Handle operational risk with urgency it deserves

So, what do the August 2017 presidential elections, the near-collapse of Kenya Airways (KQ), the circus of the hoods at KRA in July 2019, the infamous IFMIS scandals at the National Youth Service (NYS), the CBK and Kamlesh Pattni Goldenberg scandals of the 1990s, the Sh50 billion possible loss at the National Hospital Insurance Fund (NHIF), the Britam versus Cytton legal wrangles, the alleged executive grand theft of the Kamwarer and Arror dams funds, the structural collapse of private and public schools in the country have in common?

They exemplify operational risk events that have affected just about every sector of Kenya’s economic life in the recent and not so recent past. These are not tail events, but frequent and impactful occurrences whose consequences linger on for generations.

The list of operational risk events in this country is endless. Most if not all of the events are tragic, and represent some element of moral failure, some flaw in character, nevertheless, they are serious operational risk failures.

Many people have a difficult time understanding operational risk, while an even larger majority of stakeholders have never heard of the term – even though a great number of risk managers and finance specialists continually affirm that extraordinarily poor management of operational risk (not other categories of risk, such as market, liquidity or credit) is exactly what led to the collapse of global financial markets starting in 2007/2008.

In Kenya at the centre of most losses, collapsed organisations and institutions, collapsed buildings and even electoral malpractices occur due to failure of operational risk management. Successful management of risk is underpinned on behaviour and conduct.

In this country, there is the misplaced perception that credit risk, the possibility of a loss resulting from a borrower’s failure to repay a loan or meet their contractual obligations, is the most important of the core risks. It simply is not and pales in comparison with operational risk.

Market risk, which is caused by changes in commodities, asset prices, changes in interest rate, and foreign exchange, remain largely insignificant in the risk taxonomy and in the economic life of this country. The beast lies in operational risk, and its impact is larger than the combined force of both credit and market risks.

What matters most, and boards, C-suite and CRO ought to be closely watching over are failures in operational risk management. But, more damaging and still unclear to many is the present convergence of […]

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