Central Bank of The Gambia’s Handbook for Banking Supervision Faces Scrutiny

The Central Bank of The Gambia issued a handbook outlining its guidelines for banking supervision two years ago. However, recent concerns over financial stability and prudential practices have led experts to call for a reevaluation of these guidelines.

Handling Non-Performing Loans

One area of concern is the handling of non-performing loans. The handbook recommends a provision of 5% against the balance of restructured loans until they are transferred to a performing status, as well as a 1% provision for foreseen but undetected losses in the portfolio. However, some experts argue that these benchmarks may not be sufficient and that banks should be required to make more robust provisions.

• Critics argue that the recommended provisions do not adequately account for potential losses.
• Experts recommend prompt write-offs and removals from the books of non-performing loans for greater transparency and accountability.

Management Discretion

Another area of concern is the management’s use of discretion when it comes to provisioning. The handbook states that bank management is not required to adhere to specific benchmarks, but rather must demonstrate why their allowance is adequate if it falls below the recommended level. Critics argue that this lack of transparency and accountability can lead to lax provisioning practices.

Lending and Credit Concentration Limits

The handbook also sets out guidelines for lending and credit concentration limits. For instance, it recommends that banks impose prudential credit limits on single borrowers, related groups, and geographical or economic sectors. However, some experts argue that these limits may not be sufficient to prevent undue risk-taking by banks.

• Experts recommend stricter lending limits to reduce the risk of bank failures.
• The handbook’s guidelines may not take into account other important factors such as a bank’s risk-taking behavior or its ability to withstand economic shocks.

Supervisory Approach

The Central Bank of The Gambia’s supervisory approach has also come under scrutiny. The handbook outlines the use of both off-site and on-site supervision techniques, including the development of a bank’s risk profile and the assignment of a CAMEL rating based on five components: capital adequacy, asset quality, management, earnings, and liquidity.

• Experts argue that these ratings may not provide an accurate picture of a bank’s financial health.
• The ratings do not take into account other important factors such as a bank’s risk-taking behavior or its ability to withstand economic shocks.

Recommendations

In light of these concerns, regulators are now recommending prompt write-offs and removals from the books of non-performing loans. This approach is seen as more transparent and accountable, and would help to ensure that banks maintain adequate provisions for potential losses.

• The Central Bank of The Gambia has not yet commented on these recommendations.
• Experts believe it is essential for the bank to revisit its guidelines and ensure they are robust enough to support financial stability in the country.