Last week I was doing some Research based issues on Small and Medium Enterprises Financing in Kenya when I ran into a gentleman who heads the SME Banking division for one of the Standard Chartered Kenyan branches. We had a constructive conversation and exchanged numerous ideas on the state of the Financial Services, methodology adopted in product development, several corporate brands and Credit and Risk issues in Finance. It was by far a very enlightening conversation and I gained wealth of knowledge from it. One thing stood out though and that forms the base of this post.
The Kenyan tertiary education programmes and training institutions happen to be lacking on an area that is quite fundamental in running the very basic and the most complicated functions of Risk Management and Risk Analysis. Traditionally, focus has been on financial management and accounting professional courses whose basic foundation is in administration and routine management of Debits and Credits as my former boss who has remote training in Accounting and happens to be a reference point for many accountants when they hit a snag used to tell me.
Risk Management is an extensive topic; basically every thing has risk assessment and judgement in it before further engagements. I will focus on analysis for financial derivatives where I have been involved for a while and where my particular interest is. Market deregulation, growth in global trade, and continuing technological developments have revolutionized the financial marketplace during for quite a while now, fairly twenty to twenty five years, globally speaking. Increased market volatility, which has led to a corresponding increase in demand for risk management products, is a by-product of this revolution.
This demand is reflected in the growth of financial derivatives from the standardized futures and options products to the wide spectrum of over-the-counter products offered and sold thereafter. Many products and instruments are often described as derivatives by the financial press and market participants. In this guidance, financial derivatives are broadly defined as instruments that primarily derive their value from the performance of underlying interest or foreign exchange rates, equity, or commodity prices. Financial derivatives come in many shapes and forms, including futures, forwards, swaps, options, structured debt obligations and deposits, and various combinations thereof. Some are traded on organized exchanges, whereas others are privately negotiated transactions.
Derivatives have become an integral part of the financial markets because they can serve several economic functions. Derivatives can be used to reduce business risks, expand product offerings to customers, trade for profit, manage capital and funding costs, and alter the risk-reward profile of a particular item or an entire balance sheet. Although derivatives are legitimate and valuable tools for banks, like all financial instruments they contain risks that must be managed. Managing these risks should not be considered unique or singular. Rather, doing so should be integrated into the bank’s overall risk management structure. Risks associated with derivatives are not new or exotic. They are basically the same as those faced in traditional activities (e.g., price, interest rate, liquidity, credit risk).
Fundamentally, the risk of derivatives is a function of the timing and variability of cash flows. There have been several widely publicized reports on large derivative losses experienced by banks and corporations. Contributing to these losses were inadequate board and senior management oversight, excessive risk-taking, insufficient understanding of the products, and poor internal controls.
These events have served as a reminder of the importance of understanding the various risk factors associated with business activities and the subsequent need of establishing appropriate risk management systems to identify, measure, monitor, and control exposure.
That should act as a guide towards establishment of proper curriculum to address the need for appropriate training in Risk Management, at least from a financial view point. Institutions locally have taken pride in ensuring that for people to access meaningful employment in areas they represent, they must have taken exams and studied for certification courses geared towards such professions. For instance for Accountancy, ACCA and CPA are mandatory even for the most basic of clerical jobs like writing cheques and preparing payment vouchers. Employers too have not been left out, for you to be even considered for any meaningful placement, you must possess certification relative to the vacancy you’re seeking to fill for you to be shortlisted.
Risk management; be it Credit, Market, Reputation, Enterprise, Operation, Management, Finance and many other areas are a critical field of study whose need has not been handled conclusively. I am aware of discussions that have been considered for institutions like KASNEB and KNEC to establish grounds for such curriculum…
Back to my discussions with my fellow banker as we deliberated upon the numerous issues and opportunities around, I gathered that there has been local push for having local examination for those interested in Financial Risk Management courses. I was made aware of a global professional body, Global Association of Risk Professionals, GARP. They offer FRM and a few forward looking Kenyans in the industry have been expressing interest and parting the course through self study and sitting exams in foreign placements.
Anyway, I have passion for management, Strategic, Risk, Planning and all that successful monitoring of the path towards goals attainment entails… I believe and strongly advocate for a local institution making available a globally recognized Risk Management curriculum or professional training.
This is not to say that there are no alternative courses that have been made available that address Risk management. In Kenya for instance, you are considered an Auditor if you belong to an Accounting body. The CPA, ACCA and university curriculum hardly teach Audit; they provide for one or two subjects or units if you like that address the issue. This is considered somewhat sufficient for consideration as an Auditor. There is CISA and CISM, which are very good, courses for Systems based Audit management. But then again, systems are just an operation based function. Global understandings of Risk for Institutions of all kinds need to be embraced.