Addressing Vulnerabilities in Financial Industry

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James Emejo writes that the banking sector regulatory authorities must step up their enforcement roles in addressing the factors which have caused cracks in financial stability in recent times

There’s no doubt that there had been significant progress and innovation in terms of regulatory oversight of the banking industry by the Nigeria Deposit Insurance Corporation (NDIC) and the Central Bank of Nigeria (CBN) in recent times, leading to some level of sanity in the landscape, particularly in the aftermath of the recent financial crisis.

Such regulatory interventions had seen remarkable reduction in non-performing loans (NPLs) ratio, boosted corporate governance and repositioned the industry to support the diversification of the economy through improved lending to the real sector through several innovative measures by the regulators.

However, the banking sector had continued to witness some vulnerabilities which appeared to threaten the relative stability and progress so far recorded in recent times.

Despite regulatory overbearing, there had been an increase in fraudulent cases arising from the “increase in the sophistication of fraud related techniques such as hacking, cybercrime as well as increase in I.T related products and usage, fraudulent withdrawals and unauthorised credit.”

The NDIC, in its most recent assessment of the health of the banking industry, had discovered that the sum of N15.15 billion was lost to incidences of fraud last year, indicating an increase of 539 per cent when compared to the N2.37 billion lost in 2017- adding that the total amount involved in fraud stood at N38.93 billion compared to N12.01 billion in 2017.

According to the statistics, a total of 37,817 fraud cases were reported in 2018 compared to 26,182 in 2017 mainly as a result of the “sophistication of fraud related techniques such as hacking, cybercrime as well as increase in I.T related products and usage, fraudulent withdrawals and unauthorised credit.”

The NDIC report also stated that internet and technology-based sources of fraud had the highest frequency, accounting for 59.2 per cent of fraud cases and 42.83 per cent of the actual total loss suffered.

The corporation had among other things highlighted the need for regulators and the banks to address the problem of contract/temporary staff in terms of welfare and permanent employment in view of the risk their current status poses to banks operations as well strengthen their internal controls and validate their recruitment process.

The impact of lax corporate governance, which has in most cases given rise to fraud and other underhand dealings cannot be underestimated in the quest to guarantee stability in the financial sector of the economy.

The role of regulators had particularly been called to question for not doing enough to curtail abuses and excesses in the industry.

This perhaps explains why the issue of stability and fraud-free industry had continued to give the regulatory authorities cause for concern in recent times.

Speaking at the 2019 NDIC workshop for business editors and finance correspondents, themed:” Nigerian Banking System Stability: Tackling Emerging Issues” which was concluded recently Yola, Adamawa State, Deputy Director. Bank Examination Department, NDIC, Mr. Abdulhameed Aliyu, had highlighted some of the major constraints to regulatory oversight functions to include legal limitations, weak inter-agency collaboration, weak market discipline as well as weak fiscal policy stance particularly, the mis-alignment of monetary and fiscal policies.

He said the rising ratio of NPLs, diminishing margins, liquidity constraints by largely marginal banks and heightened reputational and legal risk arising from inability to fund foreign obligations due to administrative caps on forex by the CBN continued to post challenges for regulation and industry stability.

In his paper presentation titled, ‘Emerging Issues in the Regulation and Supervision of Banks in Nigeria’, Aliyu further raised concerns concerning defaults from traditional income haven of banks, particularly oil and gas; derivatives defaults, especially on currency swap, disruptive technology, entry of big tech firms like Google, Amazon an Apple into the financial services, adding that the development posts a financial stability risk for the industry.

According to Aliyu, cyber-crime and insufficient expertise in the assessment of IFRS 9 implementation may affect the level of compliance and enforcement, a situation which could further impinge on industry stability.

Further highlighting threats to the banking industry, he said: “Events in the recent past has challenged regulatory initiatives, not only in Nigeria, but globally. These events were characterised by unprecedented volatility and uncertainty, ushered in by a quick succession of bubble and burst in the financial and business cycle.

“Heightened by the linkages and interconnectedness created by ICT in the process of globalisation.

The challenge is therefore to continue to evolve forward looking/ counter-cyclical measures enhanced with strong risk management systems to facilitate financial system stability.”

He maintained that achieving financial stability will further demand early warning systems and strong supervisory oversights to reduce chances of systemic crisis.

According to him, enhancement of public confidence remains critical to financial system stability, through active collaboration among the stakeholders as well as effective enabling laws and removal of any legal provision, which hampers the effective discharge of regulatory and supervisory mandate.

The NDIC director said a robust resolution frameworks that would guarantee resolution of distress institution, thereby engendering public confidence was also central to a safe banking system going forward.

He said for the sake of achieving financial stability, there should be collaboration through a symbiotic relationship and convergence of goals between the regulatory authorities and the banking system supervisors on one hand, and between the monetary authority and the fiscal authority on the other hand.

He emphasised that legislative support remained crucial for boosting consumer confidence and ensuring stability and called for enhancement of enabling laws, removal of fiscal constraints, particularly the Fiscal Responsibility Act as well as strong oversight on the financial industry.

“The effectiveness of prudential regulation is dependent on the robustness of legal and judicial framework and practices. This is particularly apt for NDIC in the quest to effectively carry out its mandate,” he stated.

Aliyu further told participants that for a sound financial system, both the NDIC and CBN must have zero tolerance for regulatory infractions by banks and further enhance macro-prudential framework and systemic crisis management.

Also, in a paper presentation titled, ‘Fintech and the Future of Banking’, Deputy Director, Research Department, NDIC, Dr. Kabir Katata, had warned that Fintechs, in spite of their benefits still posed a threat to banks by raising service expectations and coming between banks and their customers.

According to him, Fintech firms and bigtech organisations are capturing more and more of the banking value chain, providing services such as payments, checking and even savings accounts that could erode much of the traditional bank revenues in the foreseeable future.