Weak corporate governance threatens bank examination

Nigeria Deposit Insurance Corporation (NDIC) has identified weak corporate governance and inadequate implementation of risk based supervision (RBS) strategies as major threats to effective bank examination in the country. Director, Bank Examination Department, NDIC, Mr. Adedapo Adeleke said this at the 2014 Bank Examiners’ conference organised by the corporation in  Lagos. In a paper titled, ‘Overview of challenges faced by examiners on on-site examination” he noted that bank examiners faced major challenges which are both systemic and operational. According to him, weak corporate governance forms the bulk of the systemic challenges faced by examiners. He said despite the fact that Nigeria has adopted the International Financial Reporting Standard (IFRS), the people that introduced it and worked out the modalities for its adoption also took into cognizance that without strong corporate governance in the financial system, there is no guarantee that the financials will change in terms of their reliability. He explained that systemic challenges have led to declaration of profits by banks in what appears like profit game in the face of dwindling real sector, including regulatory induced balance sheets and low level of financial inclusion. He said, “The challenges with examination are many. If you look at what has happened, we have had significant growth in the balance sheets of the banks and industry watchers would understand that with the introduction of IFRS, it has all been off- balance sheet engagements. This is because you are supposed to list all those transactions you consider as off-balance sheet engagement and then appraise them for fairness and then put them on your balance sheet. So if you look at the total bank assets between 2011 and 2012, we had 10.15 percent growth in assets but the off-balance sheet engagements growth was 22.91 percent within the same period. “There is also increasing introduction of financial products which are esoteric and which when examiners try to interact with board members of banks, they find that some of these board members do not even understand what these products are all about. And examiners need to have deep knowledge of these instruments in order for them to appraise the risks that surround them. This is because the Risk Based Supervision that we are currently using is only about thinking of how we can isolate the risks inherent in transaction of banks.” He further noted that, “Beyond the issues that have happened, in terms of the crisis in the global system, NDIC and the CBN have tried to introduce some reforms. “We are  also trying to protect ourselves from future occurrence. The period of financial crisis was very unique. Our supervisory resources were overstretched. We also tried to retool the bank examination department, build capacity for our examiners and also get new staff to come into the department.” On operational concerns, he said coupled with inadequate Risk Based Supervision implementation, it has been observed that banks do not give adequate consideration to operational risks. There is also the question of joint examination and the  need to ensure cultural and latitudinal congruence in determining leadership, identity and capacity utilization. He advocated solo examination in order for the corporation to concentrate on its core mandates. He also called for continual management support, adequate sanction powers, political will, expert knowledge, adoption of zero tolerance for wrong reporting and value added supervision in order to address these challenges.