PREAMBLE

The Nigeria Deposit Insurance Corporation (NDIC) organized a 2-Day Bank Examiners Conference from 28th – 30th July, 2011.  The theme of the workshop was The Future of Banking Supervision in Nigeria.  The Executive Director (Operations) welcomed the participants to the conference while the Keynote address was presented by the MD/CEO Alhaji Umaru Ibrahim, (mni).

KEYNOTE ADDRESS BY MANAGING DIRECTOR OF NDIC

The MD/CEO of the Corporation, Alhaji Umaru Ibrahim, mni; formally opened the 2011 Examiners’ Conference on 29th July 2011 with a keynote address.

The keynote address provided a background to the current global economic meltdown and how the banking regulators and supervisors in Nigeria were able to rise to the occasion even if the negative impact of the global economic crisis on the banks remains unresolved.

The MD noted that although the bank regulators in Nigeria were commended for their quick interventions, which greatly moderated the negative effects of the economic crisis, still many stakeholders posited that a better performance would have been recorded had the regulators been more proactive.  Consequently, the MD advocated a more effective approach to supervision by financial safety net (FSN) players in order to preview systemic risk and protect customers.

A key component of the more rigorous, more effective approach to supervision being canvassed is the adoption of a macro-prudential regulation more so that we now have systemically important financial institutions (SIFIs).

The MD welcomed the adoption of Risk Based Supervision on a consolidated basis but noted that the supervisory framework itself can only succeed in jurisdictions where there is data integrity. Another key success factor of the supervisory framework is capacity building.  The MD also spoke extensively on the initiatives of the Corporation to address emerging challenges arising from the dynamics of the environment in which it operates.  Some of these initiatives, according to the MD included:
a) The formulation of a comprehensive 5-year strategic plan;
b) The replacement of the subsisting financial information and liquidation management system (FILMS) with a new more robust system;
c) Capacity building on IFRS and the secondment of a Resident Technical Advisor in the person of Mr Phillip Morris to the Corporation by the Office of Technical Assistance (OTA) of the United States of America’s Treasury Department.

Other issues, which the MD brought to the attention of participants included:
a) The adoption of integrated deposit insurance system which offers protection to both depositors of deposit-taking financial institutions as well as consumers of other financial products such as insurance and capital markets;
b) The need for Examiners to upgrade their skills in project management given the increasing emphasis on long term loans to finance agriculture and infrastructure; and
c) The increasing worldwide interest in financial inclusion.

In conclusion, the MD reiterated that the Corporation places a lot of premium on capacity building and knowledge sharing and urged the participants to participate actively in the Conference and make constructive suggestions on how to tackle some of the challenges that could militate against the effective discharge of the Corporation’s mandate in the nation’s banking system.

TECHNICAL AND SYNDICATE GROUP SESSIONS

After the keynote Address by the MD, deliberations at the conference were organised into 9 technical sessions during which 10 papers were presented. In addition to the technical sessions, participants were constituted into six syndicate groups that deliberated on 10 conference theme-related issues.

OBSERVATIONS

The following observations were drawn from the deliberations at both the technical and syndicate group sessions:

• The implementation of Risk - Based Examination was hampered by, inadequate capacity of Bank Examiners, poor data integrity, inappropriate supervisory structure, limited understanding of the approach by the operators and the inappropriateness of the single regulator Canadian Model for our jurisdiction with multiple regulators.
• The proper supervision of the operations of PMIs and MFBs in Nigeria was plagued with the internal issues such as; lack of capacity in the supervision of MFBs and PMI’s, lack of IT infrastructure in NDIC to effectively supervise the institutions in the subsector, complexity of implementation of Risk - Based Supervision for the sub sector, evolving an appropriate failure resolution framework for the sub-sector, enforcement of the Code of Corporate Governance, collaboration concerns with CBN in the supervision of the sub-sector, enthronement of effective risk management practices as well as sound corporate governance and the introduction of Differential Premium Assessment methodology for the sub-sector.
• External factors hindering the proper supervision of operations of PMIs and MFBs in Nigeria were identified as the inadequate coverage of the institutions due to their large number (as there were 868 MFBs and 101 PMIs) and the non-deployment of appropriate IT platform by the insured institutions.
• The requirement for the adoption of the International Financial Reporting Standards (IFRS) has been observed to pose some challenges to bank supervisors. The challenges include the fluid nature of the standards, quantum of detailed disclosures required, required changes in financial processes and procedures, review of regulatory policies, possible impact of the standards on the capital of insured institutions, requirement for new IT platforms, level of preparedness of the supervisors, lack of capacity of supervisors and legal issues that may arise.
• Some of the challenges of implementing non-interest banking in Nigeria to the Corporation were identified to include difficulty in segregating the NIDIF from DIF and SIIF, lack of investment outlets for NIDIF, strengthening inter-agency collaboration and bridging the observed gaps in the existing legal framework.
• Given the on-going banking reforms and the need for effective regulation and supervision, it was observed that supervisors still lacked adequate capacity to: effectively adopt RBS, successfully implement non-interest banking, project management, IFRS and Basle II. There were also issues with translating the benefits of the reforms to the real sector.
• Challenges encountered by SIID and BED in handling customer complaints included the difficulty in obtaining information from banks, inadequate enforcement powers by the Corporation, cost of investigations and the large number of complaints.
• The value chain proposal by BED was accepted by AMD, ISD, CRD and Legal.

RECOMMENDATIONS

Based on the above observations, the following recommendations were drawn from the conference:

• There is the need to sustain and reinforce efforts at capacity building for Examiners areas of: risk based supervision, risk management, IFRS, supervisory approach for the emerging bank holding companies, non-interest banking, new prudential guidelines, macro economic issues, operational areas of banking such as treasury (local and international), communication and report writing skills, interview skills, e-FASS, supervision of SIFIs and operations and supervision of MFBs and PMIs.  In that regard and in view of the fact that supervision of deposit-taking financial institutions is a shared responsibility of both the Corporation and the CBN, there is the need to have an agreed approach at addressing the capacity building for Examiners of the two institutions in all the areas listed above.  That requires closer collaboration with the CBN in the supervision function.
• In order to enhance the effectiveness of supervision, there is the need for the provision of a robust IT infrastructure, including Internet and intranet facilities, laptops and effective antivirus systems.
• Given the benefits of hindsight, there is the need for strict enforcement of the code of corporate governance and the enthronement of risk management practises.
• In order to ensure fairness and equity in deposit insurance pricing and further promote sound risk management in all insured institutions, there is the need for the adoption of differential premium assessment methodology for all insured institutions, including MFBs and PMIs.
• Apart from various capacity building initiatives already introduced to ease transitioning to IFRS, there is the need to engage a consultant/expert on IFRS to advise on the supervisory process of the new reporting standards, including aligning the examination process with the requirements of IFRS. In addition, the need to intensify efforts, in a coordinated manner by all the concerned stakeholders, with a view to expediting the process of reviewing relevant laws to facilitate the adoption of IFRS was stressed.
• The Corporation should collaborate more with the Ethics and Professionalism Sub-Committee of the Bankers’ Committee and the National Association of MFBs and PMIs in order to enhance consumer protection.
• In order to instil discipline and deter financial malpractices, Examiners should provide documentary evidence to Legal Department to facilitate prosecution of erring bank officials and directors.
• Information required by AMD should be obtained for e-FASS while BED during its on-site visits should: ensure that credits disbursed by the bank are properly documented, confirm the status of collaterals held and ensure perfection, ensure that professional valuation reports are in the credit files, obtain the schedule of fixed assets of the bank and a register of safe custody items.
• BED should share information on paid-up capital, share premium, reserves, capital adequacy ratio, adjusted capital ratio, capital and reserves (unadjusted) to total assets, assets quality, earnings, liquidity, adequacy of internal controls and risk management practices with ISD. Templates of how the information should be shared should be developed by ISD.
• BED should gather detailed information on: deposits, mandate records, opened and closed accounts with dates on behalf of CRD.
• Research Department should pay attention to emerging issues in the banking industry in the areas of product development, virtual banking, direction of competition, direction of risks in banks, among others with a view to indicating implications of such developments for the Corporation’s supervisory and resolution functions.