Risk assets and management by all of us
In one of my recent pieces in this column, I discussed the importance of monitoring and supervision as a critical strategy for protecting risk assets of microfinance institutions, and indeed all lenders, especially at times like these. Risk assets are the loans and advances a lending institution makes to its customers or clients. Clearly, loans and advances are very important sources of income to banks and, in particular, microfinance banks. All banking institutions have diverse sources of income, including earnings from risk assets, foreign exchange transactions, investments, financial advisory and issuing house services, among others. The extent to which these sources impact deposit money banks differ from the two kinds of banks as microfinance banks do not have capacity or the opportunity to handle some of these services.
Microfinance banks therefore have less diverse streams of income. Accordingly, they rely a lot on earnings from the loans they make. Although deposit money banks have a wider stream of income, the bulk of their earnings also comes from their lending operations. This is why a bank stops being a bank the moment it can no longer make loans. Other sources of income do not provide the level of revenue they need to operate profitably and comfortably, at least on a consistent basis. So we can understand why risk assets, even though everyone knows they are risky and are even so named, remain very important to every bank.
In the course of that earlier piece on management by all of us, I emphasised the importance of sound asset protection through proper monitoring, buoyed by shared responsibility. Without doubt, it is possible for a single loan officer or a team of loan officers to make a loan, without reference to any other person in the system, provided it is within their limit or capacity. However, the consequences of their action always overflow to others. The loss of such a loan always becomes the common patrimony of every staff and stakeholder in the bank. Every member of staff and indeed, all stakeholders, will get a share in the pain and difficulty that follow a major loan loss. There’s one particular place a banker should pray not to find himself – in a failing bank, especially in the last days leading to a final collapse.
First, the job stops looking like a bank job and begins to reflect something like a loan recovery or legal outfit. Then musclemen, looking anything but bankly, together with the lawyers who hired them, begin to frequent the place to report their daily encounter with debtors. Those are the days when frightened and disappointed customers come to the bank to collect their money, armed with dangerous weapons, the efficacy of which they have no difficulty testing on the heads of erstwhile smooth-talking, well-packaged account officers now looking lost. Those are the days when the Ivy League shirts and suits that bankers wear, made to measure by itinerant dressmakers sometimes from far away China and Hong Kong, no longer sit properly on their shoulders. Those are the times when lunch time is no longer a time to dine with friends but a time for a quick communion with the pastor or imam. Yes. Those are the days to account for your fat pay, irrespective of your department in the bank.
When regulators, for one reason or the other, place a failing bank on what they call Holding Action, which prevents such a bank from making further loans, the bank, and for such a period it is under the Holding Action, is only a shadow of itself. The trauma on staff is nerve-wrecking. This is why, no matter the roles we play in a lending institution, we all have a joint responsibility to ensure that its lending operations are run excellently well. Risk assets are therefore a key part of the life-wire of banks and need to be properly handled, from inception of the credit request to the recovery of the loan.
On the basis of this understanding the need for monitoring and supervision becomes very clear and more particularly, a shared responsibility. Besides, it has proven to be an important strategy for improving loan quality and reducing delinquency in some world class microfinance institutions. A key success factors for the Association for Social Advancement (ASA), one of the pioneer microfinance institutions in Bangladesh, for instance, is extensive monitoring and supervision of loans. In the operations of ASA, monitoring and supervision were both extensive and multi-tiered. Unit managers monitor and supervise the functions of a group of credit officers, while a Relationship Manager monitors and supervises the work of unit managers, and a Coordinator monitors and supervises the work of the rest. This approach ensures that over half the activities of any fictional level is cross-checked or benefits from the oversight of a senior functionary.
In the piece I referred to earlier, I used the concept of Management by all of us to designate a management style that democratises the monitoring function of managersin an institution, without taking away their prestige as managers or diminishing their core responsibility for their units. It expands the ASA monitoring strategy by including not only the vertical monitoring entailed in the ASA model, but also by encouraging horizontal monitoring, albeit unofficially. Perhaps, it may be necessary to further elaborate a bit on this concept.
Management by all of us (MBAOU) is a strategy that encourages the sharing of monitoring responsibility among all members of management, both vertically and horizontally. It aims to democratise the responsibility of monitoring activities without taking the responsibility off the core domain of duty. It borrows extensively from the concept of management by Walking About (MBWA), which was popularised by the Hewlett-Packard computer company. MBAOU also has some marked differences.
First, Management by walking about restricts the duty of walking through the departments to the manager. Management by all of us recognises that managers cannot be everywhere at the same time and may come to a scene after the fact. It allows persons other than mangers to take interest in what other staff are doing and to act as sounding board for management information. Second, Management by Walking about uses the opportunity created by chats and sharing of coffee among staff to elicit information. We all know that workers are freer among their peers than their managers, no matter the extent of his preaching about Open Door Policy. This is an edge for Management by all of us. Generally workers will always talk more freely to their peers than their managers.
Besides, managers are viewed with suspicion whenever they implement Management by walking about. In some extreme cases, workers are known to have called them spies who want to hurt their careers. This makes it difficult for important information to get to managers. Management by all of us removes this suspicion. For these and the need to avoid the shared distress that comes with bank distress, we should democratise risk asset monitoring in our microfinance and indeed all banks.
Emeka Osuji