De-risking refers to the practice of financial institutions exiting relationships with and closing the accounts of clients perceived to be high risk. Rather than manage these risky clients, financial institutions opt to end the relationship altogether, consequently minimizing their own risk exposure while leaving clients bank-less. In developing countries, the concept and practice of entrepreneurship has been embraced by both academia and professionals as a result of its effect on the economic development and growth of nations. Globally, there has been bolstering emphasis on female entrepreneurship in light of tangible evidence of the importance of new business creation for economic growth and development (Bergmann, Müller & Schrettle 2014; Lock & Lawton-Smith 2016).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.
1.2 Background of Study
In recent years, the international community has begun to focus on financial inclusion as part of a broader strategy to reduce poverty, encourage economic development, and promote stability and security. In the US alone, 50.9 million adults are considered under banked and have relied on alternative financial services in the past 12 months, including payday lenders, pawn shops, or check-cashing services. The Smallholder Agribusiness Financing (SAF) model by the Program for Rural Outreach of Financial Innovations and Technologies (PROFIT) through this chapter provides an alternative solution through de-risking of these agricultural financing processes.
Globally, demand for international banking services appears to be outpacing capacity to meet that demand. In 2016, more banks reported increased demand for international banking services than increased capacity to meet demand. Over 60 percent of survey participants in both East and South Asia reported increases in demand. And in East Asia, Europe and Central Asia, Latin America and the Caribbean and Sub-Saharan Africa, banks more frequently reported increased demand than increased capacity to meet that demand.
Recent efforts to strengthen the global financial system will ultimately contribute to greater financial stability and a safer world. However, the resultant de-risking is reportedly having a negative impact on banking in emerging markets. The financiers on the other hand face higher loan servicing costs due to limited volumes and high information acquisition costs coupled with lack of collateral or inadequate security from the rural farmers. Some of the financiers also lack technical knowledge at the bank level to evaluate and analyze the creditworthiness of these agribusinesses.
Risk management is one of the most effective strategies which companies and financial institutions must adopt it in their major projects. Risk management is considered as a part of project management but it has been neglected in our country and only a small number of organizations hold a clear view on risk management process. Developing scientific attitude towards risk management and introducing the processes and techniques of risk management thoroughly and scientifically will lead to systematic codification and application of project risk management in the country and the companies (Sheikh and Sobhiye, 2012).
Unbanked or under banked communities, particularly in the developing world, are also vulnerable to private lenders. These “loan sharks” offer no legal customer protection measures and have anecdotally been linked to extortion and even threats of violence. As banks close the accounts of non-bank financial service providers, underserved communities may be forced to increase their reliance on these types of costlier and less-regulated options.
As financial institutions re-calculate risk appetites and decide to exit relationships, they directly and negatively affect these sectors and the populations they serve. The closure of these bank accounts not only threatens these businesses but also jeopardizes the vital flow of remittances to Somalia from diaspora populations, which constitute an estimated 25 to 45 percent of the country’s GDP and serve as a key source of income for more than 40 percent of its vulnerable population. Financial exclusion is a huge barrier for disadvantaged populations.
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact and Barriers of Evaluating the De-Risking Strategies.
1.3 Statement of Problems
Investigation revealed that de-risking practices have not been localized in any particular population, community, or industry. However, in recent years there has been an “aggregation of results” best described as a trend toward de-risking of sectors, including money service businesses (MSBs), foreign embassies, nonprofit organizations (NPOs), and correspondent banks. Those closures have had a ripple effect on financial access for the individuals and populations served by those businesses.
Regulatory authorities continue to emphasize that de-risking is not in line with international guidelines, and in fact is a misapplication of the risk-based approach. Yet in the absence of clear instructions or an incentive to bank these clients, account closures continue across the United States, the United Kingdom, and Australia. These closures have significant humanitarian, economic, political, and security implications, effectively cutting off access to finances, further isolating communities from the global financial system, exacerbating political tensions, and potentially facilitating the development of parallel underground “shadow markets”.
Unfortunately, little empirical data is available about the extent and nature of the client relationships being exited and the decision-making processes of financial institutions. This presents challenges to assessing the scale and scope of the problem, identifying vulnerable communities affected by the reduction in services, and developing effective responses. Nevertheless, this study endeavors to illuminate a number of existing trends and themes relating to the issue and provides some insight into likely factors behind de-risking practices.
1.4 Aim and Objectives of Study
The aim of the study is to examine the Impact and Barriers of Evaluating the De-Risking Strategies. In achieving this aim, the following specific objectives were laid out as follows:
- To identify the barriers to de-risking strategies in Nigerian banks; and
- To know whether de-risking strategy have any significant impact on Nigerian Banks.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Does de-risking strategy have any significant impact on Nigerian banks?
- Is there a barrier to de-risking strategy in Nigerian banks?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
- H0: De-risking strategy has no significant impact on Access Bank Plc.
- H1: De-risking strategy has significant impact on Access Bank Plc.
- H0: There is no significant barrier to de-risking strategy by Banks in Nigeria.
- H1: There are barriers to de-risking strategy by Banks in Nigeria.
1.7 Significance of Study
The study will provide a number of relevant case studies highlighting innovative approaches to, and lessons learned from, addressing de-banking challenges across six different sectors with varying degrees of banking incentives, as well as a set of recommendations about how invested stakeholders can better address de-risking challenges. Rather than manage these risky clients, financial institutions opt to end the relationship altogether, consequently minimizing their own risk exposure while leaving clients bank-less. This exploratory study was designed to identify the core drivers of this practice and its implications for financial inclusion goals, particularly as they affect vulnerable communities.
This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.
1.8 Scope of Study
The scope of the research is focused on the Impact and Barriers of Evaluating the De-Risking Strategies in Nigeria using Access Bank Plc as a case study.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definition of Terms
De-risk: This means to make something safer by reducing the possibility that something bad will happen and that money will be lost.
Barrier: Anything that prevents or obstructs passage, access, or progress.
Evaluation: An appraisal of something to determine its worth or fitness.
Impact: To have a strong effect on someone or something.
Strategy: A plan of action designed to achieve a long-term or overall aim.