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Banks must creatively distribute risks – Hennah

By on February 17, 2015

Mr. David Hennah is the Head of Trade and Supply Chain Finance at the United Kingdom-based Misys Limited, a global financial services software producer. He tells OYETUNJI ABIOYE about the growing challenge of risks distribution facing Nigerian and foreign banks on the sidelines of the sixth annual West Africa Trade and Export Finance Conference held in Lagos.

The Central Bank of Nigeria is driving the implementation of Basel II and III in the country, how do you think this will affect the performance of banks?

When I talk about regulation, I look at it in the context of capital, which is Basel II and Basel III; and also regulation in the context of compliance, which is the Know-Your-Customer requirements that emanate from the Financial Action Task Force-the FATF dates back to over 25 years now. All of these regulations are rules and guidelines which still require enactments at the local and regional levels. Because it requires a second step in each country or region, what you end up with is firstly a multi-speed environment where some countries have, for example, implemented Basel III ahead of others. Also, you end up with multiple interpretations of what those regulations mean. So, it is a challenge for banks and represents additional costs to the banks because they have to cater for multiple interpretations of these regulations in a multi-speed environment. If we go specifically to the question of capital (Basel III), it has what some people call unintended consequences for trade finance in the sense that it increases the cost of providing trade financing.

So, banks need to be a lot more selective in the way they deploy limited amount of capital. So, I think that has represented a problem and banks need to be more selective in terms of the risks they take on and how it is priced competitively. Therefore, banks need the ability not only to take on risks, but also to distribute risks. So, if you are a bank and you want to take on the entirety of a corporate portfolio, you may not actually have the capacity to take on all of that risks and therefore you need some sort of outlets to distribute the risks potentially to other financial institutions, third party investors and other means of distributing risks. So, a lot of people have argued that regulation as such is having a negative effect on the industry and certainly has a negative impact in terms of pushing up cost and imposing constraints on banks’ ability to do business. But at the same time, it arguably has a positive impact because it is accelerating the demand for next-generation solutions for risks and financing.

What do you think banks should do to overcome cybercrime?

One of the ways we are trying to achieve that (as a financial software company) is that we have a strategic partnership with a company called Focal Soft. Focal Soft specialises in KYC solutions. We have a strategic partnership with this firm whereby when banks want to originate open-account transaction or payables, we would have a customised interface into Focal Soft to perform checks and compliance so as to prevent the risk of crime.

What are the effects of regulation on banks in Nigeria and Africa in general?

What I will do is to interpret market trends that influence changes. I have a roadmap that is made up of four things. The first one is regulation, and regulation by far is the most important thing. If I talk to any banker anywhere in the world, one of the things that keep them awake is regulation. Regulation in the context of capital-which is a cost and constraint to their business; and regulation in the context of Know-Your-Customer requirements, which also represent cost and constraint to their business. But at the same time, this is also fuelling the demand for the next generation of solutions in supply chain finance or what some people call bank-assisted open accounts. So there are banks here in Nigeria and all over the world that are looking for solutions to address that growing sectoral market that is currently serviced by open account solutions. But it is not just about financing, it is also about risks and what is changing in the field of risk is the ability not only to take on and manage risks, but also the ability to distribute risks.

So, because of the constraint on capital that results from regulations, banks now need to have the ability to distribute risks, to invite other financial institutions to participate in those risks or to engage with capital markets or get involved in assets securitisation. So, a company like Misys is in a privileged position, in the sense that we can provide solutions for all of those things. So, we have solutions in transaction banking, corporate banking, treasury and capital markets. The third area is what I boldly refer to as digitisation, which is the dematerialisation of trade. In that context, we have developments in traditional trades; we have developments in open accounts, in something called the bank payment obligation, which is one of the most significant developments in the industry in the last 200 years. Also, in terms of dematerialisation of trade, letters of credit and electronic bills of lading, we also provide solution in that area. The fourth area broadly speaking is globalisation, where we are seeing a displacement of traditional trade relationship. Again, this is relevant to Africa because traditionally we are used to seeing trades conducted across the North-South axis, or the East-West axis. But now increasingly, what we see is more trade being conducted across the South-South trade axis.

Increasingly, emerging markets trade with one another. What we observe there is the emergence of some strategic markets and certainly Nigeria is one of them. I tend to look at countries that relatively have low levels of public debt and relatively high levels of Gross Domestic Product, and Nigeria sits in the right area, according to those dynamics. So, Nigeria is definitely a strategic market for us. When we look at strategic markets, we also look at local requirements. So, in Nigeria for example, we build licensing capability into our solutions and in other countries like Saudi Arabia. There is need to conform with monetary authorities’ regulations; in India, there are special regulations about taxes. So, we have an application which services the need of the global market, but at the same time, we support local deployment of our applications. So, the four key areas within the roadmap are regulations; risks and financing, including risks distribution; digitisation and globalisation. They are the four things that are driving the products’ roadmap today.

What do you see as the future of banking in Africa?

If we look at the world of trade finance over the last 20 to 30 years, the volume and value of trade conducted using traditional instruments has flattened. It is not necessarily shrinking, but it is not growing. This is happening at a time when the volume and value of world trade are growing exponentially. If you look at the value of world trade in 2010 for example, it is somewhere within the region of $15tn. By 2030, it is projected to be more than $33tn, more than double. That means that the vast majority of new businesses coming into the market globally would be conducted on open account. So, that is the direction that banks everywhere have to go. They have to invest in the next generation of solutions in financial supply chain management. I personally think banks so far have not woken up to the potential of what the bank payment obligation can bring to the market. But I do think that undoubtedly, it is the future of the business, not just for Nigeria or Africa but globally.

 

[Punch]