Data-Driven Risk Management: A Must for Banks in the MEA Region

Data-Driven Risk Management A Must for Banks in the MEA Region

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Effective risk management in the banking business, particularly in the Middle East and Africa (MEA), is dependent on having access to accurate and timely data. Risk managers must evaluate private enterprises in markets where data may be scarce, limited, and inaccurate.
This problem is exacerbated by market volatility, regulatory difficulties, and international operations. 

Key Challenges for Risk Managers in the MEA Region: Limited Access to Data 

Many enterprises in the MEA region, particularly in Gulf Cooperation Council (GCC) countries, are privately owned and do not have to disclose financial information to the public. The lack of transparency makes it difficult for risk managers to conduct appropriate credit risk evaluations.  Approximately 80% of enterprises in the GCC are privately held according to World Bank figures, making it challenging to obtain trustworthy financial statements without the proper data sources. Furthermore, fragmented data from smaller enterprises frequently lacks the completeness and trustworthiness required for thorough risk assessments. 
 
Moreover, regulatory regimes in the MEA region are complicated and vary greatly between countries. Banks must comply not just with local rules, but also with international standards like Basel III and Anti-Money Laundering (AML) requirements. This variability complicates things for risk managers. For example, regulatory regimes in countries such as the UAE and Saudi Arabia require extensive due diligence, yet the lack of consistent data across borders makes full compliance difficult to verify. A 2023 PwC analysis reveals that erroneous data-induced regulatory noncompliance can lead to significant fines for banks, amounting to billions of dollars. Regulatory fines in 2023 surged to $3.9 billion, tripling from $1.3 billion the previous year. This rise highlights the growing regulatory scrutiny and the severe financial consequences for noncompliance, particularly in areas such as anti-money laundering and fair lending practices. 
 
The MEA region has a history of economic volatility and political instability, including frequent government transitions, economic sanctions, and civil unrest. For example, the World Bank's Political Stability Index places numerous MEA countries among the most volatile in the world. Such volatility can swiftly impair the financial health of firms, particularly small and medium-sized organisations (SMEs), making it difficult for banks to forecast credit risks. Inconsistent access to current information compounds these risks, as banks may lack real-time visibility into how political events affect companies' financial health. 
 
Banks operating in the MEA face challenges in managing risk across many countries due to a lack of consistent data. Due to differences in legal systems, accounting standards, and business practices, credit risk evaluations might vary greatly depending on the country in which the customer operates. A lack of standardised data makes cross-border risk management especially problematic in countries where banking regulations are rapidly changing, such as Egypt and Lebanon. According to a McKinsey study on the MEA banking sector, banks expanding regionally are increasingly concerned about a lack of reliable data, which serves as a barrier to effective risk profiling. 

Why Reliable Data Is Essential 

Reliable and validated data is more than just a tool for risk managers; it is an essential component of a successful risk management plan. The accuracy, timeliness, and completeness of the data used to make decisions can influence whether a bank effectively controls risk or faces considerable financial exposure. 
 
Research by the Economist Intelligence Unit found that 60% of banking professionals believe improved data availability leads to better risk management decisions. Risk managers use extensive and precise data to determine a company's creditworthiness, financial stability, and development prospects. In regions like the Middle East and Africa, where public information is rare, having access to private, verifiable data—such as firm financial statements, ownership structures, and legal histories—is crucial for making educated decisions. Credit choices based on faulty or outdated data, for example, can result in inadequate loans, leading to an increase in non-performing loans (NPLs), which remains an issue in the MEA banking industry. 
 
Reliable data enables banks to regularly monitor their exposure to high-risk clients or businesses. Given the MEA region's economic swings, organisations' financial health can change quickly, and outdated data increases the danger of a bank's portfolio becoming over-exposed to risky industries. For example, during the COVID-19 epidemic, the MEA's retail, hospitality, and oil and gas businesses were severely disrupted. Banks that had access to current financial and sector-specific data were better positioned to modify their exposure levels, whereas those that relied on out-of-date data suffered bigger losses. According to analysis by Deloitte, having access to real-time data enables banks to anticipate changes and better manage customer portfolios. 
 
Reliable data is crucial in preventing fraud and ensuring AML compliance for banks in the Middle East and Africa. This region is considered high-risk for money laundering by the FATF due to its complex company setups that can hide essential client details such as ownership structures, beneficiary owners, and legal history. Without verified data, banks are exposed to fraud risks. Having comprehensive and validated customer data enables banks to adhere to AML requirements efficiently, allowing them to promptly identify and report suspicious activities. Taking a proactive approach doesn't just reduce risks; it also safeguards the bank’s reputation and resources.  

Moreover, manually sourcing and confirming data can waste a significant amount of time for risk managers, reducing operational efficiency.  In fact, a McKinsey study found that many risk management teams spend up to 40% of their time collecting and evaluating data. Banks may significantly enhance operational efficiency by adopting dependable and automated data solutions. For instance, automated systems, such as Cedar Rose's CRiS Intelligence platform shorten the time required to collect and verify data, freeing risk managers to focus on analysis and decision-making. This transition from manual data gathering to automated, real-time access decreases the possibility of human error, ensuring that risk managers work with the most accurate and relevant data available.  

In summary, access to trustworthy and timely data is essential for risk managers in the MEA banking business. With restricted access to information, complex regulatory settings, and regional market volatility, accurate data is critical for sustaining successful risk management strategies. Banks that invest in the proper data solutions are better positioned to face these issues, make informed decisions, and efficiently manage risk exposure. 
 
Risk managers can tackle the region's specific problems by embracing verified data platforms, like Cedar Rose's CRiS Intelligence platform. It provides the tools they need to safeguard their institutions from financial losses, regulatory penalties, and reputational damage. 