Nigeria
Publication of Financial Sector Assessment Program Documentation––Detailed Assessment of Compliance of the Basel Core Priciples for Effective Banking Supervision

The assessment of the implementation of the Basel Core Principles (BCP) was conducted for effective banking supervision in Nigeria. The assessment team reviewed the legal framework for banking supervision and held extensive discussions with the staff of the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC). It is assessed that Nigeria has recorded significant improvement in its level of compliance with the BCPs, which is attributed to the enhancement of the supervisory capacity of Nigerian banking system supervisors.

Abstract

The assessment of the implementation of the Basel Core Principles (BCP) was conducted for effective banking supervision in Nigeria. The assessment team reviewed the legal framework for banking supervision and held extensive discussions with the staff of the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC). It is assessed that Nigeria has recorded significant improvement in its level of compliance with the BCPs, which is attributed to the enhancement of the supervisory capacity of Nigerian banking system supervisors.

I. Summary, Key Findings and Recommendations

A. Introduction

1. The assessment of the current state of the implementation of the Basel Core Principles for Effective Banking Supervision (BCP) in Nigeria, against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in October 20061, was completed between August 27 and September 19, 2012, as part of a Financial Sector Assessment Program (FSAP) update, undertaken jointly by the Fund (IMF) and the World Bank, and reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment. An assessment of the effectiveness of banking supervision requires a review of the legal framework, both generally and as specifically related to the financial sector, and a detailed examination of the policies and practices of the institutions responsible for banking supervision. In line with the BCP methodology, the assessment focused more on the major commercial banks and their regulation and supervision, given their importance to the system. The previous BCP assessment was conducted in 2002, in terms of the 1998 BCP methodology, which is not directly comparable to this assessment.

B. Information and Methodology Used for Assessment

2. Reaching conclusions required judgment by the assessment team. Banking systems differ from one country to another, as do their domestic circumstances. The BCPs are capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, a proportionate approach is adopted within the BCPs, both in terms of expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the essential criteria must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, risk profile and cross-border operation of the banks being supervised. In other words, the assessment must consider the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another. The assessors take an overarching view of bank regulation and supervision in the country, and the analysis is comprehensive—however, though issues may be identified and recommendations may be proposed, these are not necessarily exhaustive for purposes of achieving full compliance, given the purpose of the BCP assessment, and time and resource constraints.

3. The assessment of compliance with each principle is made on a qualitative basis. A four-part assessment system is used: compliant; largely compliant; materially non-compliant and non-compliant. To achieve a “compliant” assessment with a principle, all essential criteria (ECs) generally must be met without any significant deficiencies. A “largely compliant” assessment is given if only minor shortcomings are observed, and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. Under the BCP methodology, a “materially non-compliant assessment is given whenever there are severe shortcoming, despite the existence of formal rules, regulations and procedures, and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A “non-compliant” assessment is given when no substantive progress toward compliance has been achieved. In interpreting ratings, it is also important to note that for some CPs the assessment takes into account both compliance by banks and compliance of the supervisors. Furthermore, it should provide an overview of the supervisory environment (e.g., the mandate, role and functions of the local regulatory authority, the role of self-regulatory organizations, oversight and regulatory arrangements, legal and institutional framework, transparency, public disclosure, and accountability practices). It should also summarize the capacity, competence, internal controls, integrity of operations, and operational autonomy of the supervisory function.

4. The assessment team2 reviewed the legal framework for banking supervision and held extensive discussions with the staff of the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC), which both perform supervision of banks, though the former is the lead supervisor. The assessors also met with officials of the FMOF, several commercial banks, audit firms and the Chartered Institute of Bankers of Nigeria. The team examined the current practice of on-site and off-site supervision of the CBN and the NDIC.

5. The assessors appreciated the collaboration and hospitality of the CBN. The assessment team had the benefit of working with a comprehensive self-assessment completed by the CBN, enjoyed excellent cooperation with its counterparts, and received the information it required. In addition, the assessment team was given access to all documentation and information systems. The team extends its thanks to the staff of the CBN for their participation in the process and their comprehensive self-assessment.

C. Institutional and Macroeconomic Setting, and Market Structure—Overview

6. Nigeria has a diverse financial sector. The number of financial institutions as at December 31, 2011 included the following: 213 commercial banks (CBs) (six banks, including five domestic banks one pan-African bank, dominate the banking sector) five discount houses (DHs), 876 microfinance banks (MFBs), 107 finance companies (FCs), 101 primary mortgage institutions (PMIs), 31 pension fund administrators (PFAs), five pension fund custodians (PFCs), 1,946 bureaux de change (BDCs), 690 securities brokerage firms, five development finance institutions (DFIs), three private credit bureaux, 61 insurance companies, two reinsurance companies, 50 loss adjusters and the Asset Management Corporation of Nigeria (AMCON).

Structure of the Financial System, 2011

(₦billion, unless specified otherwise)

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Source: CBN.

7. The CBN, as part of its statutory mandate of promoting a sound financial system in Nigeria, licenses and carries out the prudential regulation and supervision of CBs, other financial institutions (OFIs), DHs, Non-interest Banks (NIBs), MFBs, PMIs, FCs, BDCs and AMCON. NDIC, on the other hand, administers the deposit insurance scheme and also collaborates with the CBN in the onsite and offsite supervision of commercial banks, merchant banks, and insured MFBs and PMIs. The supervisory departments of the CBN and NDIC had 847 supervisors as at end December 2011. Each of the CBN and NDIC, respectively, separately maintain off-site supervision function in Abuja and on-site examination function in Lagos. Other sector regulators include the Securities and Exchange Commission (SEC), the National Insurance Commission (NAICOM) and the National Pensions Commission (PENCOM) for the securities, insurance and pensions sector respective

8. The co-ordination of the activities of the Nigerian banking sector supervisory authorities is conducted under the aegis of the CBN/NDIC Executive Committee on Supervision which should ensure that operations of the two supervisory authorities are coordinated to remove overlaps, avoid gaps and ensure adequate information sharing on issues of supervisory concern. The Financial Services Regulation Coordinating Committee (FSRCC) provides the platform for the co-ordination among and information sharing with regulatory authorities, inter alia with reference to financial sector stability, and supervision of financial conglomerates, financial holding companies and bank holding companies.

9. There are also self regulatory organisations that prescribe code of ethics/advocacy for their members. They include, the Chartered Institute of Bankers of Nigeria (CIBN), Institute of Chartered Accountants, Association of National Accountants, Chartered Institute of Stockbrokers, Association of Stock Broking Houses of Nigeria, Association of Issuing Houses of Nigeria, Association of Capital Market Registrars, Association of Corporate Trustees, Financial Market Association of Nigeria, Capital Market Solicitors Association and the Association of Bureau de Change Operators of Nigeria. They have the powers to sanction erring members in line with their code of ethics.

10. The CBN and NDIC derive their supervisory powers principally from the Central Bank of Nigeria Act, 2007 (CBN Act), Nigeria Deposit Insurance Corporation Act, 2006 (NDIC Act), and the Banks and Other Financial Institutions Act, 1991 (BOFI Act). Other legislative instruments that impact on banking supervision include the Failed Banks (Recovery of Debts) and Other Malpractices in Banks Act, 2004, the Companies and Allied Matters Act (CAM Act), 2004, the Economic and Financial Crimes Commission Act 2004 and the Money Laundering Prohibition Act 2011. The CBN and NDIC also issue rules and regulations pursuant to their powers under the above mentioned legislation.

11. The CBN Act was re-enacted in 2007 to bring the law in tune with developments in the financial system. New provisions introduced included: enhancement of the security of tenure of the governor and deputy governors of the bank through the Senate’s confirmation of appointments and removal of the governor, deputy governors and Board members; operational autonomy of the CBN; establishment of a Monetary Policy Committee (MPC) to drive the implementation of the Bank’s monetary policy; expansion of the membership of the FSRCC to include the NDIC; power to regulate Credit Bureaus and the Payment Systems; and enhanced powers for promoting mutual cooperation and exchange of information. At present, due to the dynamism of the industry, the CBN, BOFI and NDIC Acts are undergoing further review.

12. Total banking sector assets stood at ₦18.21 trillion4 as at end–December 2011, which represented 53.6 percent of GDP. Of the 21 banks, four are owned by foreign banking organisations while seventeen are domestically controlled. The domestic banks controlled 86.4 percent of industry assets as at end–December 2011 compared with 13.6 percent controlled by foreign institutions. The three domestic banks that were acquired by the AMCON in 2011 controlled 5.0 percent of industry assets.

13. The banking sector appears relatively sound as at end–December 2011, as shown by soundness indicators, many of which displayed an improving trend. The ratio of regulatory capital to risk weighted assets increased to 17.8 percent at end–December 2011, representing a 13.6 percentage point increase over the ratio of 4.2 percent recorded at the peak of the banking crisis (end–June 2011). Similarly, the ratio of tier 1 capital to risk weighted assets of 18.1 percent at end–December 2011 was 13.6 percentage points higher than the level of 4.5 percent achieved at end–June 2011. Asset quality indicators also showed a substantial improvement. The ratio of nonperforming loans (NPLs) to total loans of 4.9 percent showed a decline of 22.5 percentage points from its peak of 28.8 percent at end–June 2010. The level of liquidity in the system also displayed an increasing trend—the ratio of core liquid assets to total assets increased to 25.7 percent at end–December 2011 from 17.2 percent at end–June 2010. Similarly, the ratio of liquid assets to short-term liabilities increased by 11.8 percentage points to 31.2 percent between June 2010 and end–December 2011.

14. The Financial Reporting Council of Nigeria (FRCoN) is a statutory body responsible for auditing and financial reporting standards to be observed in the preparation of financial statements of public interest companies. The FRCoN developed a roadmap for the adoption of International Financial Reporting Standards (IFRSs) and International Auditing Standards (ISAs) in Nigeria. Currently, the FRCoN and the CBN are collaborating in the adoption of IFRS in the Nigerian banking sector with effect from 2012 (financial statements for financial year ended December 31, 2012 will be the first to be IFRS compliant).

15. The banking sector has undergone significant change and reform. After the bank recapitalizations following the 2005–06 banking sector consolidation, Nigeria experienced rapid credit expansion as banks broadened their activities and moved to the untapped retail sector, to borrowers involved in equity market speculation (margin lending collateralized by shares) and acquiring non bank subsidiaries. The 2005–06 banking sector consolidation generated capacity for several Nigerian banks to expand internationally, establishing subsidiaries particularly in Africa.

16. The Nigerian economy has experienced a number of domestic and external shocks in recent years, which impacted the banking sector. The oil price drop and currency devaluation accompanying the 2008 global financial crisis stressed those banks with heavy concentration in the oil and gas sector, while the NSE downturn adversely affected banks exposed to margin lending. In 2008, the Nigerian stock market lost about two-thirds of its value, following a sharp decline in world oil prices and currency devaluation. Banks with heavy concentration in the oil and gas sector were stressed, while the stock exchange downturn adversely affected banks exposures to margin lending. By 2009, the banking sector was in crisis.

17. But large buffers, built before the global crisis, and low debt, helped mitigate the impact of the shocks by providing room for expansionary fiscal policy. Fortunately, the economy continued to grow rapidly at over 7 percent during each year since 2009. Monetary policy was tightened in 2011 after an increase in inflation and a decline in international reserves in 2010. Although the macroeconomic outlook remains positive, substantial risks remain, in view of the fact that oil constitute more than 90 percent of exports and oil receipts generate 75 percent of government revenue, and the recent spate of social unrest in the north of the country continues.

18. A banking crisis, which involved more than 40 percent of the banking sector assets, came to a head in the second half of 2009. The authorities identified the following as the main contributing factors, namely:

  • Macro-economic instability caused by large and sudden capital inflows.

  • Major failures in corporate governance at banks.

  • Lack of investor and consumer sophistication.

  • Inadequate disclosure and transparency about the financial position of banks.

  • Critical gaps in regulatory framework and regulations.

  • Uneven supervision and enforcement.

  • Unstructured governance and management processes at the CBN/weaknesses within the CBN.

  • Weaknesses in the business environment.

19. A comprehensive set of measures were taken by the authorities to counteract the 2009 banking crisis and, as a result, Nigeria avoided a major economic meltdown, and the economy was stabilized. The measures adopted in response to the 2009 banking crisis included the following:

  • Special examinations were commissioned in respect of all banks and executed by the CBN and NDIC.

  • Ten banks were found to be in a “grave situation” and were intervened.

  • The CBN removed eight banks’ senior management and replaced them with CBN appointees.

  • The CBN provided liquidity support in the amount of ₦620 billion (US$4.1 billion) in the form of unsecured, subordinated debt. (In essence, this constituted solvency support as well.)

  • A blanket guarantee of interbank and foreign credit lines of banks was introduced, and extended (for six–monthly periods) until end–2011.

  • The CBN made a public commitment to protect all depositors and foreign creditors against loss and not to permit any bank to fail.

  • At the peak of the crisis, the CBN created an expanded discount window which admitted non-federal government securities as eligible securities, while extending the tenure of the facilities to 360 days.

  • The FMoF and the CBN established AMCON to support troubled bank resolution, and the banking sector more broadly. AMCON purchased banks’ NPLs in exchange for AMCON three–year zero coupon bonds (which are guaranteed by the Federal Government.) AMCON facilitated mergers and acquisitions of the intervened banks and the creation of bridge banks, which were re-capitalized by AMCON.

  • NDIC coverage of insured deposits was recently increased to ₦500,000 for CBs and ₦200,000 for insured community banks.

20. Important reforms, broadly in line with BCBS pronouncements, were instituted. These reforms included the following:

  • The universal banking model was abolished in favour of a “back-to-basics” banking model, and a new bank license regime was introduced.

  • Risk-based supervision was embedded.

  • The Corporate Governance Code was implemented.

  • A number of regulatory prescriptions were issued covering a range of issues, inter alia by way of circular, code, guideline, prudential guideline, framework and regulation, including capital adequacy, risk and risk management and risk-based supervision, credit risk management, large exposures and related parties, margin lending, cross-border supervision, consolidated supervision (only in draft form), fitness and propriety, internal control, disclosure and AML/CFT.

  • Adoption of IFRS in 2012.

21. The financial sector is large, remains dominated by the banking sector, and has significant international linkages. The Nigerian banking system has undergone significant change in the recent period, and this process is still ongoing. Although the sector remains dominated by domestic institutions, a few international banks have a presence in Nigeria, with a major regional bank headquartered outside Nigeria and active in 32 countries in Africa, having its largest subsidiary in Nigeria. Overall the number of banks has fallen from 89 in 2005 to 21 in 2012. Six of the banks, of which one is the abovementioned subsidiary, dominate the banking system, with a market share of around 60 percent of total banking sector assets. Three small banks are distressed, the smallest of which is insolvent and the other to being former bridge banks with AMCON being the main owner.

22. The macroeconomic outlook remains positive, but substantial risks remain. Like the rest of the Nigerian economy, the financial sector is exposed to the effects of volatility in international markets for commodities and capital. Fortunately, large buffers built before the global crisis, and low debt, helped mitigate the impact of the shocks, by providing room for expansionary fiscal policy.

23. The Nigerian economy emerged from the banking crisis, and has the potential to enjoy an extended period of strong economic growth. This could be facilitated by a comprehensive strategy to conclude and exit from the crisis management period; to enhance protection against existing and emerging vulnerabilities; and foster financial deepening that can underpin sustainable growth on an enduring path for the periods ahead.

24. Although systemic risk has declined since the peak of the recent crisis, the financial system is still exposed to risks from both global and domestic factors. Though oil prices recovered, a further deterioration in the global environment could result in a sharp drop in oil prices. Also, oil exports could be disrupted. This could impact negatively the current account and fiscal positions, thereby dampening the build up of international reserves and/or increasing public debt, in the absence of fiscal consolidation. The security situation is concerning, arising from terrorist activity in the north of the country.

25. The bank regulators and supervisors have an extensive reform agenda. In addition to IFRS, the authorities intend to implement Basel II and Basel III. New instruments, such as macroprudential, and new techniques, such as stress testing and scenario analysis and analysing financial stability are also important.

D. Preconditions for Effective Banking Supervision

26. Macroeconomic policies have the potential to pose risk to financial stability. Sound macroeconomic policies are a precondition to and a foundation of a stable financial system. Failure to implement politically difficult fiscal adjustment measures or curb overly ambitious infrastructure spending could pose a risk to the financial system. Fiscal dominance (arising from the imperative to keep monetary policy tight, in order to counteract the deleterious effects of weak fiscal discipline, consequential pressures or the currency, all of which fuels inflation, notwithstanding private credit growth sputtering) is a major contributor to an unfavorable trade-off between inflation and growth. This could also put an undue burden on monetary policy to contain inflation and also fight pressures on the currency and international reserves. At times the markets appear confused, perceiving that the CBN is pursuing multiple objectives. Following the crisis, significant efforts are being made to harmonize the structure for the implementation of monetary policy and prudential regulation. Accordingly, a framework has been developed in Nigeria to align financial system stability goals with broad macroeconomic policy. The key areas that are being addressed progressively by The authorities progressively are addressing key areas, including: policy harmonization and the resolution of the conflict of objectives between the Economic Policy Directorate and the Financial System Stability Directorate of the CBN, the development of a macro prudential toolkit, enhancing the quality of data and consideration of fiscal and monetary policy instruments that have the potential to impact financial stability.

27. The key elements of required public infrastructure are present, though the qualitative dimensions show weaknesses and vulnerabilities. These key elements include a system of business laws, including corporate, bankruptcy, contract, consumer protection and private property laws; comprehensive and well-defined accounting principles and rules that command wide international acceptance, in the form of IFRS, which banks are required to adopted with effect from 2012; a system of independent audits for listed companies, as well as for banks, independent assurance for users of financial statements that the accounts provide a true and fair view of the financial position of the company; an independent judiciary and self-regulated accounting, auditing and legal professions; supervision of other financial markets and, where appropriate, their participants; a payment and clearing system for the settlement of financial transactions. Concerns regarding the qualitative dimensions of public infrastructure arise, inter alia, from weaknesses in policy making and legislative processes, legal uncertainty on key issues, inability to resolve banks promptly, inability to achieve prompt collection of outstanding debts through legal avenues, inability to execute promptly on collateral, unpredictability of legal outcomes, weak ability to prosecute financial crimes, seeming absence of accountability of external auditors, weaknesses in supervision of other financial institutions and markets, and weaknesses in the payments and clearing system (though the Payment System Vision 2020 aims at significant improvements.)

28. Gaps and weaknesses in market discipline was a material contributor to the 2009 banking crisis. Effective market discipline depends substantially on adequate flows of information to market participants, to enable informed decisions, appropriate financial incentives to reward well-managed institutions, and arrangements that ensure investors are not insulated from the consequences of their decisions. In 2010, the CBN issued a circular on minimum disclosure in the financial statements of banks. The implementation of international standards like IFRS and the relevant part/s of Basel II/III should enhance transparency. Since 2010, the CBN has published a Financial Stability Report on a bi-annual basis, to focus stakeholders’ attention on those factors that predispose the financial system to shock as well as the policies to address these concerns. More attention has focused on the data quality of regulatory information submissions by banks. Since 2008, the CBN has not issued an annual bank supervision report. With effect from 2011, a semi-annual Financial Stability Report (FSR), which strives to cover also what previously was covered by the annual bank supervision report, has been issued.

29. The Nigerian framework for crisis management and the financial sector safety net was effective in containing (the contagion from) the crisis, though much needs to be done to benefit from the lessons learnt. The CBN took decisive measures to avert a potential systemic crisis by intervening in troubled banks, injecting liquidity into these banks and providing broad guarantees. These quick measures stabilized the banking system and allowed the authorities time to design a strategy to resolve the intervened banks. The resolution strategy ultimately employed consisted of many elements, including: replacing management in a number of banks; recapitalization subject to shareholders’ approval; setting up an asset management company, AMCON, to purchase NPLs of banks in exchange for tradable three-year zero coupon bonds issued by AMCON and guaranteed by the Federal Government; entering into M&A arrangements; and setting up bridge banks that were capitalized by AMCON. All these measures helped the authorities stabilize a banking system that was on the verge of a systemic crisis. The NDIC constitutes an important component of the safety net. Despite the success, the CBN should more fully develop its crisis management and safety net arrangements. Nigeria has taken important steps to facilitate the identification and adoption of a framework for macroprudential policies, with the FSRCC coordinating the supervision of financial institutions and a dedicated department, the Financial Policy and Regulation Department (FPRD), in the CBN having been set up to perform the function of macroprudential supervision. It is necessary to improve bank resolution, inter alia, by specifying preference for depositors and creating a non-judicial/administrative special resolution regime.

E. Main Findings of the BCP Assessment

30. Nigeria has recorded significant improvement in its level of compliance with the BCPs since the last independent assessment by the IMF and the World Bank in 2002. The 2002 independent assessment concluded that Nigeria was compliant with three, largely compliant with eleven, materially non-compliant with nine and non-compliant with two core principles. Considered against the essential criteria, Nigeria is now compliant with one, largely compliant with seventeen and materially non-compliant with seven CPs.

31. The improvement in the assessment ratings is attributed to the enhancements of the supervisory capacity of Nigerian banking system supervisors through: (i) the enactment of new laws and amendment of laws; (ii) issuance of various regulations, circulars and guidelines to address the weaknesses observed during the 2002 assessment; and (iii) reform initiatives embarked upon in the aftermath of the 2009 banking crisis.

Objectives, independence, powers, transparency and co-operation (CP1)

32. A principal objective of the CBN is to promote financial stability. The CBN is charged with the primary responsibility of bank supervision and has clear related objectives. The NDIC cooperates with the CBN in discharging the bank supervision responsibility. Though bank supervision is not explicitly clearly stated as an objective of the NDIC, it is implicit. An effective and efficient legislative process through the National Assembly is a necessary precondition to enable congruence and to keep pace with the internationally generally accepted legal and regulatory framework for banking, which is not being achieved currently. It is important to maintain the currency of the legal and regulatory framework, by way of prompt responses (to international policy developments and local needs), through sound policy development and a responsible legislative and regulatory process. (BCP1(1))

33. The CBN possesses operational independence, transparent processes, sound governance and adequate resources, and is accountable for the discharge of its duties. The position of the NDIC in relation to independence and to whom it is accountable is less clear. (BCP1(2))

34. A legal framework for banking supervision, including provisions relating to authorization of banking establishments and their ongoing supervision is in place. A thorough review and comprehensive updating of the legal and regulatory framework is necessary. (BCP1(3))

35. The legal framework for banking supervision empowers the supervisor to address compliance with laws. The law and regulations appear, implicitly, though not necessarily explicitly, to permit the supervisor to apply qualitative judgment in safeguarding the safety and soundness of the banks within its jurisdiction—this should be made explicit. (BCP1(4))

36. The legal framework for banking supervision makes provision for legal protection for supervisors—however, it does not make provision for their concomitant legal costs. (BCP1(5))

37. Arrangements for sharing information between supervisors and protecting the confidentiality of such information are in place, though the coordination between the CBN and the NDIC may require attention. (BCP1(6))

Licensing and structure (CPs 2-5)

38. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined, and the use of the word “bank” in names is controlled as far as possible. (BCP2)

39. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, consists of an assessment of the ownership structure and governance of the bank and its wider group, including the fitness and propriety of board members and senior management, its strategic and operating plan, internal controls and risk management, and its projected financial condition, including its capital base. Where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor is obtained. Important elements of licensing, including important criteria, and other requirements and process, are implicit and informal—these should be explicitly specified and formalized. The list of prescribed criteria contained in the legal and regulatory framework is incomplete, and the criteria should be focused on outcomes, as opposed to inputs. In addition, the CBN should be required to create a formal audit trail, by the CBN formally and in writing assessing a new bank license application against each and every one of the prescribed criteria. (BCP3)

40. The supervisor is empowered to review and, if deemed appropriate, to reject any proposals to transfer significant ownership or controlling interest, whether held directly or indirectly in a bank, to other parties. The supervisor’s flawed powers to review and the supervisor’s weak and inadequate powers to enforce such a rejection should be remedied and bolstered. Furthermore, it is necessary to focus on the beneficial shareholders, as opposed to focusing merely on the registered/nominee shareholders.(BCP4)

41. The supervisor has the power to review major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and confirming that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. (BCP5)

Prudential regulation and requirements (CPs 6-18)

42. The CBN has set prudent and appropriate minimum capital adequacy requirements for banks (though this applies in respect of a bank’s credit risk exposures only) and has defined the components of capital, (largely) bearing in mind its ability to absorb losses. These requirements, which are applicable to all banks (both local and foreign, and both internationally active and non-internationally active) are mostly in line with those established in the applicable Basel requirement, apart from some important shortcomings, which need to be rectified. The authorities should develop comprehensive and detailed principles, standards, guidance, prescriptions, statutory returns and supervisory work programs, inter alia based on and aligned with relevant pronouncements of the BCBS, for all key areas, including risk areas, which would enhance effectiveness, efficiency, consistency and transparency of and quality control over supervision, thereby enabling more effective challenging of banks by the supervisor. The authorities should perform overall micro/bottom up and macro/top-down stress testing and simulation exercises in relation to all key areas (including risk areas), as a tool to provide forward-looking assessments of a bank’s capacity (in relation to capital, liquidity and earnings) to withstand extreme but plausible macro-financial shocks. Banks should hold capital also against risk exposures other than credit risk, and hold adequate capital where the Basel I capital requirements are not sufficiently prudent. (BCP6)

43. The CBN’s Guideline for the Development of Risk Management Frameworks for Individual Risk Elements generally governs a bank’s risk taking and risk exposures. However, it is overarching and generic, and not supplemented with specific and detailed guidance and prescriptions, implying that there are important gaps and shortcomings in the legal, regulatory and supervisory framework relating, inter alia, to a bank’s risk management. The CBN applies a risk-based approach to supervision, as provided for in the CBN’s RBS Framework, including to off-site and on-site supervision. Accordingly, the CBN assesses a bank’s risk management (which should be under the oversight of the board of directors and senior management) by gaining an understanding of the risk management policies, strategies, processes and risk appetite/aversion, thereupon assessing the identification, evaluation, monitoring and controlling or mitigating of all material risks, and then assessing the bank’s overall capital adequacy in relation to the bank’s risk profile. The CBN also assesses whether these processes are commensurate with the size and complexity of the institution. In line with the CBN’s HRD plan for specialist career streams, the CBN should engage specialists to support the regulatory and supervisory functions in addressing specialized and complex issues in a range of areas, including corporate governance, capital and capital management, risk management, accounting and auditing, IT and project management, to enable the authorities more effectively to challenge the banks. (BCP7)

44. The legal and regulatory framework requires that a bank has adequate credit risk management policies, strategies and processes, (including to identify, measure, monitor, and control credit risk, including counterparty risk) commensurate with its credit risk profile. This includes addressing the granting of loans and making of investments, the evaluation of the quality of such loans and investments, and the ongoing administration and management of the loan and investment portfolios. (BCP8)

45. In general, the law and regulation provides explicit requirements on how a bank should identify and manage problematic loans and adequately provision. In addition, the RBS approach entails an appropriate review of banks’ significant risky asset portfolios. However, with the adoption of IFRS by banks with effect from 2012, the provisioning regime prescribed in the Prudential Guidelines should be updated concomitantly. (BCP9)

46. Though supervisors ensure that banks have policies and processes that enable management to identify and manage concentrations within the portfolio, and supervisors set prudential limits to restrict bank exposures to single counterparties or groups of connected counterparties, there are important gaps, shortcomings and vulnerabilities which require attention. (BCP10)

47. Abuses, arising from related party transactions and exposures, and conflicts of interest, were identified as major causes of the 2009 banking crisis. Hopefully the CBN’s action in removing executive management in eight banks and sanctioning directors constituted a reality check, instilled necessary discipline and will serve as a deterrent. In general, the law and regulations on related parties are sparse and need to be reviewed and enhanced substantially, to prevent related party abuse again posing a significant threat to financial stability. (BCP11)

48. The CBN has provided over-arching and generic guidance for banks in managing their risks, including country and transfer risk. Further, the RBS Framework provides CBN supervisors with guidance on how to assess significant activities of banks including cross-border operations. With the increasing internationalization of the banking system, country and transfer risk is an emerging risk requiring increasing attention. (BCP12)

49. The regulatory and supervisory framework for and supervisory approach to market risk should be improved, inter alia, by adoption of the 1996 Market Risk Amendment, and further strengthening regulatory policies. (BCP13)

50. The CBN supervisors (on an ongoing basis) monitor a bank’s (day-to-day) liquidity risk management by assessing a bank’s compliance with the (somewhat dated) Guidelines for the Development of Liquidity Management Policies (2003), while being cognizant of a bank’s risk profile. In summary, the guidelines require banks to have a proper strategy for managing liquidity risk, with appropriate internal policies and procedures as well as adequate liquidity contingency plans. (BCP14)

51. The supervisor is satisfied that a bank has in place risk management policies and processes to identify, assess, monitor and control/mitigate operational risk, which policies are commensurate with the size and complexity of the bank. Detailed guidance on operational risk management is lacking. (BCP15)

52. IRRBB is not separately and specifically identified in the legal, regulatory or supervisory frameworks as a separate risk. The IRRBB exposures of banks appear modest, in view of variable interest rates (mostly) applying to both assets and liabilities. Nonetheless, the interest rate profile of the system may change in the future, and it is imperative that the CBN be suitably prepared. (BCP16).

53. Supervisors are satisfied that banks have in place internal controls that are adequate for the size and complexity of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding the bank’s assets; and appropriate independent internal audit and compliance functions to test adherence to these controls as well as applicable laws and regulations. Major failures in corporate governance at banks have been identified as one of the main factors which contributed to the 2009 banking crisis. Undoubtedly, there were major gaps and breakdowns of internal controls. Though important regulatory reforms have been undertaken and the supervisory approach and processes were significantly enhanced, at this stage it is too early to come to a conclusive conclusion on whether supervisory effectiveness is at an acceptable and satisfactory level, though the signs are positive. However, fundamental concerns include whether the stakeholders (including the internal auditor, the external auditor and the supervisor) are effectively challenging one another, and whether the supervisors are willing to act proactively, not only in respect of compliance issues, such as relating to breaches of prudential requirements but also in respect of corporate governance, risk management and internal control weaknesses, breaches and excesses. Training of all stakeholders on their duties and responsibilities in relation to all key aspects of banking, and the consequences of breaches and failures of such duties and responsibilities, is necessary. (BCP17).

54. Though relevant legislation (The Money Laundering Prohibition Act and the Anti-Terrorism Act), KYC guidelines and other regulations are in place to control and check the abuse of financial services, there remain fundamental gaps and weaknesses. The CBN supervisors are equipped with an appropriate supervisory programme and have applied this programme to assess banks’ compliance with the relevant law and regulations as well as to determine whether a bank has adequate policies and processes in place which would prevent the bank from being used intentionally and unintentionally for criminal activities. In the light of the 2011 FATF conclusion on Nigeria, the governance breakdowns which contributed to the 2009 banking crisis and the 2011 report by the OCC on a particular bank’s CML/CFT failings, there remain grave concerns about the quality of implementation and adherence in relation to AML/CFT. As some of the changes to the legal and regulatory framework were implemented only very recently, it is not as yet appropriate to comment on the quality of implementation thereof. (BCP18).

Methods of ongoing banking supervision (CPs 19-21)

55. The RBS Framework provides an adequate supervisory process, essentially based on the risk profiling of banks, enabling the CBN supervisors to have appropriate understanding of the safety and soundness of banks in the system, and has a forward looking focus. The framework enables a better evaluation of risks, through the separate assessment of inherent risks and risk management processes, which also requires the CBN supervisors to understand the effect of the external environment, firstly at the level of the banking system and, secondly at the level of the whole economy. (BCP19)

56. There is a proper mix of on-site and off-site supervisors to evaluate the condition of banks and their inherent risks. However, efforts should be in place to increase the quality of the assessment by having an independent quality assurance process in relation to the ratings of banks. More engagement is recommended with the banks’ board members, particularly the independent and non-executive members, outside the onsite examination period. (BCP20)

57. Supervisors are empowered to obtain information from banks, but not from entities related to banks, and have a means of collecting, reviewing and analyzing prudential reports and statistical returns from banks on a solo, but not (as yet) on a consolidated basis, and a means of independent verification of these reports, through either on-site examinations or use of external experts. (To date, the authorities have not as yet implemented consolidated supervision.) (BCP21)

Accounting and disclosure (CP22)

58. Generally, the CBN seemingly ensures that each bank maintains adequate records drawn up in accordance with accounting policies and practices that are widely accepted internationally, and publishes, on a regular basis, information that fairly reflects its financial condition and profitability. However, the 2009 banking crisis came about partly as a result of material failures in this area, and there is a lingering concern that not enough has been done, perhaps, to improve the quality of corporate governance insofar as it relates to and involves the internal audit/auditor or the external audit/auditor, or the quality of the application of accounting, auditing and disclosure. (BCP22).

Corrective and remedial powers of supervisors (CP23)

59. Supervisors have at their disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability, where appropriate, to revoke the banking license or to recommend its revocation. These powers were promptly deployed during the 2009 banking crisis. However, there is a concern that the authorities may lack the resolve to fully apply the Intervention Framework and finally resolve a bank which is hopelessly insolvent. The authorities should apply zero tolerance and act promptly, resolutely and forcefully in relation to actions or inactions which put financial stability at risk, as well as in relation to corporate governance transgressions, non-compliance with statutory prescriptions and submission/disclosure of substandard quality of data/information.(BCP23)

Consolidated and cross-border banking supervision (CPs 24-25)

60. The legal and regulatory framework for consolidated supervision is not yet in place. Notwithstanding, the CBN performs some elements of consolidated supervision in relation to the interests of a bank. (The draft Framework for the Consolidated Supervision of Financial Institutions in Nigeria, which contains a formal process of evaluating the overall structure of the bank and related parties as well as identifying the risks arising from non-banking activities, should provide largely the necessary regulatory platform for an effective supervisory function on consolidated basis, though a legal foundation is also required. The FSRCC provides a vehicle for coordination among the relevant domestic supervisors and ensures that ongoing supervisory efforts are closely integrated for the local components of a banking group.) (BCP24)

61. The CBN has in place a Framework for the Supervision of Cross-Border Institutions and this document forms the basis of its cross-border supervisory activities. In addition, CBN has a unit within BSD, dedicated to the supervision of cross-border institutions. There are MoUs in place with other foreign regulatory agencies in jurisdictions where Nigerian banks have presence. In the case of other jurisdictions which have not signed formal information sharing arrangements with the CBN, there are informal arrangements for information sharing, for instance, in the case of the OCC and U.K. FSA. In certain circumstances, the information sharing via informal arrangements is more active than those via the formal arrangements. Foreign banks operating in Nigeria are subjected to the same regulatory and supervisory regimes as applied to domestic banks. (BCP25)

Table 1.

Nigeria: Summary Compliance with the Basel Core Principles—Detailed Assessments

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Table 2.

Nigeria: Recommended Action Plan to Improve Compliance with the Basel Core Principles

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F. Authorities’ Response to Assessment

62. The supervisory authorities (Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation) express their appreciation for the comprehensive review of the regulatory and supervisory framework for the Nigerian banking system, carried out by the IMF/World Bank assessment team. The assessment has largely achieved its objective of benchmarking Nigeria’s supervisory system against the Basel Core Principles and has also helped in focusing attention on areas where there are gaps and weaknesses that would require more work to further strengthen banking supervision and the overall stability of the Nigerian banking system.

63. Coming at the time it did, it is not unexpected that the outcome of the assessment exercise would be influenced largely by (the run-up to) the banking crisis and the experiences in 2008–2009. The crisis severely tested the resilience of the Nigerian banking system and the capabilities of the supervisors—in response to the crisis, the authorities took unprecedented and extraordinary measures to ameliorate the impact, and also launched reforms which entailed the overhaul of regulations as well as practices underlying supervision. While certain aspects of the reforms had been concluded prior to the commencement of the assessment exercise, other key aspects were either being concluded or were ongoing at the time of the assessment, e.g., Basel II/III and IFRS. The final assessments were not fully reflective of this aspect of the reforms. The continuing and effective implementation of the reforms should result in significant improvement in the level of compliance in the short to medium term. The authorities will not relent on their resolve to ensure that the regulations keep pace with developments in the banking system.

64. The authorities appreciate the recommendations arising from the assessment, including the need to adopt the relevant BCBS pronouncements and ensure their full alignment with local regulations; develop and maintain a well-structured compendium of supervisory regulations; enhance supervisory capacity and capabilities in relation to consolidated supervision; and have in place a more responsive legislative review process, among others. The prospect of significant consequential improvements to the legal, regulatory and supervisory frameworks and processes stiffen the authorities’ resolve at ensuring full and effective implementation of the recommendations. Some of the recommendations, especially those that relate to improvement to the legal framework, will require the involvement and cooperation of stakeholders other than the supervisory authorities.

65. Finally, the authorities commend the efforts of the IMF and World Bank in promoting stability and effective supervision of the global financial system and look forward to continued dialogue with the IMF and World Bank, beyond the FSAP exercise.

Table 3.

Nigeria: Detailed Self-Assessment of Compliance with the Basel Core Principles

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