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Breach in risk management caused banking crisis, Engineer Adeosun

By Ifeanyi Ugwuadu
The global financial crisis which spiraled into credit crunch has seen experts examining the application of enterprise risk management in organisations. Risk management has become the latest lexicon which interest now cuts across all professions. In this interview, Engineer Jacob Adeosun, one of Nigeria’s few risk management experts speaks of the imperatives of risk management in all facets of life.

Adeosun, a petroleum and chemical engineer and an executive director at Industrial Risks Protection Consultants, a subsidiary of Insurance Brokers of Nigeria (IBN) says there has been no time that risk management had become so vital and more urgent than now.

Excerpts:
What is risk management. Is its application restricted to only enterprise risk management
Risk management is the conscious application of risk identification and risk control techniques for the purpose of eliminating or minimising undesirable consequences in the pursuit of corporate objectives and targets.

Risk management is the most modern management support system available to individuals, organisations, businesses and governments to drive thier growth and development opportunities (upside risks) as well as for clearing the ‘dark clouds’ confronting various operational activities (downside risks).

Application of risk management is not restricted to Enterprise Risk Management (ERM). Risk management is broad-based and the principles are applicable to virtually all aspects of human endeavours ( both private and public). While ERM is dedicated to the needs and challenges of varying businesses, Public Sector Risk Management goes to the roots of result-oriented public governance.

Risk management is developing rapidly especially in advanced economies and the application has extended to several specialist areas. Hence, the terms: Project Risk Management, Environment Risk Management, Credit Risk Management, Energy Risk Management etc may not sound strange.

How do you rate risk management in Nigeria. How best can the cause of risk management be promoted in the country assuming you rate it low.
I will rate the practice of risk management in Nigeria low. My assessment is based on current level of practice, awareness, and available skills compared to where we should be. Risk management is currently known in few organisations (mostly listed public limited companies) including pockets of others in energy and financial sevices sectors. These companies have created some roles and functions including positions in risk management and thier annual reports feature commentaries on risk status in compliance with audit specification.

Although these few companies need to progress further by embedding risk management through ERM into their corporate culture, majority of other organisations in the real productive sector (commerce and industry) and the public sector are yet to embrace this concept.

My assessment is hinged on the practice and commitment to risk management which can be described as being ‘cosmetic’ in many organisations. Several individuals with risk management roles and responsibilities are not fully trained or empowered. This is partly responsible for the recent “bubble blow’’ in the banking sector due to severe breach of risk management prescriptions of corporate governance and treasury risk management.

The best way to promote the cause of risk management in Nigeria is through improved awareness and professional development. Risk and Insurance Managers Association of Nigeria (RIMSON) is at the forefront of professional development of risk management in Nigeria. Over the years, it had organised seminars, workshops and conferences where topical risk mangement issues were addressed.  In recognition of the huge professional skills gap in risk management in Nigeria, RIMSON is partnering with the famous Institute of Risk Management, UK to run training programs which will create the opportunity for Nigerians to earn internationally respected professional qualifications in risk management. The first of this initiative is scheduled to hold in Lagos third week of March.

Is risk management entirely different from insurance. What is the interplay between the two
It is not correct to equate risk management with insurance. However, there is a ‘family’ relationship between the two. In order to explain the relationship, I will summarise “The Risk Management Process’’ in a simple way. This consists of the following continuous cyclic activities: Objectives & Targets Setting, Risk Identification, Risk Analysis, Risk Treatment ( Physical and Financial Risk Controls), Implementation, Continuous Monitoring & Periodic Reviews.

Insurance is one of the methods of financial risk controls in the risk management process. Indeed, insurance is oldest and most popular traditional method of risk financing. As a forerunner in the business of risk bearing, insurers readily imbibe the concept of risk management. However, we all know that there are several risks which are uninsurable or for which insurance covers are not readily available. These risks are challenges which require risk management solutions.

How do we get government to appreciate the importance of risk management in national life and the economy
The best way to get government to appreciate the importance of risk management in national life and the economy is through improved enlightenment especially via the press.

There is a need for the press to interact more with risk management professionals for the purpose of highlighting how risk management can help to solve the challenges of governance and the economy. More than ever before, risk management professionals need to articulate and analyse the application of risk management techniques in the public sector and the economy. As the primary “educator” of the public, the role of the press in this important service to our nation is paramount.

Does the current global financial meltdown have any correlation to lack of, absence or inefficient risk management. What are the lessons from the global crisis

From risk management considerations, the current global financial meltdown could be attributed to a number of factors including breach of credit risk management, failure of oversight, control, regulatory functions, lack of or ineffective impact analysis including risk assessment of new business models and financial products ( e.g.derivatives ). Today, risk management is being employed by Central Banks of Countries and financial institutions in the salvage mission.  The lessons from the global crisis are numerous for Nigeria as a country, for organisations as corporate entities as well as for individuals.  Let me state a few;

Capital flight, withdrawal of private equity funds and foreign direct investments from Nigeria were the first impact of the meltdown. The sudden divestment hit the banks and the capital market and the impact was not anticipated. Stock values have not recovered since. This was a true measure of the strength of our capital market which was dependent on foreign resources. Managers of our resources need to be fully aware of the risk profile in order to deploy appropriate risk mitigation measures.

The crash of the price of crude oil in the international market in the wake of the meltdown brought to the fore the weakness of a mono-product economy. We heard President Obama’s challenge to American Scientists to find alternate energy solution to oil. Nigeria has been singing choruses on the need to diversify the economic base through Extraction of Solid Minerals, development of commercial agriculture and tourism, deregulation of the petroleum industry etc. However, due to inconsistent policies and lack of continuity of government projects implementation, little or no progress is achieved, retrogression is what we get.

Risk management is a tool that should be used to underpin and rationalize government policy decisions and implementation which should outlive political actors and regimes.

The crash of the stock values and the resultant collosal losses suffered by numerous individuals and corporate entities have confirmed the importance of cautious, balanced and diversified investment practice as a risk control mechanism. The need for continuous indepth risk evaluation while taking advantage of wealth creation opportunities is very important for all investors. Regulatory agencies in Nigeria ( e.g. CBN, SEC, NAICOM, PENCOM etc.) have the responsibility to adopt appropriate risk protection strategies to safeguard the wealth and assests of Nigeria and investors against the risk exposures of financial fraudsters proactively and consistently.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.