As a credit union owner, you know that credit unions now face increasingly complex and dynamic regulatory and risk environments. While all businesses, both small and large, face several risks to achieving their goals and objectives, note that few spend sufficient time and resources identifying these risks and developing robust plans and strategies to overcome or preempt them.

However, as your business recognises the significant and profound impact that unforeseen events are likely to have on it, you should turn to risk management as part of your strategic business plans.

Also, note that traditional management methods, usually manual, disconnected and spreadsheet-based, result in siloed data and inconsistent processes. And this kind of approach to risk management cannot align various risk management activities across your institution and will not equip your credit union to assess, manage, monitor, and minimise risks in real-time.

Did you know that risk management programs and plans to date have primarily focused on internal controls; however, effective risk management goes beyond that. For example, it must also consider your credit union’s risk appetite.

What is Risk Management?

We can say that fundamentally, most credit unions are engaged in the business of managing risk. Many of the risks that your credit union faces fall into several broad categories, like hazard risks from property damage, legal action, natural disasters, various financial risks linked to lending, markets, and currency/strategic risks like competition with other unions and financial institutions.

You may know that in many credit unions, these risks are often managed individually and in a silo approach, which is not very productive. Although an effective risk management program doesn’t necessarily replace all these existing risk management practices in your union, it can certainly serve to form a standard sharing of risk-related information. This will result in a comprehensive and detailed view of risk across your organisation.

And this helps create increased transparency and an understanding of all risks, such as financial risks, organization-wide, allowing for gaps in the risk management framework to be identified. As a result, successful risk management strategies allow your credit unions to assess risks globally, with a proactive and forward-looking perspective. And this results in more effective risk management, especially on an enterprise-wide basis.

Although there are many different tools and techniques to manage risks, note that most of them involve clearly laying out your goals, identifying several factors that may affect your union’s ability to achieve these goals, evaluating both the likelihood as well as the impact of these factors, and then developing practical plans to address these risks.

So, risk management is a strategic and collaborative process that identifies, manages, and monitors organisational risks, both external and internal, to ensure achievement of your credit union’s strategic goals and objectives and continued financial viability and stability.

And, it is worth noting that risk management is more than merely identifying control weaknesses in your organisation; instead, it helps identify potential risk events that could result in damaging or negative consequences for your organisation. Keep in mind that it is also carefully designed to ensure that risk is effectively managed within your credit union’s risk appetite or tolerance level.

Why should Credit Unions Care about Risk Management?

There is no doubt that credit unions have many causes of business uncertainty. This uncertainty is why both boards and managers have to give risk management in their organisations a high priority. Also, note that knowing how to effectively identify potential risks and devising plans to manage and mitigate them before they adversely affect your business positions your credit union to act on many future business decisions with a lot of confidence..

So, to receive a more relevant and informative assessment, you have to understand both risk context and trends by evaluating numerous factors, like:

The root cause of the relevant risk
Likelihood of an adverse event
Effect of an adverse event
Preparedness to effectively respond to an adverse event
The trajectory of risk—decreasing, increasing, or flat
Activities and steps to manage or minimise risk
A suitable description of the environment

These factors require collaboration, and you can use team chat apps to increase the cooperation between your team members. You can also use messaging tools and Webchat. Keep in mind that a thorough and comprehensive risk assessment that carefully analyses all these elements will allow your organisation to identify and address risk areas based on each area’s specific and unique circumstances. And that is not all; it can inspire your organisation to devise new and improved mitigation strategies to prevent, minimise, or manage future exposure.

And new risk mitigation strategies may take the form of systems, policies and procedures, processes, and education, among others.

2. Monitor and Evaluate

Measuring your performance, such as lending performance, is an ongoing process that must be monitored monthly. Timely, consistent, and accurate measurements are essential as they will help you determine if risk levels in your organisation are increasing, stable, or decreasing.

It is also crucial that credit union management and the board of directors implement an early warning process that alerts management when your union is approaching its risk limit. And similarly, these reports should also indicate when it may be suitable for your credit union to take on additional risk.

Identifying key risk indicators can help your credit union be on the constant lookout for signs of higher exposure. Examples of risk indicators include:

A high concentration of specific loan types measured as a percentage of aggregate portfolio value
A considerable increase in the time of delinquency ageing
Keep track of areas, like loan risk grades

3. Create an Effective Risk Management Structure

A well-structured and comprehensive risk management system will successfully address several key areas, ranging from loan and application reviews to regulatory compliance.

And it is equally vital to ensure that controls are suitable for the specific business units in your union. Policies are effective processes that offer assurance and confidence that the risk management strategy meets all regulatory expectations and needs.

You can also integrate practices into your credit union’s daily workflows so that scenarios and situations involving exceptions, for instance, can be targeted as well as rectified well before they can become sore spots.>

5 risk management strategies for your credit union.

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