After identifying factors that led to the creation of extremely fragile financial system that was tipped into crisis by the global financial meltdown, the Central Bank of Nigeria (CBN) has unveiled revised prudential guidelines for Deposit Money Banks (DMBs) to reduce potential risks in the future.
Samuel Oni, director of banking supervision, CBN, said in a statement that the objectives of the guidelines include•promoting enhanced provisioning policies and practices, which are consistent with sound risk management practices for Nigerian banks; ensuring that provisioning guidelines support the life cycle and gestation periods of the various specialised loans; •providing a framework for ensuring that the current provisioning guidelines are counter-cyclical; and •providing the framework for “haircuts” adjustments.
“These prudential guidelines should be regarded as minimum requirements and licensed banks are encouraged to implement more stringent policies and practices to enhance mitigation of risks”, he said. He said the loan loss provisioning guidelines which form part of the enhanced Prudential Guidelines provide guidance on recognition and measurement of loans, establishment of loan loss allowances, credit risk disclosure and related matters.
According to the director, the guidelines set out CBN’s views on sound loan provisioning and disclosure practices for deposit money banks in Nigeria. The guidelines also serve as a basic framework for evaluation of banks’ provisioning policies and practices.
Oni recalled that the Nigerian banking sector witnessed dramatic growth post-2005 consolidation and the development posed a lot of challenges for the industry and regulation. He said the initial perceptions that the banking system was sound and insulated from global financial crisis were misplaced.
Oni listed factors that brought the financial sector to its knees to include macro-economic instability due largely to sudden capital outflows; major failures in corporate governance at banks; lack of investor and consumer sophistication; inadequate disclosure and transparency about financial position of banks; critical gaps in prudential guidelines (current prudential guidelines was issued in 1990) and uneven supervision and enforcement.
In addressing the listed challenges, Oni recalled that the CBN introduced a four-pillar reform programme tailored towards enhancing the quality of banks; establishing financial stability; enabling healthy financial sector evolution, and ensuring the financial sector contributes to the real economy. As part of the initiative to enhance the quality of the banks, he said the CBN undertook a review of the prudential guidelines.
“In this regard, the revised prudential guidelines aim to address various aspects of banks’ operations, such as risk management, corporate governance, anti-money laundering/ counter financing of terrorism and loan loss provisioning. The guidelines also aim to address the peculiarities of different loan types and financing to different sectors”, he explained.