Consolidated supervision: The answer to banking rot?
By Adeyemi Adepetun
BANKING is a profession that attracts so much attention. May be because it has to do with money and its custody.
And that is majorly why any issue that has to do with banking or bankers attracts so much attention.
It is on this premise that experts over the weekend in Lagos urgently called for a consolidated supervision strategy to safeguard the nation's banking industry.
Their point is anchored on the plank that an independent monitoring and supervision by various regulatory agencies will definitely leave loose ends to be exploited by some wily and unscrupulous bankers.
To avoid this situation, the need for a closer, stronger collaboration and cooperation amongst various regulatory authorities in the country was called for. In this regard, the collaboration between the Financial Service Regulation Coordinating Committee (FSRCC) and the professional bodies was said would be of immense advantage to the industry.
Speaking on the theme of the event: " Ethical challenges in the financial services industry: The Role of professional bodies", at the 2009, sixth Investiture of Honorary Senior members of the Chartered Institute of Bankers of Nigeria (CIBN), the President and Chairman of Council, Institute of Directors (IoD) Nigeria, Chike Nwanze, said ethical challenges in the financial services sector are multi-dimensional in nature and there is need to adopt a multi disciplinary approach to solving the problem.
Nwanze said one of the reasons why Nigeria's ranking went up in the recently released Transparency Initiative list was because of the recent rot discovered in the banking industry, where various forms of terrible acts were discovered by those who were supposed to be custodian of peoples' money.
He said it is imperative that the financial reporting format of banks and other financial institutions is and are reviewed so as to incorporate all activities undertaken by them.
The IoD president said the breach of the grand rules of ethics is what gives rise to ethical challenges, stressing that these ethical challenges are procedural lapses that result in fraudulent practices in the financial service industry.
To him, in a developing economy, such as Nigeria, there are obviously various bedeviling factors the financial service sector, but, 'a good corporate governance is critical to the proper functioning of the financial system and the economy.'
"The main antidote for director contamination through ethical lapses is a strong, independent thinking board of directors. It is also necessary that directors should avoid compromising conflicts of interests in the discharge of their duties."
The IoD President, who stated that ethical issues are universal and have been with man from creation and are not just arising nor are they peculiar to the financial services or Nigeria only added that we have ethical issues in all professions, such as medicine, politics, law, engineering, public administration and of course financial services amongst others, both in developed and developing economies.
Arguably, he said given the efforts of the government to check ethical challenges through the existing regulatory, supervisory bodies, laws and measures; it has become imperative that professional bodies, as custodians of code of professional conduct for its practitioners, should rise up to partner with government towards enforcing good ethics and corporate governance in all facets of the economy.
"The need to resort to fundamentals of ethics of the various professions has become necessary. Ethics takes precedence over law and sets standards for it.
"For the professional bodies in Nigeria to remain relevant, maintain the dignity of their profession as well as attract recognition from their local and foreign counterparts; the question of ethics has to be re-addressed through capacity building and imposition of appropriate sanctions for professional misconduct of members," said Nwanze.
According to him: "Ethics is a body of knowledge in Philosophy which is concerned with the right conduct and the good life. The American Heritage Dictionary defines ethics as the study of the general nature and of morals and of specific moral choices; moral philosophy and the rules or standards governing the conduct of the members of a profession."
According to Charles Futrel, a frontline American professor of Management, ethics is "the code of moral principles and values that govern the behaviours of a person or group with respect to what is right or wrong." J. M. Elegido of Lagos Business School (LBS), sees ethics as a practical discipline which tries to determine how people should act not only to attain given objectives but behave in a way to ensure that life is flourishing, successful, worth living and fulfilling."
In his remarks, the President of the Lagos Chamber of Commerce and industry (LCCI), Chief Solomon Onafowokan, said the present time is definitely challenging for the banking sector, but that all must work hard to restore the dignity of the sector.
Onafowokan argued that where there are distortions among regulatory bodies, the tendencies are very high for the perpetration of nefarious activities. He stressed that, with a nascent economy such as ours, concerted efforts in terms of regulations would go a long way to put things in proper perspective and avoid things that could hamper the growth of the economy.
Onafowokan said because of the crisis in the sector, there has been tight liquidity conditions; higher interest rate for depositors; dislocation of loans; job insecurity, with investors feeling the pains and unable to get funds to do their business.
Furthermore, the LCCI President said the following lessons must be learnt from the banking crisis; in all situation, there is need to uphold the rules of the profession, as a day of reckoning would surely come; Risk management should be taken seriously in the management of funds, no matter how placed the customer may be; board of directors and managers should strengthen their work by doing it accordingly.
Others are that regulatory functions should be overhauled. He stressed that the crisis in the sector would have been averted if the regulators had done their jobs properly, while calling for prosecution of anybody found culpable in the act from the regulators angle.
The other lessons according to the LCCI boss are; credit portfolio should not be excessively concentrated on a particular front; there is need to strengthen the fundamentals of the micro economy to be able to diversify credit portfolios and that there is need for a moderate interest rate, an interest rate on the high side would continued to create loan defaults.
Earlier in his opening remarks, the Acting President of CIBN, Laoye Jaiyeola, tasked the 154 new honourary members on ethics and professionalism.
Jaiyeola said the challenges of the banking sector today are daunting, but that there is need to remain focus by ensuring that the business of banking is carried out with integrity and professionalism. "We need to renew our entrepreneurial spirit and re-state our commitment to excellence, we must embrace the values of honesty, integrity and self control and trade the culture of immediate gratification for future gains."
It would be recalled that because of the huge losses the banks incurred in the capital market and the oil and gas sector, they are now embracing Internal Capital Adequacy Assessment Process (ICAAP).
They also adopted the ICAAP in an effort to ensure that supervisions are not muddled up and scuffled.
ICAAP is a system whereby a bank ensures that its capital meets the risks it is exposed to.
According to reports, these banks now see the adoption of ICAAP as one way of avoiding the recent embarrassment of over-exposure to margin lending and lending to oil marketers, which gave rise to huge non-performing loans, which has been the cankerworm destroying the prestige of the industry.
Recently, the Chief Risk Officer of UBA Plc, Andre Blaauw, said: "The ICAAP is integrated with the bank's risk management system and uses output of the risk measurement system, noting that capital is a buffer to absorb losses (write down) of assets during times of distress."
He explained that the larger the capital buffer, the more losses that could be absorbed to protect depositors' funds. But stressed that high capital adequacy levels will not necessarily guarantee that depositors' funds were protected.
Buttressing his point, he pointed out that some of the nation's banks that had to be bailed out by the CBN recently had capital levels in excess of 20 per cent of risk assets, which could be considered high by international standards, yet, when they (banks) had to provide for potential losses, some were found to be below the regulatory minimum of 10 per cent.
Rather, he submitted that the riskiness of the assets and the strength of risk management practices would determine whether depositors would be protected or not.
He pointed out that the boards of directors of the various banks were supposed to be the one to champion the cause but were rather faced with other things.
He explained that the CBN having established the framework for a risk-based supervision for banks, had played its part, but now it was left for various banks, knowing the risks they were exposed to in their operations to institute ICAAP to cover those risks.
Banks that take large exposure in high risk assets, such as margin lending, he said, would need much more capital to absorb potential losses than those banks with limited exposure in these assets, adding that the central bank minimum capital rules did not address the potential losses for each specific type of risk in the bank's balance sheet.
The onus, he said, is on the bank to assess its own capital adequacy for specific risks.
However, he explained that the central bank must ensure that there was a thorough review of banks' ICAAP results, methodologies, input and assumptions among other things, adding that, "the central bank must further have a framework to quantify capital add-ons required, should the bank's ICAAP and risk management framework not be sufficiently robust."
It is based on the foregoing that he stated that the new CBN risk-based supervisory framework would provide the platform for ongoing review of banks' ICAAP.
On the role of banks' boards of directors, he stressed that the ultimate responsibility for the ICAAP was with the boards, as ensuring the capital adequacy of a bank could be regarded as the most important function of a bank's board.
On the strength of that assertion, according to him, the board of directors is thus responsible to; set tolerance for risk, ensure that the senior management of the bank establishes a risk management framework in order to assess and appropriately manage the risk exposure of the bank, develop a system to relate the bank's risk exposure and potential losses to the bank's capital and reserve funds; and ensure that the bank has an appropriate capital plan in place, which capital plan, as a minimum, shall duly outline the bank's minimum capital level required to absorb potential losses, capital required for growth, the bank's desired capital level and the capital supply plan.
In his recent assessment of current developments in the nation's economy and the CBN policy action, the Governor of the CBN, Lamido Sanusi had this to say: "Banks would be required to further strengthen their risk management process, while the present supervisory methodology of risk-based and consolidated supervision with special emphasis on macro-prudential regulation and sound stress testing practices would be pursued more vigorously."
He added: "More and rigorous emphasis would be placed on the implementation of the Code of Corporate Governance for banks in Nigeria," advising that, "banks that have not fully complied with the requirements of the code would be encouraged to do so."
Based on that, he warned: "For the avoidance of doubt, enforcement of the code of conduct on the board and top management of banks, especially in the areas of display of professionalism and high ethical standard shall not be compromised."
