Financial Crime World

Assessment of the Banking Sector in Lesotho

Introduction

The banking sector in Lesotho has undergone a significant assessment by an international organization, highlighting various aspects of its size, structure, risks, and regulatory framework.

Key Findings

Banking Sector Overview

  • The banking sector in Lesotho is highly concentrated, with Standard Lesotho Bank holding about 53% of total banking assets.
  • Customer deposits are the predominant liability of banks, while loans to customers represent a smaller percentage of total assets.

Risk-Based Supervision (RBS) Framework

  • The Central Bank of Lesotho’s (CBL) RBS framework is in place but needs enhancement to fully leverage Pillar 2 ICAAP and SREP.
  • Technical assistance (TA) is required to improve the CBL’s supervisory practices, risk culture, and on- and off-site work.

Regulatory Framework

  • The Financial Institutions Act of 2012 enables the CBL to set prudential requirements but contains language and methodology belonging to Basel I.
  • Amendments to the FIA are necessary for the CBL to be “fleet footed” in its supervisory processes.

Banks’ Risks Exposures and Prudential Capital

  • Current regulations address major banks’ risk exposures and prudential capital, including Basel I risk-based capital requirements, lending limits, asset classification, and provisioning.
  • Banks must maintain minimum liquid assets, a reserve for liquidity of 3% of aggregated deposits, balances due to local and foreign banks, and other borrowed money (excluding funds from the Government and the CBL).

Regulatory Capital

  • The CBL will require TA to address issues in the short run to enhance its RBS framework, improve supervisory practices, risk culture, and on- and off-site work.

Challenges Facing Lesotho’s Banking Sector

PostBank’s Challenges

  • Lesotho PostBank faces challenges, including a liquidity policy that mandates additional capital for liquidity purposes above Basel II capital requirements.
  • The bank’s headroom between its capital and Basel II capital requirements could erode over time due to statutory limitations on increasing capital.

Draft ICAAP Report

  • The draft ICAAP report flags important challenges for the PostBank, necessitating immediate supervisory attention and guidance.
  • The bank needs help understanding and managing risks and planning and providing for regulatory capital based on these risks.

Regulatory Framework Limitations

  • Amendments to the FIA are necessary to enable the CBL to leverage Pillar 2 ICAAP and SREP fully.
  • Enhancing the RBS framework will necessitate TA to address issues in the short run.