The Managing Director of Zedvance Finance Limited, Ever Obi, is a risk management and business leader, with over 12 years of experience with leading financial institutions, and proven expertise in financial technology, risk management, strategy and product management. He has led risk and digital transformations, refining processes, building digital channels and products, designing risk frameworks and building business models. He worked in Enterprise Risk Management, Credit Risk Analysis, Risk Analytics & Reporting, Credit Portfolio Modelling and Optimization, for Polaris, Zenith and Access Bank, and has been Chief Risk Officer and Managing Director of Zedvance Finance Limited, a leading non-bank financial institution.
Obi holds an MBA from TIAS Business School in the Netherlands and a master’s degree in risk management. He is also a Chartered Risk Manager and member of the Risk Management Association of Nigeria (RIMAN).
In this interview with OLUKOREDE YISHAU, he speaks about the Nigerian banking industry’s numerous transformations in the past twenty years. Excerpts:
The Nigerian banking industry has come a long way since the days of Soludo as the CBN governor. In this journey, there have been numerous critical moving parts, risk management being one of them. How would you describe the evolution of risk management so far?
It’s been quite a journey for Risk Management, yes. Years ago, when I started my banking career, I had to study the financial crises of 2007/2008, caused by the subprime lending disaster in the US, and its ripple effects, leading to bank failures and the crash of stock markets. I remember reading about the collapse of Lehman Brothers, and having to make a presentation about the Bank of Elmwood which was closed in 2009. The practises that led to these failures are a telling testament of the spectacular neglect that risk management was suffering at the time. In hindsight, it is shocking that these poor practices were permissible then in creating risk assets. Now, there is still a room for further improvement, but management and investors of financial institutions have learnt a few lessons and are now more risk conscious. The regulators too have learnt.
In what way would you say that the regulators have learned? What are some of the things they have done to show that they have learned?
Well, these experiences led to multiple revisions of the recommendations of the Basel Accord. It was after the financial crises that regulators, through the Basel recommendations, started mandating financial institutions to have better capital adequacy, improving supervisory reviews and disclosures. From Basel I, we moved to Basel II and III, things kept getting better from there. Also, you will find that risk governance and enterprise risk management improved tremendously. Financial institutions now define their risk appetites, with regulatory and internal limits in mind. This guides the way business is done. There are limits that you must adhere to in terms of Non-Performing Loan (NPL) Ratio, Cost of Risk, and other key risk indicators. The CBN’s risk-based supervision has also been made more stringent. And there has been a lot of improvement in terms of credit appraisals.
Could you throw more light on these improvements in terms of credit appraisals?
Yes, credit analysis, credit administration as whole, has gotten better over the years. Better credit risk models are being built. When I was in Access Bank, I was part of a credit modelling project, in conjunction with Dun & Bradstreet, to build an elaborate rating engine for the purpose of meaningfully measuring credit risk parameters, for better credit-decisioning, rating and appropriate pricing.
And also, there has been better partnerships with the credit bureaus. This was never the case. The likes of CRC, CRS and XDS (now, First Central) did an amazing job, moving across states, onboarding as many financial institutions as possible. Having the credit bureaus, with improved coverage, has helped financial institutions to objectively predict the character of clients, based on their historical credit performance.
These improvements, for the commercial banks, also led to more strict collateral and documentation requirements.
And how would you say these improvements have affected businesses?
They have affected businesses in a lot of ways. On the one hand, having the credit bureaus and better rating engines, means that the banks can bring in more business under their coverage for loan assessment, but on the other hand, the bureaucracies and longer turnaround time make it difficult for disbursements to eventually happen to small businesses. Even though there has been an improvement, the credit gap in Africa is still massive, and this is what created a huge opportunity for the non-bank financial institutions like Renmoney, Zedvance, Page and Credit Direct to thrive. We are in a country where, only about a decade ago, the commercial banks idea of financial inclusion was liability generation, to open bank accounts for the unbanked, to mobilize deposits, and when they want to lend, they focus on the large corporates. Financial inclusion is not complete without credit availability.
Speaking of the non-bank players, how would you describe the role they have played, and how well have they performed in terms of risk management?
You should know that these non-bank institutions and fintechs came into the space to fill the gap left by the traditional commercial and microfinance banks. There was a huge lending gap for both retail clients and MSMEs. These institutions started developing digital and mass market products to cater to underserved individuals and businesses. Some of these products were risky by nature; this meant that interest rates needed to be higher, to ensure adequate compensation for these risks. The companies that have survived are companies that took risk management seriously. Not just credit risk, but other risk spaces. Their successes have not gone unnoticed as you can see banks, in recent years, coming up with strategies to develop payroll and micro loan products. These were products they did not really care about before.
Apart from credit risk, what are these other risk types that are important for financial institutions?
For anyone starting a career in a financial institution as a risk manager, you would find out that the most important risks are credit, operational and market risk. While credit risk directly speaks to the risk of loss due to a probable default by an obligor, market risk deals with adverse movement in prices, exchange rates and interest. Operational risk is a non-financial risk that focuses on the possibility of loss arising from failed internal systems, people, processes, and other external factors. Financial institutions are expected to have a clearly written Enterprise Risk Management (ERM) framework, from where different policies guiding management of these risks derive. But apart from these three, there is a full universe of different dimensions of risks. That is what the Pillar 2 of the Basel II Accord tries to address with the Internal Capital Adequacy Assessment Process (ICAAP), which identifies, measures and recommends additional capital to be held as buffer, for this universe of risks.
In your experience, how do financial institutions treat their non-performing loans?
Well, once you are in the business of lending, it is fundamentally impractical to expect to do businesses without having or carrying NPLs. Credit risk is inherent in the lending business. While risk managers can advise that some risks be totally avoided, the core of what they do is an effort to mitigate the downsides of transactions as much as possible. That is why their focus is on understanding the risks the business is exposed to through identification, measurement, monitoring and control. While there is an acceptance that some loans will go bad, the plan is to keep NPL ratio, Cost of Risk (and other risk metrics) as low as possible, below the regulatory and internal limits. NPL recognition and consequent classing into default buckets depend on the license the institution operates under and the recommendations of the CBN’s prudential guidelines for holders of that license. Every lending institution must work with the credit bureaus, and have a solid collections and recovery strategy, to manage bad loans. Write-offs of loans to recalcitrant and incapacitated debtors only should happen when all recovery measures have been exhausted.
It is advisable that loans are adequately provided for. While CBN recommends rates to be charged to different asset classes for loan provisioning, IFRS 9 allows institutions to compute lifetime Expected Credit Loss (ECL) to measure the appropriate impairment for transactions. Banks need to be careful, because NPLs, if not controlled, will continue to eat into retained earnings, directly hitting tier 1 capital, and can take the bank below the regulatory minimum capital requirement.
How would you describe the future of risk management in financial institutions?
As the world is changing, we have seen that more risks such as cyber and data risks are becoming more prominent, requiring more attention. It is in our best interest for regulators and financial institutions to view their relationship as a partnership, managing these risks better. I also believe that a lot has improved in terms of identity verification and KYC. All these improvements make it easier for financial institutions to book high quality risk assets. There is an opportunity for lenders to leverage the explosive potential of technology for client onboarding and risk analytics. Risk management will cease being a thankless job, and all stakeholders will begin to give it the appreciation that it deserves.
One last thing: you are also an author? Could you tell us about that?
Yes, I have another life where I am a creative writer. I have two published works; Men Don’t Die and Some Angels Don’t See God. My second book was shortlisted for the ANA Prose Prize.
