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Some finance
experts have commended the Central Bank in releasing its updated
prudential guidelines for banks in Nigeria, released last week.

The new prudential
guidelines were issued about a month after a revised one was posted on
the Central Bank’s website. The experts said there were issues that
needed to be addressed in the revised version, as some of the demands
of the guidelines were contested by the banks as not achievable.

Renaissance
Capital, an investment banking firm, said the move by the bank shows
its attitude towards banks is changing, and it seems to be showing
signs of improvement in listening to Nigerians concerns.

“This is very
important to highlight that the action of the Central Bank demonstrates
just how much the Central Bank’s attitude towards the banks has
changed. The Central Bank is clearly listening now and wants to do
everything to support the banks in their recovery. With the full
support of the CBN, the recovery process will happen, there can surely
be no doubting this,” the firm said.

In the Central
Bank’s statement, it said that the Nigerian banking sector witnessed
dramatic growth post consolidation (2005) and the developments posed a
lot of challenges for the industry and regulation.

“The initial
perceptions that the Nigerian banking system was sound and insulated
from global financial crisis were misplaced. The factors that led to
creation of extremely fragile financial system that was tipped into
crisis by the global financial meltdown.”

It said such
factors include macro-economic instability caused by large and sudden
capital outflows, major failures in corporate governance at banks, lack
of investor and consumer sophistication, inadequate disclosure and
transparency about financial position of banks, critical gaps in
prudential guidelines – current prudential guidelines was issued in
1990 – and uneven supervision and enforcement.

In addressing these
challenges, the Central Bank said it introduced a four pillar reform
programme in 2010 tailored towards enhancing the quality of banks,
establishing financial stability, enabling healthy financial sector
evolution, and ensuring the financial sector contributes to the real
economy.

As part of the
initiative to enhance the quality of the banks, the Central Bank said
it undertook a review of the prudential guidelines. “In this regard,
the revised Prudential Guidelines aim to address various aspects of
banks’ operations, such as risk management, corporate governance, ‘know
your customer’, anti-money laundering/counter financing of terrorism,
and loan loss provisioning. The guidelines also aim to address the
peculiarities of different loan types and financing to different
sectors.”

Watch yourselves

The Central Bank,
however, urged the banks to put into operations stricter policies to
address risks, and not rely solely on its guidelines.

“The issued
guidelines should be regarded as minimum requirements and licensed
banks are encouraged to implement more stringent policies and practices
to enhance mitigation of risks,” said Samuel Oni, the Central Bank’s
director of banking supervision said.

“Banks should pay
special attention to all complex, unusually large transactions, and all
unusual patterns of transactions, which have no apparent economic or
visible lawful purpose. The background and purpose of such transactions
should, as far as possible, be examined, the findings established in
writing, and be available to help the relevant authorities in
inspection and investigation.

“Banks should put
in place effective internal policies, systems and controls to identify,
measure, monitor, and control their credit risk concentrations. The
policies should be approved by the Board of Directors and should cover
the different forms of credit risk concentrations to which a bank may
be exposed,” the CBN said.

The Central Bank
also said that banks should make general loan loss provisions of at
least two percent of loan portfolio not specifically provided for, in
addition to specific provisions, to provide against the unidentified
losses which are known to exist in any portfolio, using a systematic
method which should be consistently followed from period to period.

Ciuci Consulting, a
management consulting firm, said banks should cooperate with the
Central Bank for the successful implementation of the ongoing reforms
in the industry.

“Given the changes
in the agenda of the regulators, the Nigerian banking landscape will
dramatically evolve in the coming months. Evidence of this lies in the
Central Bank’s focus, which essentially is designed to improve the
quality of banks, restore financial stability, enable a healthy
financial sector, and ensure that the financial sector contributes to
the real economy.

“Banks that accept
the future for what it is, as laid out by the regulator, will be
partnering with the Central Bank to work towards achieving these
objectives. It is in the interest of the Central Bank that banks are
supported in their endeavours, that necessary rule and regulations are
designed such that banks can thrive.

“In addition to strategic renewal and operational transformation,
implementation of rules and regulations at the banks will come at a
cost. However, this cost is necessary to come to a more solid,
efficient, effective and lasting banking system,” the firm said in a
report titled ‘What Nigerian Banks should become’.