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Nigeria: Increased costs as banks align with Basel II

Banji Adenusi
In December 2013, the Central Bank of Nigeria released the guidelines on the implementation of Basel II/III recommendations of the Basel Committee on Banking Supervision, which implementation took effect from January 2014. While the timeframe for implementation of the minimum capital adequacy computation under Basel II rules will commence in June 2014, the banks have already begun a parallel run of the Basel II capital adequacy computation along with existing Basel I requirements. In specifying the approaches for quantifying the risk-weighted assets for the purpose of determining regulatory capital, the banks are required to adopt the standardised approach in relation to market and credit risks, with the basic indicator approach adopted for operational risk.

Rather than adopt a sweeping endorsement of the Basel II/III accords however, the Central Bank (CBN) has modified the guidelines, taking into consideration the present realities of the Nigerian banking system. Credit risk modifications abound in the risk weight assigned to inter-bank transactions and exposures guaranteed by the Federal Government of Nigeria (FGN) or CBN, exposures to FGN or CBN transactions denominated in naira and funded in that currency, amongst others, which carry risk weight of 0%. Other modifications include exposures secured by residential mortgage loans, which carry a risk weight of 100%, compared to the recommended 35% in the Basel II accord. Unrated on-balance sheet securitisation carries a risk weight of 1250%, whereas the Basel II accord provides no risk weight for such transaction.

With respect to compliance, the biggest challenge for the banks – and to an extent the CBN – is in terms of cost: improving human capacity and information technology. The vast amounts of data that will be required and processed for risk measurement, management, compliance and reporting means banks must invest extensively in their IT solutions; not only that, but ensure that deployed IT solutions are capable of handling the massive amounts of requests of the institutions. In short, Basel II gains are gradual and long term, while impact on the banks' bottom-line is immediate. In the same vein, investment in risk modelling is required, as developing good credit rating models require quality data, with inaccurate or insufficient data serving as obstacles for models development.

Nonetheless, considering the successes of jurisdictions like Hong Kong, it is conceivable that these costs will turn out to be beneficial to the long-term viability of the Nigerian banking industry.

Banji Adenusi

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