The rapid changes taking place in the financial services industry here in Rwanda, as elsewhere in the world, have significant implications on how financial services organizations govern and manage risk.
Around the world, focus on financial services regulation and risk management has been heightened following the global financial crisis.
In our region however, the global financial crisis has had only a muted effect and a recent survey by PwC found out that financial institutions identify risks related to growing economies as more pressing for example competition from new entrants, a high dependence on technology and industry reputation. Banks and insurers are also similarly focused on skills shortages that affect risk management quality and the accuracy of actuarial assumptions, respectively.
Whether in Rwanda or abroad, market and regulatory forces have generated incentives for financial institutions to fundamentally re-examine their existing risk management structures. This in turn has created a need and an opportunity to re-examine and enhance strategies, processes, and infrastructure for measuring performance and analyzing risk for financial institutions in Rwanda.
Legislative and other regulatory changes introduced by the National Bank of Rwanda (BNR) over the last four years as part of the Government’s Financial Sector Development Program (FSDP) is a pointer to the increased BNR’s regulatory expectations for risk management coverage and oversight. In line with what we are seeing in other markets, financial institutions in Rwanda can only expect new levels of risk scrutiny and analysis by BNR.
The top three risks identified by the PwC survey in Eastern Africa financial institutions are a high dependence on technology, competition from new entrants and fraud. These will be familiar to Rwanda’s changing financial services industry.
The competitive structure is evolving with expected entry of new regional players in the market and existing players redefining their competitive strategies. At the same time, changes in the core information systems, increased automation and integration of branch networks and the new integration to Rwanda Integrated Payments Processing System (RIPPS) are indicators of the new levels of dependence on technology.
Experience elsewhere shows that with technology evolution and a new generation of employees who are tech-savvy and ambitious, banks are exposed to increasing incidences of fraud. Cheque fraud, electronic fraud, cash fraud, impersonation fraud such as with credit card theft, fraudulent loan applications and personal information theft are some of the current trends in fraud which are exacerbated by technology advances, competition and a rapidly evolving marketplace. Rwanda financial institutions are not immune to these risks.
During this time of change, industry players will have to seek new ways to do business and pursue growth using new business models. These changes will in turn introduce new complexity, making it more challenging to fully understand risk and potentially leading to an inadvertent increase in overall risk.
Financial institutions should therefore fundamentally enhance the way they govern and manage risk. Raising the bar in risk management would require them to first align the risk management model to the business model and focusing on the underlying asset classes and products , rather than primarily analyzing risk by type (such as market, credit, and operational risk).
Second, they should rebalance the relationship between the risk management function and the business including reinforcing the stature of the function beyond written policy while managing risk in the context of risk appetite and strategy. Third, they also need to shift to an integrated reporting framework and measure performance on a risk-adjusted basis.
We will in the next few weeks examine each of these components in detail, including their practical application in organizations.
The author is a Manager with PwC Rwanda