assessment is critical to the effective management of processes, performance and even people.

The four pillars of risk management:

* Risk avoidance
* Risk reduction
* Risk retention
* Risk transfer

In Africa one of the biggest risk elements remains its consumers. On a continent where the majority of consumers remain unbanked, credit risk is a serious threat to financial institutions, retailers and to that end importers and even exporters. Managing and understanding the flow of capital within and out of the country, as well as the individual wealth of the consumer, is a continual process and ever-changing in the evolution of the African market.

It is therefore key to be able to identify, understand, analyse and measure risk to an organisation from internal and external influences, both application and behavioural tendencies, and then effectively weight these as opportunities or threats to an organisation. Not all risk is a threat; certain processes and results of risk management can emphasise the ability to capitalise on the risk events and therefore convert it into a measurable, and in turn profitable, part of the business.

Risk management has always been seen as the last process in the management of the organisation, or even just a small step in the application or behavioural process.

Acknowledging that an organisation may fall prey to risk, is at risk or needs a risk strategy is not enough.

Harry Pretorius, Head of risk practice at SAS, Middle East and Africa.

Acknowledging that an organisation may fall prey to risk, is at risk or needs a risk strategy is not enough. Ensuring the ability to filter the data within the organisation, and then crunching it into useable information, requires a technology solution that can penetrate all of the existing systems in the enterprise.

The biggest flaw in the current thinking is that companies need to uproot and overhaul the systems already in place. A forklift upgrade of every system in the company is not necessary in order to execute a proper ERM solution or project. If the data is solid, and can be cleansed in order to be evaluated, half the battle is won.

The best way to summarise risk is that data is king. The new risk revolution dictates that companies know every nook and cranny of the business and are able to report on this in an instant. If in life knowledge is power, it can then be said that in risk, information is king.

Benefits of managed risk include reduced losses, optimised allocation of economic and regulatory capital, protection against loss of reputation, improved performance management, improved selection of clients according to risk profile and improved pricing of products. These benefits go hand-in-hand with greater levels of compliance, and together can strengthen an organisation from all aspects.

Understanding and defining risk may possibly be the biggest challenge, and at the same time the biggest opportunity for companies in developing nations. While it can leapfrog us into the global marketplace, it can also set us ahead of competitors and enable us to better understand the demands of our customers.