Efficient risk management software crucial to tackling banks’ failures, says Okehi

Dr. Dan Okehi is the Chief Executive Officer of Brickred Consult Limited. A former Managing Director of Bank PHB Insurance. He is also a chartered insurer and former general manager at Bank PHB. Recently, he bagged a doctorate degree from Walden University, United States of America. In this interview with CHIJIOKE NELSON and LUCKY ORIOHA, he explains the reasons for delving into the development of Brickred Banking Risk Software (BBRS) and the research on why banks fail. Excerpts.

You recently concluded your doctorate progamme with Walden University, USA, on “Modeling Risk Management in Banks: Examining Why Banks Fail.” What exactly prompted you to this topic?
I considered the important roles banks play in the economy, and wanted to know why there have been persistent failures in the country (almost in every decade), which has been a major concern among stakeholders- government, depositors, shareholders and the general public. My research was to unravel the root causes of the ugly trend, which predisposes stakeholders to loss of values. Even the taxpayers whose funds were used in the eventual bailout of some of the ailing banks in recent time were involved too. To establish, without guesses, whether ineffective risk management in banks, coupled with poor corporate governance practices, and non-adherence to regulations play significant roles in Nigerian banks’ performance. But the ultimate aim is to proffer solution to the banking industry and reduce threats that lead to the persistent failures through recommendations to both the operators and regulators.

We are aware that you develop software on risk management. What do you intend to achieve?
Yes, we developed software that is called Brickred Banking Risk Software (BBRS). It was developed to backup the research that was carried out on why banks fail and why the failures have been persistent. We have presented our reports to the banking industry. The software was a backup to my doctorate research. It is specifically to assist the banks in managing the inherent risks in their operations holistically, professionally and seamlessly. The inherent risks as I identified in the research are credit, liquidity, market, operational and solvency. But how do you manage these risks holistically and seamlessly, so that the banks will not be making unnecessary losses that make them fail or enter into the trap of failure? This software is different from all the existing software the banks have been using to manage their risks. The conventional software, which has been in the market, was built on what we call Enterprise Risk Management (ERM) platform. Of course, our own was equally built on ERM platform, but the difference between ours and the existing one is that we have gone a step further by using what we call the Bow-Tie Technique. It is a risk-weighted technique that gives you a holistic risk management opportunity, as well as real time online. It goes from the top to the bottom of the management of every bank to identify risks, weight them or design weight for them and then create opportunity to control the costs in the banks. It also creates necessary alerts, such that as you proceed in every transaction in the bank- whether it is the market risk, operational risk and credit risk, it can handle it. The alarm is created to advise you what to do next and the software is also designed such that it can give you daily, weekly, monthly and quarterly reports to assist the management in handling the inherent risks as they come.

The system also looks at the costs of those risks and gives the exposure and the control at the same time, rather than the existing software that don’t have these features. Besides, there is no need for a bank to have three or four risk management software. That is why we have designed this one. There is no point having one to manage your credit risks, another one to manage market risk and another one to manage operational risks. Once you are using a system in a bank, no matter what department you are, this software will prompt you with information on the risks components. It will ask you questions without you even knowing that you are giving information for risk management and once it prompts you, you must give that information before going to the next stage. By so doing, it captures all activities of the bank holistically and gives you a report real time online to aid management decisions.

Now that you have itemised the characteristics of the software, how confident are you that they are going to work effectively?
The confidence is flowing from the Ph.D research that was carried out. The software wasn’t just developed from the blues, it was developed from the result of a research carried out to know the inherent risks and the major causes of bank failures. We looked at the practices because I have been in banking and insurance industries for years. If you ask people on the street about the causes of the failures, they will tell you that people in the banks are fraudulent. That is operational risk and this software is giving banks the opportunity to manage such risks. So, I am coming from area of strength to give the banking industry opportunity to know how they can go. I have worked with BankPHB at the General Manager level and Managing Director of PHB Insurance Company, which is an arm of the bank. So, combining the experiences in both industries, I know exactly where the shoe pinches and today I have come out with a very robust software’s that can serve the banking industry and give them results.

How are you strategizing to get banks buy into this project and the compatibility with existing infrastructure?
After the presentation, there are three banks that have volunteered to test the software. They said we should use their information to test out the software. Already, this software has been tested in America and already selling. About eight banks in America have bought it. We have sold to eight banks in America. In Nigeria we are trying to start with three banks and we want to use those banks to showcase what this product can do. And it is after those three banks have tested it that others will know the workability of this software. And I know that in no distant time, it will be the software to beat in this market, because it is locally made and you can be rest assured of what you are buying. Yes that is important and we also took that into consideration. Our software is compatible with any software, not necessary risk management, but any banking software already in use. All you need to do is to key in our software into the existing infrastructure and it flows seamlessly, because it is built on ERM platform, a global standard, which is required in the sector.

What were the main findings of your research?
There were 14 findings, among them were that the three components of Enterprises Risk Management (ERM)- profit, leverage and size, all make positive contributions to risk management as independent variables affecting bank performance. However, leverage and size make more significant impacts than profit, but they all contribute to the significant positive relationship between enterprise risk management and bank performance.

General Risk Management has the most significant effect on bank performance, followed by corporate governance, while banking regulation does not have significant effect on bank performance.

Adequate attention to inherent operational risks namely, how risks are identified, measured, analysed and controlled on ERM basis help in enhancing bank performance, among other things that contribute to persistent bank failures.

How would you relate poor risk management to the recurring bad loans and bank failures in Nigeria?
Huge non-performing loans stem from poor credit risk management in banks. It has been confirmed that 60 per cent of the persistent bank failures all over the world come from such non-performing loans. One of my recommendations in the research was that banks should adopt an efficient risk management culture that is based on the ERM platform, using the “Bow-Tie Technique”. This technique has a risk-weighted system, which the Basel Committee recommended on Basel II rule. Yes, the banks have adequate human capacity to handle the risks, but what is lacking is the technological base and the filling of human capacity gaps through adequate training to re-focus them on handling such inherent risks. In addition, the aspect of fraudulent tendencies of some bank workers is a major concern to the operators and this part of the operational risks, highlighted also in Basel II rule.
Generally speaking, banks fail for so many reasons in different countries and the reasons range from institutional, managerial, economic and political. However, they fail in developing countries like Nigeria because the inherent risks in banking operations are not well managed- there is poor corporate governance practices; non adherence to regulations; and changes in political and economic policies that do not favour banks. Put simply, banks’ failures could be attributed to lack of transparency by officials, huge non-performing loans and capital inadequacy. Some bank operators might narrow the causes further down to other specific factors. For emphasis, the research I carried out showed that the root causes centre around ineffective risk management, poor corporate governance practices and non-adherence to regulations, as well as changes in economic and political policies that exert negative effects on banks too.

What should be operators’ attitude to risk management?
Bank operators are expected to be proactive always on issues pertaining to efficient risk management in banks. They should adopt risk culture and draw up systems that flow from top to down in their operation to create efficient awareness and put in place software’s that will capture risks- online-real time, to ensure that all inherent risks are taken care of in their system. In the completion of my PhD Research, I developed Software, on risk management in banks called “Brickred Banking Risk Software” (BBRS). This Software is built on Enterprise Risk Management platform and adopted the Bow-Tie Technique, which has risk weighting system and an improvement to what banks have now, as well as in the market. It is important that bank operators look for good softwares and try to regularly train their people to renew their efficiency.

How does bank failures affect other sectors and what suggestions do you have for regulators on managing these risks?
As I mentioned earlier, banks play crucial roles in the economy of every nation, including Nigeria. They dominate the payment system landscape and once there is failure, confidence in the payment system would be eroded and the economy in turn will be affected. Both the shareholders and depositors will equally be affected, as money will surely be lost. Even the taxpayers would be affected, as the government uses proceeds from tax to bailout the ailing banks. The regulators, mainly the Central Bank of Nigeria, are part of the people we are trying to advise so that nothing lacks in the arena of supervision. If there is no gap left in that area, there won’t be failure threats, because banks will be kept on their toes to keep the rules. Where they don’t keep to the rules, there would be tendency for them to default and create holes or bottlenecks that would cause problem in the industry.

CBN as an agent of the government should strongly advise it on the implications of certain political policies affecting liquidity on banks like the TSA policy. There are other alternative ways to check corruption regarding the multiple accounting operations than TSA and the consequent withdrawal of government funds from the banking system, which is now exposing banks to liquidity risks.