African central bankers agree to strengthen bank supervision

May 21, 2011

African central bankers who met in Kampala have agreed on common front that will see all central banks strengthening bank supervision as well as introducing new measures that will lead to effective supervision of electronic bank products.

In the joint communiqué issued at the end of their two day meeting at Kampala Serena Hotel which ended on April 29, the central bankers from 26 African countries noted that although African regulators have undertaken considerable efforts in reforming banking supervision and regulation in the past two decades, this should not be taken to mean that banking regulation and supervision does not need further strengthening.

In a communiqué the central bankers said: “There is a need to advance reforms even further. African financial systems are evolving rapidly and important regulatory and supervisory gaps remain. New challenges are likely to test the resilience and stability of African banking systems,”

The central bankers explained that the rapid growth of the banking sector, innovation and introduction of new financial products, the rapid spread of the use of information technology and the increasing global and regional integration of African financial markets impose new challenges.

In general, the central bankers agreed that macro-prudential supervision needs to be established to improve regulators’ ability to identify macroeconomic and real sector risks and to deal with systemic and concentration risks.

The emergence of banks with operations across several countries requires stronger cooperation of supervisors across borders supported through efficient institutional frameworks. “The regulation of cross-border banks requires increased attention,” they stated.

When it comes to bank supervision/regulation, international standards provide an important orientation and point of reference for the long-term reform agenda, international standards should not be seen as blueprints for the reform process in African countries.

However, African central bankers noted that maximizing regulatory effectiveness and financial stability under resource constraints requires appropriate sequencing and prioritization of building blocks of financial regulation and supervision.

“Rather than adopting international standards wholesale, African regulators need to judge which elements of the standards could provide useful and effective building blocks within the current country and regional context,” they recommended.

The international standards which are always decided upon by the Basel Banking Committee and the Financial Stability Board is an overriding standards that governors bank supervision and regulations in the globe, however, the African central bankers also came up with a suggestion that, it should also be considered whether there are additions to international standards that would be valuable to African regulators.

Arguing that the identification of building blocks should inform the development of country-specific roadmaps to guide the process of financial and regulatory reform and outline concrete steps for the way forward.

The central bankers also noted while many African countries intend to move to adopt the Basel II capital framework the focus is on implementing the supervisory processes outlined under Pillar 2 and Pillar 3. The implementation of the capital adequacy rules under Pillar 1 were not seen as a priority for many countries.

Instead, the importance of enhancing supervisory capacity as a precondition for adopting the more complex rules under the Basel capital framework was emphasized by them.

Financial stability might better be achieved by focusing on increasing supervisory capacity and adding those provisions from the new Basel III framework that are of higher immediate importance for African financial systems. In line with this approach, many African countries are moving to establish macro-prudential supervisory processes building on the existing Basel I framework.

Unanimously, the participants welcomed the Financial Stability Board’s (FSB) plans to expand and formalize outreach beyond the FSB’s membership through regional consultative groups. Currently African countries are not members of Financial Stability Board, something central bankers should be looked at to have their voices in the organization.

“There is strong need for a more strategic dialogue between African regulators, international standard setting bodies and international financial institutions on the reform priorities and the applicability of international standards in African economies the central banker suggested.

Making the opening remarks on day April 28, Mr Stefan Nalletamby Partnership Coordinator making Financial For Africa said the aim of workshop to build an African consensus around reform priorities and adequate sequencing of much needed reforms. “This workshop should therefore help to design a roadmap for future banking regulatory and supervisory reforms on the continent and thereby assist in better informing development partners’ interventions,” he said.

Mr Nalletamby said that Africa should keep up with the pace of financial sector reforms and there is no doubt the agenda for future reforms will be strongly influenced by the changes proposed at the international level in the regulatory and supervisory space to avoid the repetition of a major financial crisis. “Central banks are key partners in fulfilling our mission to unleash the potential of financial sectors in Africa. It is therefore our understanding that this meeting is the starting point for a growing and longstanding relationship between MFW4A and the AACB,” he said. Martin Luther Oketch, Kampala, Uganda