NDIC Cautions Banks On Cross Border Expansion…Says
 Banks’ Risk Management Framework Inadequate
By Babajide Komolafe
 7th NOV 2006

Nigeria Deposit Insurance   Corporation (NDIC) has cautioned banks against concentrating their cross border expansion programme in one region of the continent.

Speaking at the Annual Bank Examiners Conference of the corporation at Abeokuta last week, Managing Director/Chief Executive of the corporation, Mr. Ganiyu  Ogunleye frowned at the cross boarder expansion activities of some banks, which is focused on the West African sub-region. He particularly queried the rationale  behind the setting up of subsidiaries in some west African countries, which he noted had little or no business prospects to support such initiative adding that banks  should not engage in cross boarder activities just for the sake of it but should be motivated by existence of business prospects.

“They can go elsewhere, the issue is that they need to go and concentrate in one place,  if they are looking for opportunities, I am sure they are just not all in one  place, not in one country. So if they want to expand, they should look at other countries where there are other opportunities. Assuming all the 25 banks concentrate in  one small country in West Africa, at the end of the day, that country will be over banked and they will not be able to make their capital outlay, not to talk of making  profit.”

Speaking further on the theme of the conference, “Implementing Risk-Based Supervision of Banks in Nigeria,” Ogunleye lamented the inadequacy of banks’ risk  management framework. He said: “There is no evidence that the need for effective risk management has been fully appreciated by our banks. Some banks have no  risk management framework while others focus only on credit risk to the neglect of other banking risks such as operational, reputation, liquidity and market risks.
“The board and management of banks to appreciate that by and large, bank management is risk management. The long term viability of any banking institution  depends on its ability to manage the array of risks inherent in its operations.

“The  recent consolidation in the banking system underscores the need for effective risk management in banks. Without any doubt, the size speed and complexity of  financial transactions are bound to increase. For a bank to efficiently and effectively operate in the new environment, it must deploy an effective risk-management  system with the following key elements: Active board and senior management oversight. Adequate risk management policies, procedures and exposure limits.

Effective risk identification, measurement, monitoring and control framework. Comprehensive management information system and efficient internal controls,” he said. Ogunleye disclosed that the regulatory authorities had developed a framework for Risk Based Supervision (RBS) and are currently migrating to its implementation  adding that full implementation would commence next year. RBS, he explained, focused on the adequacy of risk management systems in banks and potential systemic  risk to the banking system. It focuses regulatory efforts, and supervisory activities and resources on banks’ major risks exposures. It entails risk-profiling of banks and  developing customized supervisory program for each bank.

“At the heart of RBS is an assessment of how well institutions manage risk. The Examiner identifies the significant risks facing a bank and thereafter engaging in  assessing and testing the adequacy of risk management systems established by the bank to address them. In other words, RBS require an understanding of the nature  of risks, together with the management’s ability to deal with them. Thus, because RBS requires a greater understanding of the banks being supervised and the  environment in which they operate, it attaches a great deal of time and attention to the examination and planning the process. In addition, the process for conducting  risk assessment is a critical component of RBS," he explained.

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