This is my sample case study of (an assumed) Mr. Kofi Bukari, who had an illustrious banking career in a multinational bank. Having worked for over two decades with the bank, he decided to become his own manager. He resigned as a senior manager and used his entitlement to establish a financial institution in which he holds the majority of shares. From the onset of the company’s formation, he exuded a lot of confidence and commitment to overcome the odds and help realise his dream of owning a finance house.
It is just natural that he would have a strong emotional attachment to the company and want to see it grow, since it is the fruit of his toil and investments. As is the norm with many new companies, he developed a strong business plan containing the mission and vision statements for the business. Relying on his previous experiences, he was able to put in place the structures and relevant policies and procedures manuals for the company’s day to day operations. This is also in line with the central bank’s regulations.
As a new financial institution that was about to start operations with one branch, he poached (supposedly) Mr. Yves Barima, who once worked with him, to join the team as the credit risk manager. He also employed a few young people who did not have previous banking experience but were enterprising for the officer roles. To fill their skills gap, he engaged the services of banking consultants to train them regularly on customer service, banking operations, credit administration etc. With time, his employees developed the competencies to perform routine tasks with ease. Indeed, Mr Bukari is the face of the company – and as such considered as its chief business development officer. But do business owners always act in their company’s best interests more than their employees all the time?
Regarding this case study, the official opening of Modern Day Financial Services Ltd. (the supposed name of the company) to the public was graced by religious leaders, family members, distinguished professionals and business owners whose accounts he once managed. Interestingly, many of the first people on the list who approached the company for quick loans were the customers with banking relationships and accounts in his previous bank. Even before most of these persons came to Mr Bukari’s office to submit formal loan requests, they had discussions with him on thw phone.
Indeed, his credit risk manager had cause to express reservations on many of those credit applications after reviewing them and backed his decisions with tangible reasons within the company’s overall risk management framework. Nonetheless, Mr. Bukari, in many instances, used his rule of thumb to approve the loans and described his subordinates’ explanations as too mechanistic to grow the company’s customer base.
As he continued to assert his unbridled authority, the credit decision-making process ended up being mere formalities. In fact, he became oblivious to the implications of his actions on the company’s survival. The overdue (delinquent) loans begin to balloon, and the recovery officers begin to intensify their activities.
In recent times, the issue of businesses not surviving after a few years in operation has been topical. With a deeper appreciation of the same challenges in the banking sector, the illustrated case of Mr Bukari comes in handy in bringing to the fore behavioural challenges most of the owner-led microfinance institutions in the country are facing. Some of these finance houses, microfinance companies, money-lenders etc. are failing in their operations not necessarily due to the negative externalities in the business environment – from the early days of operation, the owners fail to lean against the invisible ‘defensive-wall’ between customers and themselves regarding the credit administration processes.
Treating the long-known customers with kid-gloves in the new company has its pros and cons when considering their loan requests. The blanket feeling of “I have known them for long in my previous company” is one of the weaknesses in the chain of nagging problems which buckle these owner-managing lenders later. Thus, it is one thing establishing the necessary structures and policies, but it is quite another thing to let them work effectively.
In the mainstream banks, these owners worked with direct supervisors and were mindful of the due processes as against personal emotional connections in terms of loan requests – but are unable to live this healthy culture when they move on to establish their companies. Even though much relevant information on loan applicants helps avoid adverse selection, it will surprise you to know that a large percentage of the defaults constituting the loan portfolio at risk in their books are mainly the credits and advances to the customers and business connections they have known over the years before setting up the companies.
In the case of Bukari’s company, the loan recovery team did upscale their efforts to have the loans paid back. However, one of the difficulties they encountered during their operations was the fact that major defaulters would hardly budge – and were quick to tell them that they had prior discussions on the repayment plans with their boss. We can also deduce that these debtors were capitalising on their close relationship with the CEO to disregard the recovery officers.
More often, the boards of directors are blamed when these companies’ failures become public. The crux of the matter is that some of these owner-managing lenders keep the board members in the dark about the true figures (financial reports) with the intention of fixing problems on the quiet even when things begin to fall apart and require the board members’ intervention. Since they constitute the board themselves to meet regulatory requirements, they wield more powers than the board members – when the reverse should be best practice in the spirit of sound corporate governance.
Policies & Compliance
I have realised over time that business management is not a straight line easily drawn from one known point to another definite point. There are many challenges or pitfalls along the way, some of which will be beyond the business managers’ immediate control. However, to surmount some of the foreseeable problems, compliance with an objective mind at all times should be the watchword.
As is the practice, Managing Directors of financial institutions have credit approval limits within their authority to sanction; and this understandable in all respects as far as credit governance culture is concerned. But credit policies should not be so liberal in their contents as to provide gaps for the owner-managing lenders to exercise excessive discretion when it comes to waivers regarding the credit documentation processes.
Without him realising this fact, Mr. Bukari’s credit policy (which he formulated himself) had those defects which triggered the emotionally-laden waivers he was giving to the favourite customers. The financial institutions which are surviving have always been doing something right, and that I believe is centred on strict compliance. Let’s keep our eyes on this guidepost always.
Dear readers, I am once again grateful for your time. Keep reading. Your views are invaluable and enrich the discussion. May the light of His face shine upon us all. God Bless!
The writer is a Chartered Banker