The Nigerian financial sector is currently moving to a gradual convergence towards the international BCBS and IFRS frameworks, which are rapidly transforming the approach of banking players towards balance sheet risks.
Historically, Nigeria has been a forerunner in the adoption of international standards on banking supervision. Central Bank of Nigeria (CBN) is considered one of the most proactive regulators in the African region and certainly one of the most experienced in managing domestic crises. The recent economic downturn, triggered by the sharp fall in the oil price, has further underscored the imperatives for emerging countries to embark on banking reforms on a regular basis. This is a lesson CBN has learnt very well and that is going to produce material consequences.
In spite of a population of almost 174 million people and an area of 1 million square metres, credit exposure in Nigeria is much more concentrated in the large corporate segment rather than households, whose borrowing capacity is still limited as a consequence of a low GDP per capita (roughly $6,000 per year). This naturally implies a very close tie between credit and commodity risk, being oil-related companies among the largest borrowers.
Despite the strong push given by the local regulatory body before the crisis, Nigerian banks still adopt standard metrics to model credit, market and liquidity risks, where parameters are fixed according to the simplified framework originally set by Basel I, the first wave of international banking regulation dating back to late 1980s. These simple rules are manifestly unable to grasp the complexity of the banking business in Nigeria, namely the multi-directional interconnectedness between the macro-economic environment, the local industrial sectors and the quality of banks’ portfolios.
In this multiform and evolving scenario, the adoption of new IFRS9 principles, the new financial reporting standard coming into force in 2018, is expected to produce relevant consequences for the P&L of banks and financial institutions.
Prometeia, a global leader in risk management consulting and software solutions, in cooperation with RIMAN, the Risk Management Association of Nigeria, discussed the new regulatory scenarios and industry trends in a conference in Lagos on 25 November. The event gathered more than 120 participants, including chief risk officers, credit risk managers and professionals from validation, compliance and audit departments from all over the country.
The focus was on the main challenges that IFRS9 is setting for loan loss provisioning and the impacts that Basel II and Basel III are having on capital adequacy and liquidity management, the two cornerstones of enterprise risk governance, for Nigerian banks.
“The Nigerian banking system is currently facing a transition phase, from the use of standard models to monitor credit and liquidity risks, to the adoption of advanced solutions, more aligned with the new Basel and IFRS standards,” says High Chief Samuel Oni, Prometeia’s representative for Nigeria and member of the board of UBA, a top Nigerian bank.
While the adoption of Basel II regulations for capital adequacy in Nigeria is somehow voluntary and there is no deadline, IFRS9, in particular, will compel banks in the country to keep pace with the rest of the world. Introducing quantitative metrics and models into banking processes has become an imperative turning point.
The local regulator is trying to make the transition as smooth as possible. “It is an obligatory way of growing,” goes Agnes Tokunbo Martins, director of banking Supervision at the Central Bank of Nigeria. “We are willing to support the Nigerian banking system towards more advanced models and new regulatory standards.”
Tokunbo Martins acknowledges this process will take time, anyway. “We first have to think at new models before being able to develop them internally right away. We need to build first-quality datasets and acquire the necessary expertise. We are pretty aware of that,” she says.
“Leveraging its international experience and successful track record in emerging countries, Prometeia can effectively support the evolution of risk management capabilities of Nigerian banks,” comments Massimo Pedroni, Head of International Business at Prometeia. “Our blend of advisory services, RiskTech solutions and economic research is exactly what is needed by a financial sector in rapid transformation: a timely delivery accompanied by a deep and extensive transfer of knowledge from risk matter experts to a young and dynamic professional community.”
Actually, the future of risk management in Nigeria does not seem so different from what other countries have already experienced in their recent transitions – risk managers will have to work more and more in collaboration with finance and planning departments inside the bank. “Every business decision will have to consider risk management implications, and vice versa,” says Jude Monye, president of RIMAN.
Last but not the least, another interesting aspect in Nigeria concerns liquidity risk compliance, in a country where Islamic finance is all but uncommon. For the moment, international regulation does not seem to impose specific modelling requirements for Sharia-compliant products, whose liquidity profiles differ from classical commercial products, particularly when designed for retail customers.
One more challenge in an already challenging environment.