Adopting the right technology is critical to success
Banks across Africa face many compliance and risk challenges, but the implementation of an effective Risk and Finance Platform can help them to stay relevant in a rapidly changing market.
The financial services sector is one of the most regulated industries in the world, with banks today needing not only to comply with constantly changing regulations, but also to modernise their systems, so they can reduce compliance costs, improve efficiency and effectiveness in risk management processes, and be innovative on risk assessments during new product development.
In addition, they face other challenges, including risk analytics skills shortages, data management issues and the integration of their risk management and finance processes across the enterprise. Banks on the African continent also find themselves grappling with the regulatory pressure that stems from the requirements, questions and challenges related to conducting stress tests, which are becoming more stringent all the time.
According to Charles Nyamuzinga, Senior Business Solutions Manager, Pre-Sales Risk Practice SEMEA, SAS, if the stress test calculations, which are based on risk models, are incorrect, banks will have much to fear. These concerns include not only non-compliance penalties, but also potential capital shortfalls, reputational damage and negative impact on earnings performance.
"There is reason to be concerned too, as there is a good chance that many banks in Africa could get this wrong, due to using disparate and fragmented systems for data management, model building and implementation and reporting. This approach is more common than one might realise, as is that of trying to do the computations manually," he says.
"Naturally, the biggest causes of incorrect modelling are data management and quality issues, along with skills shortages. This is not surprising, when one considers that banks have to obtain and analyse enormous amounts of detailed data, and to comply with IFRS 9, these institutions must look at millions of customers with hundreds of data points."
Typically, he explains, banks in Africa have to draw this data from a number of disparate systems, and the more disparate systems the information is drawn from, the more likely for there to be some type of inaccuracy in the data. This, naturally, significantly impacts on the quality of the data used.
"The problem, of course, is that accurate modelling and calculations are critical in credit scoring, estimation of credit losses, calculation of risk weighted assets and stress testing. Accuracy ultimately depends on all departments in the bank having access to the same clean, accurate data as well as a flexible integrated risk management platform. It also depends on having access to the required data analytics skills, something which is yet another challenge facing banks in Africa."
"The answer to these problems is to implement an effective risk and finance platform; one that offers data management, risk calculations, scenario management and reporting capabilities. This platform should also be able to ensure that the risk and finance departments can access the same data sets, populated with data that has been scrubbed, scrutinised and validated, while also performing calculations and producing reports, so that executives can make confident business decisions."
This, continues Nyamuzinga, is critical as it means the banks can trust that the information they are using to build their risk and credit models is reliable. This, in turn, will mean the reports generated are automatically compliant with regulatory requirements and can easily adapt to regulatory changes as and when they happen.
"There is no doubt that banks need to modernise and integrate their risk management systems if they hope to stay relevant in a rapidly changing market," he suggests. They also need to adopt advanced analytics solutions that are multi-tenancy in terms of risk management use cases and cover the entire risk management process, from data management, risk analytics and reporting, to meeting governance and controls requirements. And, of course, if they don't have the analytics skills that they require in-house, then they must partner with an organisation that does.
"Understanding this, it is not hard to realise why financial institutions are considering technology as a means to both eliminate the challenges already outlined and deliver access to new streams of data. Ultimately, if you wants to be a leader in this space, you will need impeccable risk management processes, you will have to be innovative on risk assessments, and you will have to adopt the right technology.
"This means technology that is able to help you to quickly adapt to regulatory changes, promote enterprise-wide collaboration in risk management activities, enhance risk management strategies, uncover new revenue streams, manage costs and improve your customer service," he concludes.