Malawi Banks Face Compliance Risks as Reserve Bank Shifts Focus to Risk-Based Supervision
Strengthening Financial System through New Approach
In a move aimed at strengthening the country’s financial system, the Reserve Bank of Malawi has launched a new risk-based supervision approach, replacing the traditional CAMEL model. This change brings increased expectations for banks to adopt a more proactive approach to risk management.
Adopting International Best Practices
According to Deputy Governor Mary C Nkosi, the shift is intended to improve the way supervision is conducted in Malawi, mirroring international best practices such as those employed by regulatory bodies like the Federal Reserve System of the USA and Financial Services Authority of the United Kingdom.
Key Risks to Prioritize
Under the new approach, banks are expected to adopt a more holistic view of risk management, addressing not only traditional financial risks but also non-financial risks such as:
- Strategic risks
- Operational risks
- Compliance risks
- Reputation risks
The Reserve Bank has identified nine key risks that banks must prioritize, including:
- Credit risks
- Liquidity risks
- Interest rate risks
- Foreign exchange rate risks
- Price risks
- Operational risks
- Compliance risks
- Reputation risks
Enhancing Governance Structure and Risk Management Practices
To achieve this, banks are required to:
- Enhance their governance structure, ensuring that the board plays a more active role in policy formulation, strategy review, and oversight.
- Implement robust risk management practices, including:
- Identifying risks
- Measuring risks
- Monitoring risks
- Controlling risks
Collaboration between Supervisors and Banks
The launch of risk-based supervision in Malawi comes at a critical time, with the country still reeling from the effects of the global financial crisis. The Reserve Bank is keen to ensure that Malawian banks are better equipped to manage risks and maintain stability.
Supervisors will adopt a more proactive role, working closely with banks to identify and mitigate risks. This collaboration will enable regulators to gain a deeper understanding of bank operations and assess their risk management practices more effectively.
Commitment to Effective Risk-Based Supervision
In her address, Nkosi urged stakeholders to take responsibility for their roles in ensuring the success of the new approach:
“Let us do our job,” she emphasized. “We must learn from past failures and ensure that we are better equipped to manage risks.”
The Reserve Bank’s commitment to effective risk-based supervision is underscored by its legal mandate to ensure a safe and sound financial system, critical to Malawi’s development agenda.
Acknowledging International Support
The bank has also acknowledged the support of international partners, including the IMF East Africa Regional Technical Assistance Centre (IMF East AFRITAC), which provided technical assistance for the project.