Throughout the history of Banking activities within the financial industry, any period within that history, which Bankers made a surprising effort to shift the operational borderlines from conservativeness to a perceived ambitious credit expansion towards agents of the real economy did result in some level of financial crises, either a minor or major.
This kind of fracture, which leads to spillage across the economy in a form of financial crises in the Banking history, led to a formal introduction and acceptance of more comprehensive risk regulatory policies and laws, positioning Banking services deep into conservative practices and motivation, as a means to shield it from all forms of risk. Which such model of posture in ‘playing safe’ towards its economic activities, especially in fragile economies has resulted in a stiffening industrial productivity due to the cost of acquiring capital, thereby making such economies become highly vulnerable to external shocks from developed economies as years pass by.
The essence of this article is to argue, how Banks could strategically position itself out as in risk management innovations towards fragile economies, keeping them in competition, as well as profitability, while making a significant impact on expansion of the real economy and sustainable growth within a poor fiscal management space, a popular character trait of under developing and developing economies.
Risk in Banking is naturally unavoidable as argued by Senzu (2019b), “Success in Banking is attained not by avoiding risk but by effectively selecting and managing risk.”
The question which rises in addressing the current conservative posture of Banking services to the real economy with a fragile character trait is, what is required for a Bank to assume in full confidence towards risk management innovative posture within a weak fiscal policy environment and remain profitable with significant industrial impact?
The article addresses the question in the following subjective proposition taken into cognisant, the following basic facts of any established Bank within a jurisdiction. It is by Law required that the manner of determining, evaluating and managing risk will be prescribed by the Central Bank in a jurisdiction. And such prescribed methodology holds the scope of the level of Credit risk a Bank could take, limit of exposure to the exchange rate risk, the methodology in determining, evaluating and managing liquidity risk, and other types of risk a Bank faces within a jurisdiction.
However, the critical emphasis of the article to address the above question, is how Bankers should pay a special attention to the Law, which requires Banks to have its bodies and management as specified by statute with the notable ones being the ‘Managing Body’, the ‘Executive Body’, the ‘Risk Management Committee’, the ‘Auditing Committee’ and the ‘Assembly of shareholders’. With these various bodies, the powerhouse of a modern Bank to lead in risk management innovation, emerges out from the quality of personnel in a speciality field of Financial Econometrics or Actuarial Science driving the Risk Management Committee. This offers such Banks a unique opportunity to develop advanced and feasible methodological risk assessment tools to address the microcosm market fragility in addition to the existing methods granted to their library by their Central Banks.
The higher the competency, and the aptitude skill of the risk management team, the greater the Bank has the capacity to weather the storm of uncertainties, remain profitable, competitive, and industrially relevant.
This article therefore concludes, the Managing Body of the Banks who aspire to dominate in fragile economic markets with contrarian strategies in expectation to remain competitive and profitable, yet industrially relevant, should begin to pay critical attention to building a unique top-notch risk management team to become market navigating sensor for the Banks. It is a unique approach for the Industrial Companies to experience the real impact of Banks in the market of fierce competition with high levels of uncertainty, yet be far away from liquidity risk or bankruptcy as a Bank.
Senzu, T. E. (2019b), Theoretical perspective of dynamic credit risk analysis and lending model; effective to enterprises of fragile economy. Published by Social Science Research Network https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3324909
Emmanuel Tweneboah Senzu, Ph.D., is professor of Economics and Finance, with speciality in monetary economics, Banking Law, Econometrics, investment and risk analysis. Member of World Economic Association. President of Frederic Bastiat Institute Africa, Mercatus Center fellow; Law and Economics, George Mason University-USA, Fellow of the College of Social Sciences and Humanities, University of Makeni-SL, Faculty Fellow of University of Management and Technology, Sierra Leone. Research Fellow of West Africa Monetary Institute, Ghana.