This supervisory approach focuses on individual group entities. Individual entities are supervised on a solo basis according to the capital requirements of their respective regulators. The Transaction’s Based Type of Supervision of individual entities is complemented by a general qualitative assessment of the group as a whole and, usually, by a quantitative group-wide assessment of the adequacy of capital.

The Basel committee on Banking Supervision, with the endorsement of the Central bank Governors of the Group of ten countries in collaboration with Supervisory authorities in fifteen emerging market countries developed a set of twenty-five basic principles for supervisory system to be effective. The principles are comprehensive and represent the basic elements of an effective supervisory system. The 25 principles are enumerated below:

Principle1- Objectives, Independence, Powers, Transparency and Cooperation
Principle2 – Permissible Activities
Principle3- Licensing Criteria
Principle4- Transfer of Significant Ownership
Principle5- Major Acquisitions
Principle6- Capital Adequacy
Principle 7- Risk Management Process
Principle8 – Credit Risk
Principle9 – Problem Assets, Provisions and Reserves
Principle10- Large Exposure Limits
Principle11- Exposures to Related Parties
Principle12- Country and Transfer Risks
Principle13- Market Risks
Principle14- Liquidity Risks
Principle15- Operational Risks
Principle16- Interest Rate Risk in the Banking Book
Principle17- Internal Control and Audit
Principle18- Abuse of Financial Services
Principle19- Supervisory Approach
Principle20- Supervisory Techniques
Principle21- Supervisory Reporting
Principle22- Accounting and Disclosure
Principle23- Corrective and Remedial Powers of Supervisors
Principle24- Consolidated Supervision
Principle25- Home-Host Relationships

To facilitate off-site supervision, a set of prudential guidelines was introduced by the CBN for licensed banks to ensure a stable, safe and sound banking system. It was meant to serve as a guide to banks to:

(i) ensure a more prudent approach in their credit portfolio classification, provisioning for non-performing facilities, credit portfolio disclosure and interest accrual on non-performing assets;
(ii) ensure uniformity of their approach
(iii) ensure the reliability of published accounting information and operating results.

The ultimate justification for prudential guidelines is the failure of the market, not only to reflect a depositor’s risk exposure but more importantly, to control such exposures. The objectives of prudential regulations are therefore to protect the interest of depositors and the financial system as a whole.

The change in Nigeria’s banking environment, occasioned by the economy’s new philosophy of deregulation and the introduction of a deposit insurance scheme makes the need for such guidelines more imperative. As deregulation makes the industry more competitive, there is therefore the likelihood for depositories to get into more risky and unfamiliar undertakings. Also, the operation of deposit insurance schemes has the potential to reduce market discipline from depositories, if experiences from other countries are anything to go by.

The issue of overstatement of unearned profits by banks which enables them to declare dividends thereby eroding their capital base of a serious concern to the supervisory and regulatory authorities. The acceptance of the recommendations of the Basel Committee on the need for common and effective accounting standard for global banking makes the prudential guidelines imperative. Click CBN released Prudential Guidelines for Deposit Money Banks in Nigeria.

Many banks have adopted inconsistent accounting policies and reporting practices which make the assessment and comparison of their performances very difficult. Some banks have allegedly overstated reported profits, while some banks continue to accrue interest on non-performing credits, declare unearned profit and thereafter appropriate such profits as provisions for bad and doubtful debts.
It is the belief of the monetary authorities that there is need to sustain public confidence in the financial statement of banks. The new uniform accounting standards therefore seek to provide a guide for accounting policies and accounting methods that should be followed by banks in the preparation of their financial statements.

Other regulatory directives to the banks included the following:

(i) Code of Corporate Governance for banks: to ensure ethical practices by banks post consolidation, the CBN issued code of Corporate Governance guidelines for banks. This is with a view to encouraging transparency and accountability of management of banking institutions and the curtailment of risk appetite of banks.
(ii) Circular on the Development of Risk Management Systems in Nigerian Banks.
(iii) Framework for Risk-Based Supervision of Banks in Nigeria.
(iv)Circular on Unethical and Unprofessional Practice of Demarketing Colleagues/Other Banks in the Industry by spreading Rumours among others.

Bank Supervision in the NDIC is the responsibility of three departments, namely, Bank Examination Department (BED), Insurance & Surveillance Department (ISD) and Special Insured Institutions Department (SIID). As the names imply, on-site examination is carried out by BED and SIID while the ISD is charged with the responsibility of maintaining off-site surveillance over all insured banks. Both the On-site and Off-site supervision ensure that the insured institutions remain healthy at all times and/or where there are problems, they would be detected and addressed promptly. In addition, supervision protects the bank depositors, encourages competition among banks and assists in efficient and orderly payment system

Off-site Surveillance

Off-site supervision involves the receipt and analysis of returns from insured banks on a periodic basis to ascertain the banks’ compliance with prudential regulations. Returns, basically, are requirements of the regulatory/supervisory authorities from the banking institutions which are made on determined periodic basis to assist in ensuring that the banks conform to desired operating rules. Two categories of regulatory returns can be identified. These are statutory and non-statutory returns. Statutory returns are the returns that must be made by financial institutions as provided for in various acts governing the banking business. Non-statutory returns on the other hand are those returns which the regulatory/supervisory authorities can require from banks in their day to day operations. These non-statutory returns are usually called for by means of circulars or questionnaires.

Returns required to be prepared and submitted by financial institutions in the system are expected to be made in specified formats in accordance with instructions and in a consistent manner. The specified returns formats can only be changed or varied by the regulatory/supervisory authorities. All items are to be completed with no item left blank. Presently, the periodicity and types of bank returns can be categorized into the following:
– mid-month;
– monthly;
– quarterly; and
– semi-Annually/Annually

Others are irregular, depending on the financial environment as well as the objective of the regulatory/supervisory authorities.

Upon the receipt of the appropriate returns by the Insurance and Surveillance Department (ISD), they are first checked for completeness, accuracy and consistency before they are analysed with the aim of identifying salient problem areas in the banks’ operations and to proposing appropriate remedies to the banks. The analysis which takes the form of spreadsheets and ratios are in turn further subjected to level, trend, peer and industry analysis. The analysis is concluded with a report on the condition and performance of individual banks and the industry. A recurrent feature of these reports is the rating/ranking of individual banks and recommendation for corrective action in areas where weaknesses are observed. Information from off-site surveillance serves as the basis for identifying potential financial distress in the individual banks. On confirmation of distress through on-site examination, supervisory measures are adopted to contain the situation and maintain stability. Those measures may include granting of loans, take-over of the management of the bank or directing the bank to make specific changes in its management. The adoption of any of the measures will depend on the severity of the problems identified. The Corporation also uses such returns to monitor its Insurance Risk Exposure. The Off-site Surveillance performs the following functions:

i) DEPOSIT INSURANCE

The Off-site Surveillance is responsible for the orderly collection and administration of Deposit Insurance Premium. It assesses premium payable by banks using External Auditor’s Certified Statement of Deposits and Call Reports. Onsite deposit verification exercise is also conducted with a view to ascertaining the actual insured deposit payable by each bank. The department developed and implemented the Differential Premium Assessment System (DPAS) where banks are charged based on their perceived level of risks. The DPAS framework incorporates both quantitative and qualitative factors. It is meant:

• To provide incentives for sound risk management in insured institutions.
• To ensure fairness in deposit insurance pricing
• To reduce the overall premium burden on insured institutions.

ii) REPORTING ON FINANCIAL CONDITION OF BANKS

This is usually carried out through the analysis of periodic call reports. Also through the analysis of the call reports, rating and categorization of banks into various risk buckets is done for regulatory purposes. The bank rating had assisted the Corporation and the CBN in designing regulatory interventions for different categories of banks as appropriate.

iii) PROVISION OF EARLY WARNING SIGNALS

Through the Off-site surveillance, signals of problems in banks are detected early and addressed. Where the problems persist, On-site Examinations are conducted to assess potential problem areas earlier identified by Off-site Surveillance, with a view to resolving such problems.

iv) MONITORING OF BANKS COMPLIANCE WITH PRUDENTIAL STANDARDS

The Corporation through its Off-site Surveillance monitors banks to ensure their compliance with the Prudential Standards as well as necessary guidelines such as codes of Corporate Governance and risk management framework in order to ensure their safety and soundness.

v) DEVELOPMENT AND DEPLOYMENT OF TOOL FOR OFF-SITE SURVEILLANCE

The Bank Analysis System (BAS) jointly developed by NDIC and CBN to ensure credible results of bank analysis, had been enhanced to electronic-Financial Analysis and Surveillance System (e-FASS) that had ensured availability of required information from supervised banks on an on-line real time basis. That development had assisted in reducing the problems associated with off-site supervision such as late and inaccurate rendition of returns

To complement the off-site surveillance, on-site examinations are usually undertaken to determine the reliability of the banks’ returns sent to the regulators, determine banks’ adherence to laws and regulations as well as verify the quality of their assets. The type of examination to undertake usually depends on the initial objectives of the exercise. Accordingly, a maiden examination is carried out six months after a bank commences operation to ascertain compliance with the conditions under which it was granted licence. At least once a year, a routine examination is supposed to be carried out on a bank to determine its financial condition. Special target examinations are conducted when the CBN and NDIC have reasons to believe that a bank is carrying on its business in a manner detrimental to the interests of its depositors and other creditors or has insufficient assets to cover its liabilities or contravenes the provisions of the banking and NDIC Acts.
The examination of a bank generally entails an appraisal of the soundness of the institution’s assets; an evaluation of the adequacy of internal operations, policies and management; and analysis of key financial factors such as capital, earnings, liquidity, and interest rate sensitivity. Also, bank examination involves a review to ascertain the correctness or otherwise of banks’ returns on their operating books of account in order to ensure compliance with all banking laws and regulation as well as monetary policy circulars; an overall determination of the bank’s solvency; and ensuring that the banking operations, especially external transactions, are being carried out in accordance with standard accounting practices. The CAMEL (Capital, Assets Quality, Management, Earnings and Liquidity) rating is used as an internal assessment guide to determine how sound a bank is. This is done with a view to highlighting the position of a particular bank in comparison with the rest of its peer group, as well as determine the level of health of the particular bank in respect of capital-to-risk-weighted-assets ratio parameters.
After an examination a copy of the report is sent to the board of the bank which is required to send its response on the observations and recommendations within 14 days from the date of presentation. The bank’s response forms the basis of any post-examination follow-up. The bank is allowed three months from the date of presentation before monitoring visits are conducted to ascertain the degree of compliance/implementation of the directives/recommendations as contained in the examination report. The examination plans of the CBN and NDIC are harmonized to avoid duplication and to achieve optimum coverage of insured banks within the limits of the resources available to the two institutions. The CBN and NDIC sometimes carry out joint examinations if the circumstances of a particular bank to be examined demand this arrangement.

Other financial institutions such as Micro Finance Banks and Primary Mortgage Institutions (PMIs) are supervised by Special Insured Institutions Department of the Corporation. It covers both the on and offsite aspect of their supervision.

Adequate capital is very important for any business, and banking is not an exception. The importance of adequate capital in banking stems from the following functions being performed by capital, viz: capital provides a cushion for absorbing operational losses; it provides a measure of shareholders’ confidence and stake in the bank; it reveals the bank’s ability to finance its capital expenditure and fixed assets; and it provides protection to depositors’ funds, among others. It is therefore necessary to have enough capital so that depositors’ risks could be minimized.
Government, on the advice of the monetary authorities, prescribes the minimum paid-up capital for banks. Recently the CBN consolidated the banks by raising the Shareholders fund to N25 billion.
A bank’s capital adequacy is based on the capital ratio which involves the weighting of a bank’s capital base against the portfolio of risk assets carried. A minimum of 10 percent of the total risk-weighted assets of a bank is required to be maintained as capital funds. Similarly, it is required that not less than 50 percent of a bank’s capital must be Tier 1 or primary capital (that is, paid-up capital plus reserves). In addition, the ratio of adjusted capital to loan assets of the bank should be a maximum of 1:10. In other words, a Naira capital should support not more than N10 of loans.
Using banks’ total risk-weighted assets ratio for example, the supervisory authorities classify banks as adequately capitalized, marginally under-capitalised, significantly under-capitalised, critically under-capitalised or technically insolvent, depending on the value of their risk-weighted asset ratios. While a bank with risk-weighted asset ratio of 10 percent and above is classified as adequately capitalized, a bank with a negative risk-weighted assets ratio is classified as technically insolvent. This classification is an attempt at establishing bench-marks for prompt supervisory intervention.

Considering the fact that it is risky for a bank to concentrate its lending operations in a single sector or borrower, the regulatory authorities usually direct banks to diversify their lending activities. Also, banks are required to report large borrowings to the CBN in the statutory returns.

Banks are required to maintain a minimum liquidity requirement by ensuring that the level of cash flows is matched by expected receipts so that they can meet their obligations as they fall due. Liquidity is achieved through effective fund management. Given the critical role of liquidity in banks’ operations, it is essential for banks to provide for both the expected as well as the unexpected fluctuations in their businesses as reflected in their balance sheets and to provide funds for growth.
A bank suffers from illiquidity when its obligations to others mature faster than the obligations from others. This leads to assets/liabilities mismatch as well as gaps between its receipts and payments. When illiquidity occurs, it portends that the bank can no longer accommodate decreases in deposits or meet its obligations to its depositors. In such situations, the affected bank would not be able to grow and would be forced to acquire additional liabilities under adverse market conditions at excessively high rates. This would worsen the already illiquid position of the affected banks and may result in insolvency.

There is the need for banks to make provisions for non-performing credit facilities. The provisioning should be adequate so as not to mislead the depositors and the general public on the true state of affairs of the bank. These provisions are made on the basis of perceived risk of default on specific credit facilities. The provisioning is also applicable to performing loans because these loans also carry some elements of risk loss, no matter how small.

Good internal control is very essential in order to minimize fraud and other malpractices which can lead to loss of assets. It also helps in ensuring compliance with laid down rules and regulations on banking business by the operators. These reasons explain why bank examiners focus on the internal control systems of banks.

The CBN is responsible for approving the board and changes on the boards of banks in the country. Parameters such as competence, experience and integrity of the person or group of persons involved are considered to ensure that only qualified and responsible people are put on the boards of banks in order to safeguard depositors’ fund and enhance public confidence in the banking system. Good management in banks is a must as the quality of management has been found to be the primary determinant of success or failure of a bank the world over.

The CBN is responsible for approving the board and changes on the boards of banks in the country. Parameters such as competence, experience and integrity of the person or group of persons involved are considered to ensure that only qualified and responsible people are put on the boards of banks in order to safeguard depositors’ fund and enhance public confidence in the banking system. Good management in banks is a must as the quality of management has been found to be the primary determinant of success or failure of a bank the world over.

1. FSDH Merchant Bank LTD
UAC House (5th – 8th Floors),
1/5 Odunlami Street,
P.M.B 12913,
Lagos.
Website: www.fsdhgroup.com
Email: fsdh@fsdhgroup.com
Telephone: 01-2702880-2, 2802111, 2802112, 2770275-9

2. Rand Merchant Bank
12th Floor, Churchgate Tower
Tower 2
Plot PC 31, Churchgate Street, Victoria Island,
Lagos.
Website: www.rmb.co.za
Email: info@rmb.com.ng
Telephone: +234 (0)1 463 7900

Click here to view the full list of Microfinance Banks as at January 9, 2017