Risk Management Department Manager at KFH Paul stated that the restructuring process will place risk management in its correct position, which will allow the department to supervise the execution of the new strategy. He asked all employees to adopt a risk management mind frame, and urged them to assist in accomplishing its objectives. He considered risk management to be prioritized after the financial crisis that still has an impact on banks, companies, and countries.
Paul noted during an interview with Al-Waha that KFH has a positive work environment, but can make further progress if it works professionally and eliminates bureaucracy.
How do you see the local and global growing interest concerning risks? Where does KFH stand in that field?
Risk taking has always been part of banking. Banks need to take risk to generate profit. To be successful a bank needs to seek a balance between the desire for profit and the amount of risk (or loss) that it can tolerate to achieve that profit. The best banks hope to create sustainable growth in profit over time. This improves the share price.
In recent years some banks, and indeed countries, have got the balance wrong, chasing rapid growth in the short-term by taking risks that they cannot afford to take. The consequences of this have been very severe, particularly in the US and Europe. Governments and banking supervisors have responded by promoting a more conservative attitude to risk-taking in banks and enforcing tighter controls on capital, liquidity etc. in an effort to prevent the crisis from recurring in the future. KFH’s response to the financial crisis is to focus on creating sustainable profit growth through disciplined investment, financing, funding and capital management. The risk management department works with management and the business to achieve this through independent assessment of the risks and development of the processes policies etc. to sustain this.
There was a plan to make risk management a central issue at KFH and its subsidiaries. Are there any updates regarding that plan?
KFH has committed itself to a restructuring program that includes excellence in risk management as one of its core strengths. The bank is implementing a program to transform risk management in all of its major activities across the Group. It is also recruiting experience staff to strengthen the role of the risk management department in all of its dealing with the business.
What are the most common risks that face KFH; especially that KFH operates in various field and markets?
KFH faces credit risk through its financing activities, market risk from its investments and treasury management, funding and liquidity risk arising from the management of deposits and other funding activities and operational risk, which is the risk of loss from human error, fraud or failure in our systems. We also face business risk given the areas of business that we operate in, compliance risk from failure to comply with legal and regulatory requirements, legal risk from failure to perform under contracts entered into and reputational risk, which, most importantly includes the risk of failing to comply with Shari’ah.
Is risk management limited to your department or must all KFH employees be aware of it?
Given the nature of these risks it should appear obvious to all that these risks need to be managed actively in our daily business dealings. The first line of defense for risk is the business. Dealing with customers, handling transactions, dealing with suppliers and, indeed, how we interact as staff among ourselves, creates risk. It is everybody’s responsibility to understand the potential for loss or damage to reputation in our business dealings and to mitigate this risk to protect the bank. The risk management department’s job is to provide independent assessment of the risks taken by the bank and to work with management to control those risks we choose to accept in the course of our business.
What were the things that were regarded as givens in risk management in banks but were later on changed by the financial crisis?
The key lessons for banks from the financial crisis are as follows:
• Senior management and the Board need to fully understand the risk they are taking when deciding and implementing the strategy for the business
• Key decision makers in banks need to balance the desire for growth in profit, market share etc. with the bank’s ability to absorb losses in the future from decisions made today
• In an emerging crisis, banks need good management information and contingency plans to help them to take decisions that protect the solvency and visibility of the business
In a financial crisis, individuals behaviors change and unexpected negative outcomes occur. Before the crisis, banks considered the events that happened to be very unlikely or in some cases, impossible. Some of these assumptions were built into the risk models that were used to assess risk in banks. This attitude has changed. For those of us that worked though the crisis we have learned that if some bad event could happen, we need to assume that it will.
Do you expect that risk management will be able to maintain the level of global interest in it or will that change after the current financial crisis subsides?
Risk will always be with us in banking, but people also forget over time and, as experienced staff leave and are replaced by younger staff, the knowledge and experience of dealing with financial crises and major risks is lost. The financial crisis has been so severe that governments and banking supervisors are changing the way that banks are regulated and this will keep risk management as a high priority for banks. However, the nature of risk changes with different economic conditions.
The next major financial crisis will not be exactly the same as the last. New forms of risks will emerge as western economies struggle for growth and emerging economies continue to develop rapidly without some of the legal and regulatory safeguards needed to mitigate risk.
Please tell us about your feedback concerning your short time as a KFH employee. How do you see the bank?
Culturally and operationally KFH is quite different from what I am used to and I find it to be a difficult working environment. I believe that KFH has the potential to grow successfully in a sustainable way provided that it adopts more professionalism and reduces bureaucracy in its operations.
