Factors Affecting Financial Stability and the SADC Economy

The GDP growth rate of the SADC region has deviated from the rest of Sub Saharan Africa during 2013 – 2014, which has been attributed to lower commodities revenues globally. Most of the SADC economies have a heavy reliance on commodities for export revenue. The impact on the profitability of domestic entities and by extension capital flows, household disposable income, developments in volumes and rates on mortgages as well as pass through effects on Bank balance sheets poses concerns about bank risk management systems and puts to question the sustainability of the foreign financing of domestic debt.

The SADC Development and Training Forum seminar that was recently held in collaboration with MEFMI in Harare, Zimbabwe brought to the fore some of the factors that affect financial stability in the SADC region.

The core principles of bank supervision provide the foundation upon which bank supervision is based upon. The core principles were revised in the aftermath of the 2009 financial crisis with the focus being to strengthen financial sector supervision. The revised principles consist of 29 principles of which 16 principles refer to 16 specific supervisory actions while 13 principles specify risk management techniques to be adopted by banks. The bank regulation and supervisory weaknesses noted in the region include: weak legal frameworks in problem bank resolution; lack of supervisory skills and capacity (consolidated supervision). Areas of regional cooperation identified in order to harmonise supervisory standards in SADC region include: implementation of risk based supervision; Banking Supervision Application system (hosted by Bank of Mozambique); development of model banking law; and establishment of regional financial stability framework.

Enterprise Wide Risk Management (ERM) can be defined as a disciplined (structured & systematic) and integrated response to uncertainties in the business environment through using a risk-based approach to strategic management and governance. The ERM process is spearheaded by executive management and implemented by management in a coordinated and holistic approach to company-wide risk management.

The key drivers for implementation of ERM in the aftermath of the global financial crisis include: increased reputation risk in banking; higher consumer standards; increased pressure from regulators and change in leadership expectations which require holistic approach to risk management. The changes in the operating environment require risk managers to be proactive and accelerate business growth. Its noteworthy that risk managers must keep the risk language simple so that management understand and appreciate the key risks. Previously risk managers would focus on quantitative jargon on complex financial products without articulating the risks embedded in these products.

Information systems play a key role in risk data and analysis and must be viewed as an enabler for ERM framework. The risk management must be embedded in organisation culture for greater appreciation and ease of implementation.

Organisation leaders namely the board of directors and senior management form the core of the corporate governance framework. King III advocates for ethical leaders to be guided by sound ethical beliefs. Ethics can be broadly defined as doing the morally correct things when nobody is watching. Risk governance demands a holistic approach and risk appreciation should start at the top. Boards need to lay down appropriate risk strategies and ensure its operationalised throughout the organisation and not in silos.