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Evaluating The Impact And Barriers Forde-Risking Strategies (A Case Study Of Diamond Bank Plc)
EVALUATING THE IMPACT AND BARRIERS FORDE-RISKING STRATEGIES (A CASE STUDY OF DIAMOND BANK PLC)
CHAPTER ONE
INTRODUCTION
Background of the 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. For the purposes of this paper, the term “financial inclusion” refers to the provision of accessible, usable, and affordable financial services, either through the formal or informal financial sector, to underserved populations. This includes the estimated 2.5 billion “unbanked” individuals worldwide who lack access to a formal bank account, the vast majority of whom reside in developing countries.1 Financial inclusion also applies to “underbanked” communities, where people lack reliable access to or are unable to afford the associated costs of financial services. In the US alone, 50.9 million adults are considered underbanked and have relied on alternative financial services in the past 12 months, including payday lenders, pawn shops, or check-cashing services.2 The international focus on financial inclusion has coincided with increased attention to anti-money laundering and countering the financing of terrorism (AML/CFT) frameworks as crucial tools for advancing stability and security objectives and for curbing criminal and violent extremist activity.
The focus on AML/CFT has resulted in regulators’ increased scrutiny of the formal and informal financial sectors, as well as international pressure on low-capacity countries to develop and implement effective AML/CFT frameworks. Although overly strict approaches to AML/CFT may inadvertently limit financial access, their respective aims do not inherently conflict. Proportionate and calculated implementation of AML/CFT measures can help to advance financial inclusion goals, drawing more economic activity into the formal banking sector and consequently enhancing transaction monitoring and customer due diligence, which in turn help advance AML/CFT goals. However, with risk appetites declining in the wake of the 2008 financial crisis, many financial institutions have opted to exit relationships assessed as being high risk, unprofitable, or simply “complex,” such as those with money service businesses (MSBs), foreign embassies, international charities, and correspondent banks. Closures of these entities’ bank accounts affect financial access for the individuals and populations those businesses serve. MSBs and other financial service providers, often referred to as “alternative money transfer services,” hold accounts with formal financial institutions (banks), which allow them to perform transactions and serve as an access point and gateway for their traditionally underserved client bases. They fill an important gap, particularly in jurisdictions with nascent financial systems where the informal sector is in fact the main provider of formal and traditional banking services. Such relationships also exist internationally.
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.
1.3 Significance of the study
This report is based on an exploratory study on the impacts of bank de-risking practices on financial inclusion. “De-risking,” or “de-banking,” 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. 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. It provides 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
1.4 Objectives of the study
The research is aimed at evaluating the impact and barriers for de-risking strategies. To be concise, these objectives are:
- To know whether de-risking strategy have any significant impact on Nigerian Banks.
- To identify the barriers to de-risking strategies in Nigerian banks.
1.5 Research questions
In order to have a thorough grasp of the understanding of this research, certain questions need to be asked. These are:
- 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 hypotheses
Ho: De-risking strategy has no significant impact on Diamond Bank Plc.
Hi: De-risking strategy has significant impact on Diamond Bank Plc.
Ho: There is no barrier to de-risking strategy by Banks in Nigeria.
Hi: There are barriers to de-risking strategy by Banks in Nigeria.
1.7 Limitations of the study
The study was carried out to evaluate the impact and barriers for de-risking strategies. The study is limited to Diamond Bank Plc. This is because of her representative nature of all the banks in Nigeria, proximity to the researcher, time and financial constraints.
1.8 Scope of the study
The study focuses on the impact of de-risking on previously banked populations, whether those services are accessed directly or through an alternative financial service provider, and does not seek to assess the extent to which de-banking has affected populations that do not currently have access to financial systems.
1.9 Definition of terms
Evaluation: An appraisal of something to determine its worth or fitness.
Impact: Tohave a strong effect on someone or something.
Barrier: Anything that prevents or obstructs passage, access, or progress
De-risk: This means to make something safer by reducing the possibility that something bad will happen and that money will be lost:
Strategy: A plan of action designed to achieve a long-term or overall aim.