Mitigating Digitisation Risks in Banking Sector

The appetite for technological innovations in the banking system has brought along with it risk that ought to be mitigated, Nume Ekeghe looks at what the NDIC and others are doing to tackle the emerging risks

As the banking industry is being redefined globally through the advancement in technology so also is the need for supervisory organisations to adapt quickly or be left behind in the ever changing world.

This was the crux of the three-day workshop for finance correspondents by the Nigeria Deposit Insurance Corporation (NDIC) in Gombe last week with the theme, “Enduring Extreme Disruption- Resilience and Reinvention for the Banking System Stability and Deposit Insurance.”

Speaking at the workshop, NDIC Director, Bank Examination Department, O.O Babatolu noted that digital disruptions in form of payment solutions, lending and savings facilitations are transforming the banking industry.

In his paper titled: “Resilience and Reinvention Strategies for Deposit Insurance System in the Face of Extreme Disruption in the Banking System,” Babatolu noted that apart from globalization, disruptive technologies (digital disruption) would continue to challenge the traditional approaches to doing business generally.

Banking Industry Disruption

Digital disruption, he stated, is the change that occurs when new digital technologies and business models affect the value proposition of existing goods and services. According to him, globally, the banking industry is, “arguably, the most regulated business (enterprise) globally because of the financial intermediation roles of banks by which they mobilise deposits from the surplus units and lend to the deficit units, thereby facilitating economic growth and development, amongst other functions

“Besides being the most regulated, the banking industry is also, perhaps, the most disrupted industry, today, globally.

Technology is a key driver of rapid changes in the banking industry. As technology enhances the quality of existing banking services and or facilitates the introduction of new ones so also are the expectations of the banking public getting increasingly more complex.

“In response to these, banks and other financial institutions are forced to either partner with Financial Technology (FinTech) companies or develop their own solutions. Not only are technological disruptions and globalisation re-defining insured banks’ business models, it is also accentuating contagious risks.

“Other risks posed by the disruption in the industry include complexity of operations, speed of transmission of stress and contagions, cybersecurity risk as Babatolu furthered that digital disruptions have also come with new threats and risks, including “externalities like the novel COVID-19 pandemic have also posed significant risks to almost all sectors of the global economy.”

Mitigating Digitization Risks

In mitigating these risks, Babatolu noted that the NDIC had taken strategic decision on the nature, scope and depth of technology deployment.

Some of the steps taken, he added, include significant enhancement to virtual contents of on-site examination.

He said the Corporation, in conjunction with the CBN, has continued to examine banks using the hybrid on-site examination tool since the outbreak of Covid-19 and the same with every aspects of the Corporation’s mandate.

“There is also the establishment of Fintech and Innovation Office for policy articulation and alignment, as well as acquisition of tools and capacity for data analytics, “he said.

He added that the corporation had put into consideration; appropriate supervisory technologies (Suptech) in aid of off-site and on-site supervision, early warning systems, resolution mandate especially depositors’ payout as well as Market intelligence.

“The financial service environment is ever changing. The global economy, as we see it today, was different in the past, and surely, will be drastically different in the future, “he said.

“The banking system disruption is happening very fast, therefore, the DIS will have to rapidly adapt, withstand, and recover from the disruptions and to be able to continue to play its vital role as a safety-net component.
“The appetite for technological innovations in the banking system appears to be pervasive but it is risky, thus, requiring the DIS and other safety-net players to remain vigilant for the emerging risks.

“The corporation has evolved overtime and has continued to pursue strategies that enhance its operational resilience through innovation, strong risk management, highly motivated and empowered workforce, dynamism and adaptability, fit-for-purpose business model, strong leadership and collaboration with critical stakeholders,” Babatolu stated.
Way Forward

On his part, CBN Director of Banking Supervision, Haruna Mustapha in his paper titled, “Reviewing Financial and Banking Regulation in Nigeria – Priorities and Plans Post COVID-19 Pandemic,” stressed the need for continuous update and assessment of the prudential rule books and policy tool kits to strengthen responses to economic and financial shocks.

He said: “We must ensure smooth unwinding of COVID-19 induced forbearance regime with key focus on our goal of ensuring financial system stability as we transition into the recovery phase of the pandemic and employ effective stress testing methodologies to detect vulnerabilities early to enable appropriate pre-emptive action.

“There is also need to develop strategies in conjunction with supervised institutions to address the longer-term changes that may occur in their operational arrangements associated with the pandemic induced deviations from their business models as well ad develop and adopt more Reg-tech & Sup-tech solutions that align with our supervisory objectives.”

He added, “Despite the adverse headwinds caused by the Covid-19 pandemic and the reduction in global economic growth, the CBN has been able to sustain banking sector soundness in terms of CAR, NPL and LR.

“The banking sector has sustained the growth of key economic activities which were impacted by the pandemic such as agriculture, manufacturing, retail, health care, hospitality and tourism.

“Whilst, the Nigerian banking sector has remained resilient to the impact of the Covid-19 pandemic, the bank will develop additional counter-cyclical policy options that may be deployed if economic conditions warrant.”

Mustapha noted that macro-prudential regulation and supervision is now more critical than ever, adding that in addition to other macro-prudential tools, CBN would continue to have robust stress testing frameworks to provide forward-looking assessment of existing and emerging vulnerabilities and threats to financial system stability.

He said the bank also stands ready to provide liquidity backstops as and when required in view of its role as banker to the Federal Government and lender of last resort.

RIMAN’s View

Recently, the Risk Managers Association of Nigeria (RIMAN) urged banks to increase investments risk assessment tools to mitigate the increased risks that come with digitisation in the banking sector.

President RIMAN, Mr. Magnus Nnoka stated this while speaking at the 20th Annual International Conference of the Risk Management Association of Nigeria, where stakeholders gathered to deliberate on ‘Risk Management in a Digital Era.’

Nnoka said: “The rise in digital assets and channels consequently lead to emerging and evolving risk types, therefore, we are seeing increasing digitisation of risk. Even as organisation seek increasing digitisation, we can readily identify few of the drawbacks on this journey, these include Legacy Information asset, organizational culture, data quality, dearth of requisite talent and complexity of organizational structure.”

He noted that in the digital era, risk management professionals should be required to review and reshape their mandate and roles, develop digitally driven mindset and capacity to provide faster, more forward-looking, and deeper insights in driving the new working environment.

He added: “Furthermore, concerns have been raised not by a few, that technological innovation or digitalization specifically in the banking sector appear to be concentrated mostly on customer-facing journeys such as online banking and marketing and the activities that support these journeys such as customer onboarding, customer servicing and resolution of complaints.

“It is my submission that Managing risk in a digital era should be supported by adequate and appropriate investment in digitalisation of risk management Digital risk transformations should be pursued intentionally by organisations It will be increasingly challenging for risk management approach to stay analog while customer-facing activities and operations race ahead into digital.”

In his keynote address, Managing Director of First Bank of Nigeria Limited, Mr. Adesola Adeduntan said risk managers should be well equipped to better manage emerging risks in a digital world.

Adeduntan who was represented by Group Executive Treasury & International Banking Group of First Bank, Mr. Ini Ebong said risk leaders are expected to provide the required support that will enable their organizations to remain resilient amidst uncertainties and growing complexities in an operating business environment.

He said: “Given that digital technology has become an integral part of most businesses especially financial services businesses, risk leaders will need to be well equipped to better manage the emerging risks in the digital era. Risk leaders are expected to provide the required support that will enable their organizations to remain resilient amidst uncertainties and the growing complexities in the operating and business environments.

“Today’s risk management function must have a seat at the table be involved in the digital transformation journey, from strategy to implementation as risk leaders and professionals need to be active players in setting the organization’s technology and digital vision being an interested spectator is not an option. The risk function will need to have a far greater share of digital-savvy people with fluency in the language of both risk and the business, operating within an agile culture that values innovation and experimentation.”

He further added that risk leaders need to proactively adapt to a fast-changing risk environment manage through, recover from disruptions, forecast and mitigate the potential risks in the digital era.

“Risk leaders must remain focused on repositioning the risk function to safeguard growth and spend more time on value-adding activities and risk leaders need to investment in the right tools, technology and techniques to be better equipped in identifying and navigating threats faster and more effectively in a digital era, ”he added.