AtlasMara is Zambia’s largest bank by branch network, a product of the landmark merger between BancABC and Finance Bank Zambia. The bank was voted the fastest growing commercial bank just a few days ago only to be roiled by a $1million court order dating far back as 1996 involving a guarantee set off creating a credit exposure for the bank. In this article the Brexit Consultant analyses areas of concerns that the incident exposed the banking system to.
Weak disaster recovery architecture exposed
Firstly, to have a core banking system crippled for over 4-6 hours reveals serious weaknesses in the IT infrastructure framework and thereby hosting capabilities. Ideally in the modern day world banks are expected to have state of the art core banking systems that are hosted in the cloud or at bare minimum web based. After this requirement is met, a data centre backup is advisable for the purpose of business continuity should anything adverse incapacitate a server on either the live or backup. To have core banking paralysis points to lack of backup data centre or the system is altogether not cloud based at all exposing the commercial banks to disruption risks that ultimately impact service delivery through actualizing settlement risks as the bank struggles to honor its obligations, reputation risks as clients fail to view balances or transact online for the same reason. One school of thought could argue on restoration of service within recovery time objectives but the gravity of disruption seems to outweigh efforts to resuscitate services. It is rather unfortunate that the banks recovery site was tempered with too pointing to weaknesses in security risks which require a complete rethink.
Never underestimate actualization of legal risks
The general gut feel around legal risk in Zambia, is that most commercial banks have for a long time underestimated there actualization and crystallization. Apparently there is a perceived complacency which arguably is precipitated by a slow legal system that gives a false sense of assurance that these exposures are being managed adequately. The AtlasMara incident is a positive goodness if fit test of a very weak understanding of threat landscapes that most financial institutions are sitting on. One of the deadliest exposures are cases involving disgruntled staff in light of labor laws skewed to support weaker party. Suffice to say the likelihood of staff cases swinging in their favor is almost 1.0 and as such it is better off to settle these matters outside court than drag litigation. According to a recently published article in the Zambian press, AtlasMara is said to have 193 litigation suits involving former staff members for Finance Bank Zambia which if actualized will hit the banks bottom line if already not provided for. The litigation pendulum is a very unpredictable one but from experience most staff that get dismissed are either let go of unfairly or with little adherence to the labor law which gives then legal advantage to sue half the time. This is why I am more than convinced today that legal counsels in commercial entities need to start thinking like Chief Finance Officer’s CFOs to manage the case exposure (costs) and take responsibility for exposures that do actualize. The same way frontline units that operate to generate revenue should be the same mindset legal units should address litigation with focus on addressing actualization of exposure. Most legal units are actually pseudo hedged to the extent that the justice system is slow and as such look like they are on top of their game when in essence not. No one would have predicted that a 1996 issue would cripple a bank for 6 hours 23 years later. The pattern though not statistically tested conforms to a Poisson distribution given the randomness of the crystallization.
The role that Bank of Zambia has struggled to play
The central banks supervision units role should not only be restricted to regulating commercial banks conduct but should also extend to addressing the ecosystem in which financial institutions operate. With all these residual issues from the past cropping up in addition to a pipe line inventory of 193 litigation suits, analysts question how the merger allowed this slip through the cracks. However the Atlas Mara incident reveals the need for the regulatory authorities in this case the central bank to thicken the layers of insulation for banks faced with law suits to allow for demand deposits to be protected. This off-course, in the best interests of the financial system. It is unacceptable for the legal system to allow for bailiffs to storm financial institutions premises and cause physical damage to assets (let alone seize information assets such as lap tops that have very valuable information). It seems prima facie, that there exists lack of understanding of the importance of financial stability at regulatory level especially the courts. The disconnect is very steep. This is not the first time incidents of such magnitude are recurring involving commercial banks with little intervention from the central bank. It will be better and more professional for the those awarded with judgement in their favor to get their compensation through the central bank being the banker to all commercial banks. That way the financial system will be preserved from reputational damage and potential runs that could have systemic effects in the payment system. The passive approach by bank supervision in failing to protect banks or should I say the safety of customers deposits reflects very poorly on them. A stable financial system should extend to a thicker layer of insulation for commercial banks from any form of damage irrespective. Failure to protect banks could systemically expose the industry to potential settlement risks (credit) and reputational in nature if information assets are tempered with. Suffice to say it is a wake up call for other banks in the industry to step up their business recovery capabilities, a faculty that has for a long time been overlooked.
In conclusion, it is vivid that risks are not only fluid but can morph or sublime unexpectedly to materialize loss that would impact any organizations profitability. The AtlasMara event was an eye opener for commercial banks whose risk posture is shaky as there is need to appreciate the interdependent nature of risks. The need for seamless business resilience capability can not be overemphasized to guard against disruption and dented reputation. Regulatory supervision is required to protect financial system stability for the requisite confidence required. However despite the adversity on that day, AtlasMara can be commended for having restored operations within an acceptable time frame and can now worry about diffusing reputation damage to the franchise ik addition to re-engineering security at its recovery site.
Written by the Brexit Consultant.
