CREDIT CULTURE
July 4, 2017
THE RISK OF EXTERNAL EVENTS IN OPERATIONAL RISK MANAGEMENT – PART A
August 2, 2017

CREDIT CULTURE

As an organization in any industry or sector, kindly review your strategies and check whether you are actually working towards sustainability or merely pursuing the immediate gain without taking the long term into consideration.  The culture chosen will reflect in the strategic pursuit of the organization and ultimately determine the way the organization is ‘seen’ by the public.  Before going into the specifics, let us consider the following:

Signs that your organization is implementing immediate profit driven culture:

The organization focuses on short term earnings. For instance, the primary emphasis will be on the annual profit plan and target and every business decisions will be made with the short term perspectives in mind as follows:

An insurance company may deliberately frustrate the payment of claims to a certain number of eligible clients just to ensure that the income for the year is not eroded. Such sharp practices have cumulatively made insurance patronage to be unattractive in Nigeria (Latest statistics from Ministry of Finance confirms that only 3 million out of over 180 million Nigerians possess insurance policies). The operators with immediate profit inclination would not care much about the effect on the industry, in so far as their books look good, albeit in the short run. 

A manufacturer of drugs may, for instance lower the quality by reducing some of the essential components used in manufacturing (which is now costlier due to foreign exchange conversion issues) just in order to ensure that the projected profit for the year is still attained.

A petrol filling station may deliberately adjust its pump so as to make more money by dispensing less at the price of more, just to ensure that the profit target for the year is not threatened. There are situations where fuel stations deliberately collude with drivers of big organizations by selling less and sending invoice for fuels not sold. Reason – Immediate profit.

Many stockbrokers have been blacklisted by the regulators  and some had their licences withdrawn for selling stocks ‘behind the back of the owners’ or selling without remitting the proceeds, or under remitting for the same reason – immediate profit.

Many secondary schools were recently caught and blacklisted by JAMB and WAEC for ‘aiding and abetting’ examination frauds. Some centres are actually tagged ‘Miracle Centres’ and are well patronized by candidates who are ready to part with huge sums of money to ensure that they get good results from both bodies. Those schools are running with short term profits in mind – they may win for some time but mostly lose in the long run.

In a particular case, a bank was said to have been making impressive profits for three years consecutively but in the fourth year, there was a problem and it was obvious that the bank was heading towards a loss. In order to ‘stem the tide’ and ensure that the bank maintained a profit run, the management had a strategy meeting and decided to take the easiest way out albeit temporarily. How? All facility accounts were to be debited with various amounts ranging from thousands to millions of Naira, depending on the turnover of the accounts. The aggregate of the excess charges was used to cover the bank’s position temporarily and a further decision was taken that the bank would be ready to refund if the customer got to know eventually and in case the customer did not know or did not complain the bank would not bother to refund. What a manner of strategy embarked upon just to maintain the current or immediate profit plan!  Of course it eventually boomeranged and led to other serious risks including reputation and regulatory risks.

Specifically CREDIT CULTURE must not be driven by quick or immediate profit. If a bank or other credit offering institution including manufacturers (that offers credit sales) does so based on the short term gain only, it will compromise its standards and pay for it ultimately. If for instance a new bottling company dealing in soft drinks enters the market and starts offering credit facilities to agents and distributors without appraising their background it will eventually fall into the hands of ‘serial debtors’ that have equally taken credit facilities from other multinationals, banks and other financiers without servicing the debts as per the terms and conditions.  For instance there are some of the distributors in the markets that are ‘prima facie’  ‘perceived’ to be doing well because their warehouses and shops are full. But if one takes a closer look and conduct an assessment of the ownership of the goods in the shops, it may be found that nearly 100% of the goods in some instances do not belong to the shop owner but financed wholly by outsiders. This high gearing position would normally not be voluntarily disclosed by the distributor – customer but are usually detected through a proper risk assessment by the financier or credit supplier.

Another feature of Immediate – Profit Credit Culture is that the credit provider is often attracted to high-risk and high-return borrowers. Most of the facilities lost by banks to the Oil and gas sector in the last few years belonged to this category. The risks were very high and the financiers knew these, but prospect of very huge returns especially in the immediate was too ‘tempting’ to prevent many credit providers from parting with their funds. Many of the facilities are still non-performing after several restructuring and quite a number is still in courts almost a decade after striking the deals. So what eventually happened to the high returns?

Conclusively therefore,  immediate profit driven credit culture usually results in Higher Profit in good times, followed by Lower profit in bad times when loan losses increase.

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