Crying out in the wilderness

Chief risk officers should automatically become members of bank boards in Nigeria and should not be fired without Central Bank of Nigeria (CBN) investigation, according to a new initiative from the Risk Managers Association of Nigeria (Riman). Jude Monye, president of Riman and executive director, risk management at Heritage Bank, told Commercial Risk Africa that Riman has already put the proposal through to CBN, which is progressing the idea. He said it was vitally important to protect chief risk officers, who are often fired in Nigeria when they challenge decisions made by board directors. In the wake of the Skye Bank issues, in which directors are alleged to have received large loans from the bank, and with other banks under scrutiny, Mr Monye said it can be hard for risk officers to stand up to the board.hide“What we are proposing is that CBN makes it mandatory that chief risk officers are on the main boards of banks. Then they will not be able to be fired without a CBN investigation. Those investigations should also cover risk officers who are ‘transferred’.” He explained that, often, risk directors who challenge board decisions are transferred to branch offices. “Risk officers face a tough decision because, if they are fired they have to go out into the job market and there are not many jobs around because of the current financial crisis. It means they have to consider their family situation, whether they could keep their house etc, so it is a very big decision and some risk managers will crumble and not stand up to the board. “We have started the process that it is now with CBN. They are a government organisation so these things take time but we hope the proposal will go through,” he said. Paying the price Nigerians failed to learn from the 2009 crisis and are now paying the price, according to the Emir of Kano, HRH Muhammadu Sanusi, speaking at the Riman annual national conference. His Highness, who was Central Bank governor before inheriting as Emir, harked back to his days as a risk manager and told the room of some 160 risk managers that they had to get used to unpopularity when refusing to back bad decisions. He said he was nicknamed John the Baptist, for crying out in the wilderness, however, was the one chosen as chief risk officer because he was unafraid of saying no to the chairman if it was required. HRH Sanusi urged risk managers to have the courage of their convictions, whatever level of the organisation they were at. Risk managers had to think ahead, he said, and consider what could go wrong even when their colleagues were enjoying the good times and were prepared to take on risks. With a theme of ‘Global Oil Risks and Energy Risks in Nigeria’, the conference heard of the need for better risk management and better understanding of the challenges ahead. Mr Monye also reminded risk managers of the need to stress test during those good times and not to wait until things went wrong to ask questions. HRH Sanusi agreed, saying that risk managers only needed to look to the Bible, or the Koran, to understand business cycles, saying that for centuries farmers have understood the need to put aside grain in the good years to see them through the bad times that will inevitably follow. He said risk managers might seem like “party poopers” but they have to be looking ahead, even during the good times. Comparing the current economic woes to those of 2008/2009, he said, in some ways, Nigeria is in a worse position than it had been in 2009 because it no longer has sufficient reserves to help it ride out the storm. “The situation going on today is very sad because we ought to have learned from our past experience. In the global crisis of 2008, which started from the financial markets and then hit the commodities market, the Nigerian financial system was badly affected, precisely for reasons similar to the reasons we have today,” said HRH Sanusi. “But 2008-2009 was much less severe than 2015-2016 and the reason was that prior to 2008, the government of former President Olusegun Obasanjo had built up buffers in the excess crude account and therefore the economic management authorities, both monetary and fiscal, did have some flexibility in their pursuit of countercyclical fiscal and monetary policies.” He added: “It was possible to draw on a huge pool of reserves to mitigate the impact of a collapsing currency and to continue to fund imports and to also fund an expansion of government spending. “In 2009, the CBN and the minister of finance took the decision that the oil price shock would be absorbed by nominal variables. We preferred that the exchange rate and nominal prices took the shock than the real economy.” HRH Sanusi continued: “But what seems to have happened in 2015 is that the government took the decision to allow the real economy to take the shock, while protecting nominal variables in terms of the exchange rate and that was the wrong choice to make. “You do not absorb the real shock of the real economy – it is bad economics. As a country, in the years 2010 to 2014, we had a golden opportunity to have learned from the experience of 2008-2009. Currency concerns HRH Sanusi alluded to the CBN’s policy document, describing it as “fantastic but it needs to be allowed to be implemented properly”. He explained: “You have to let the market decide where the naira is going to be, to start with, before inflows come in and then when the inflows are in, you have an appreciation of the naira. “So you have to live with a devaluation to N300/$1 plus and then it will firm up to N270/$ or N280/$1 or whatever. But so long as you target a rate of N280/$1, you are just moving the peg. HRH Sanusi stressed: “The problem as I see it is that very difficult decisions have to be taken. Some of them have already been taken. But all the money we spent on subsidy was keeping the refineries open in Europe.” The Emir also urged the federal government to create an enabling environment to encourage foreign and local investors. He said: “We are today in a situation where clearly the government does not have money. Oil prices have dropped, oil output is low because the Niger Delta Avengers are targeting the energy security of the country and the revenues of the government. “At this point in time, the government needs to make it very clear that it recognises that economic development and investments in infrastructure can only come from the private sector. “The risk we run is that we may send the wrong signals to the private sector because some statements that are made would suggest that the private sector is not welcomed. “And if you don’t have the private sector committed to investing – local direct investment and foreign direct investment in the economy – the government simply cannot do it alone. It needs them to come in and build refineries, roads and invest in other critical infrastructure,” he said. Energy crisis impact Speaker after speaker agreed with the Emir that the government should have prepared better and that it was unfortunate that President Mohammadu Buhari had been voted in to make massive changes, just at the time that oil prices collapsed globally. Abiodun Ajifowobaje, director at the Abuja Electricity Distribution Company, asked: “Why are we producing gas in Nigeria and then pricing it in US dollars? In the UK or the US, they don’t price their own gas in a foreign currency.” His thoughts were echoed by Marcel Okeke, chief economist at Zenith Bank, who outlined the real impact of the energy crisis. “Energy affects everything”, he told delegates, stressing that it is impossible for any business to avoid being impacted. He warned risk managers they could not ignore the crisis, regardless of their business sector. Mr Okeke said the government has put aside some $200m for use in the first quarter to support the import of oil – this money could have been used in many other areas but was now essential to maintain refined oil imports. The inflation rate has doubled, he said, as people face higher fuel prices and the naira continues to devalue against major currencies. “Manufacturing and all manner of service providers need power and, whatever extra costs they face, they will pass them on to consumers.” Transport costs across the board have increased, he said, while the continuing economic uncertainty makes commercial planning extremely difficult. Unemployment numbers are increasing and Mr Okeke said the energy crisis is fuelling that still further as rising costs and “epileptic power supplies” are forcing many companies out of business. He gave the example of one firm that had a total of 11 days of power throughout April and only six days of supply in May, despite paying for the whole two-month period. As a result, he said, many companies are no longer competitive. The escalating cost of power is also hindering their ability to compete, particularly against suppliers in neighbouring countries. Mr Okeke says there are signs of companies closing down in Nigeria to reopen elsewhere in west Africa, simply because they will have more reliable access to power. Riman board chairman and director risk management at CBN, Folakemi Fatogbe, stressed: “No other country builds its economy on one thing. It is easy for us to have oil as our mainstay but you will have hiccups and now it is a giant hiccup. “I actually think it is good for us and for our children. A lot of young people are not seeking employment but are creating employment for themselves,” she said. Many of the speakers and delegates agreed, however others say higher prices are better – as long as Nigeria is then able to take advantage and prepare for low price events. One delegate pointed to Ethiopia and the way in which it manages its economy, using strong institutions to build, so despite a lot of poverty, it has been able to grow its economy at one of the fastest rates within the continent. Immediate past president of Riman, Dr Greg Jobome, said regardless of the price of oil, every transaction carries energy risk within it – from running a hairdresser to the largest of corporations. “It is all pervasive,” he said “In the last crisis it was commerce that bore the brunt rather than the oil and gas sector itself. As risk managers, we must question where the energy risk is in every transaction. All of us must be oil and gas experts. “As Mr Monye said, you don’t stress test during a crisis, but you stress test in the good times. Did we never stress test whether the oil price could fall to a level where we are unable to sustain it?” Olumide Olayinka, partner, risk consulting at KPMG, added: “We should never put all our eggs in one basket.” However, it was not all doom and gloom among the risk managers. Dapo Adeleke, director, bank examination at Nigeria Deposit Insurance Corporation (NDIC), said: “We are better prepared. Both the CBN and NDIC have done so much work ahead of this crisis.” Peter Irene, CEO of International Energy Insurance, gave voice to the concerns of those outside the banking sector. Looking at the insurance market, he said it was being hit extremely hard by the devaluing naira. It was creating huge uncertainty, he said, and leaving coverholders underinsured when it came to claims. “I think it is going to hit insurance very hard as insurance is a global business and we have to reinsure risks outside the country.” He mentioned the past problems of Nigeria Re, which he said have ultimately led to the majority of Nigerian insurance business, including almost all oil and gas business, being placed outside of the country. This makes it vulnerable to a falling naira. Ifie Sekibo, managing director at Heritage Bank, added: “In the past, 90% of the risk was in not doing business and there was a feeling that it was something of a patriotic duty to build up the country and offer loans because without power we could not move forward.” With the benefit of hindsight, however, the speakers agreed it has resulted in too high a concentration in the oil, gas and power sectors – a move that is coming back to bite Nigeria’s businesses hard. Likening the current crisis to the tulip crisis in Europe in the 16th century, the speakers agreed business leaders are going through a painful period. But, they warned, businesses tend to have a tendency to become slightly amnesic after a crisis and to forget the lessons they should be learning and they urged risk managers not to let that happen again.

Crying out in the wilderness

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