QUESTION ONE

NJENGE is a large banking and financial services group that is listed on the Lusaka Securities Exchange Plc. The group has over 8 million customers throughout the country. The NJENGE Group is composed of a mix of retail and commercial businesses that include corporate and investment banking, private banking and commercial banking.

Trends within the Financial Services Sector

The Board of Directors of NJENGE is aware that a number of trends within the sector will require the bank to substantially re-design a number of its operating and information systems and review the nature of the interface between the internal audit and risk management functions. Current issues that are having an impact on the financial services sector include:

A new law requiring banks to provide details of interest paid on personal savings accounts held by non-residents. A withholding tax of 15% is to be imposed on such income and details must be sent by the bank to the tax authorities in the country where the recipient resides;

Forecast rises in interest rates over the next two years;

The elimination within Zambia of the use of personal signatures as the authorisation method for credit and debit card transactions and their replacement with personal identification (PIN) numbers;

The increasing use, by personal customers, of both telephone and internet banking services. Over 40% of bill payments, standing order amendments and balance transfers by such customers were processed in this way during the last 12 months compared with 28% the previous year;

A growth in the number of cases being sent to the financial ombudsman or the financial industry regulator relating to claims of mis-selling or incorrect advice on the part of financial services companies in the supply of a range of savings and investment products; and

Page 2 of 14

As a result of threats of terrorist activity, money laundering legislation has been introduced or tightened in all of the countries in which NJENGE has correspondent banking relationships;

Analysis by Type of Business

(i) Net assets	Year ended
	31 December 2018	31 December 2019
	Km	Km
Corporate and investment banking	15,824	12,286
Personal financial services	9,250	6,400
Private Banking	2,320	1,755
Commercial banking	11,186	9,364
	38,580	29,805
(ii)Profit on ordinary activity before tax	Year ended
	31 December 2018	31 December 2019
	Km	Km
Corporate and investment banking	3,416	2,949
Personal financial services	2,427	1,684
Private Banking	116	85

Page 3 of 14

Commercial banking	3,356	3558
	9,315	8,276

Within the commercial banking portfolio, the allowance for credit losses equalled one per cent of the assets compared with two and a half per cent in personal financial services and private banking.

Profits from private banking are viewed as being influenced by a range of factors including the state of the world economy and sentiment and performance in the equity markets. The current outlook for the global economy remains uncertain and depressed equity markets are expected to recover slowly over the coming financial year.

Required:

A. Discuss the main categories of risk that are faced by a bank such as NJENGE and the advantages of risk categorisation in the design of a risk management system. (10 marks)

B. For every one of the six issues identified in the question, recommend the controls that might be introduced to minimise NJENGEs exposure to such risks.