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Best Practices for Financial Risk Management: Protecting Consumers and Protecting Your Community’s Financial Future

Best Practices for Financial Risk Management: Protecting Consumers and Protecting Your Community’s Financial Future

As a banking executive in one of the world’s rapidly developing nations, you know more than anyone how much new ground you and your associates are breaking. Not only are you creating banking relationships with families who have never had:

  • savings accounts,

  • access to credit, or

  • digital ways to move money,

you’re establishing a new financial marketplace and way of life for many in your community.

You are also doing this amidst competitors that offer predatory lending programs and other unethical financial products to your target market.

However, just as the government of a new nation must develop laws and regulations to protect its people – as a respectable member of the evolving financial community in your country it’s important you don’t take advantage of your potential clients and your community; and instead establish safe spaces for people in your community to do financial business and to handle money to support their families.

Consumer Protection is Essential If a Financial System is to Thrive

Developed nations like the US and UK have seen huge financial disasters simply because lenders and money hungry financial executives have refused to mitigate risk or act responsibly. For example, in 2008 the US suffered a large financial collapse:

  • Lenders extended loans to people to buy homes without properly reviewing their credit-worthiness,

  • The US government then backed bundles of these loans. These bundles were sold to banks and financial institutions all over the world. Because the loans were in bundles, the investors thought they were diversified and more secure. However, the guarantees on the loans only made provisions for repayment if only a small number of people defaulted on their loans. However, if many borrowers defaulted, there were no provisions for repayment.

  • Home prices declined. Interest rates rose. Many borrowers had bad credit and were making large monthly payments. They couldn’t refinance at these higher interest rates. Many defaulted on their loans causing mass foreclosures. In addition, none of the loan products made money for investors.

  • Most financial institutions that offered these loans couldn’t handle the large number of borrower defaults and began to collapse. The government had to bail out whatever large businesses they could to try to save the global financial structure that depended on these organizations like AIG (American International Group) and others. However, most businesses just failed. The government bail outs allowed some lenders to issue credit again. Therefore, the financial community could start moving again at a snail’s pace.

As you can see, entire financial systems can depend on the choices a few irresponsible or greedy finance executives make.

How Should Your Bank Do Business Today to Protect Your Current and Future Clients?

What are the best practices for financial risk management?

According to CGAP Author, Kate McKee,

“The most important objectives of consumer protection include transparency, fair treatment, risk mitigation and effective recourse.”

Transparency

Consumers should clearly understand the terms and conditions of the financial products they’re using, understand any risk and the full price they’re expected to pay.

Fair Treatment

Financial institutions should not use “deceptive or unsafe, abusive or aggressive” practices to gain customers. Executives should be respectful and ethical in dealing with customers.

Risk Mitigation

The modern financial landscape offers many entryways for risk. Financial institutions should quickly, “identify, monitor and mitigate risks such as fraud,” hacking, lack of credit investigation and due diligence and the improper handling of consumer data.

Effective Recourse

Customers should know exactly how to address their issues or concerns. Whether they have a simple question or a major complaint; customers should feel comfortable that your organization is meeting their needs.

How Does Your Organisation Measure Up?

As a forerunner in your community, it’s important to know the answer to that question and feel proud that in your answer, you can prove that you are serving your community well.

View the full list of Fern Software Blog posts here or visit our Library to download other useful resources here.

Filed Under: Blog Tagged With: Best Practices, Financial Risk Management

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Fern Software's blog aims to provide articles, expert opinions and case studies that will help inclusive financial institutions respond to a rapidly-changing marketplace, based around what we see as the main “pillars of successful inclusive business”: customer-centric product design; strategic direction; sustainability through technology; effective financial management; social impact; and compliance.

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