Implementation Of Risk Based Supervison

By Nomonde Sixishe
May 2011
A brief background on the Central Bank of Lesotho (the Bank) is essential at this point so as to spot how RBS comes in. The Bank is charged with the regulation and supervision of banks in Lesotho according to the Central Bank Act 2000, section 6(e) and (i) which stipulate that the Bank shall license and supervise the banks and also promote the safe and sound development of the financial system. In compliance with this, the Bank established Supervision Department which is tasked with ensuring the stability and soundness of the banking sector. The supervision of banks started as far back as 1973. However, a major regulatory and supervision overhaul took place in the late 1990s when the banking sector faced closure of two State –owned banks namely Lesotho Bank and Lesotho Agricultural Development Bank. It was at this time that through concerted efforts the new banking law was passed in 1999. It became possible therefore to review the supervision structure and the name changed from Supervisory and Development Services to Supervision Department. One of its Divisions was the Financial Institutions Supervision Division (FISD) which was charged with bank supervision and other non-bank financial institutions including insurance and micro -credit providers.
The Division in its present form supervises only banks as the non-banks have been deployed under a separate Division since 2003. The FISD has two sections named after the supervision tools namely Off-site surveillance and On-site examinations which are responsible for supervising the banks’ overall condition and risk management systems. The Off-site is a continuous assessment which is performed continuously based on the incoming returns from banks. The compliance of banks with the statutory and regulatory requirements is also determined. These returns are submitted weekly, monthly, quarterly, and bi-annually. The analysis usually focuses on the individual banks and then consolidation to illustrate the banking industry. These are tabled before the Financial Institutions Supervision Technical Committee (FISTC) and any supervisory concerns and directives are communicated to the relevant bank. The off-site surveillance has the reporting guidelines concerning all the regulatory returns.
The on-site examinations section is responsible for the examination of banks. The examinations are conducted applying the CAMELS approach, assessment of internal controls including the physical security and adherence to regulatory requirements. There is a detailed manual covering examination procedures for all activities and operations of the bank. The examinations unlike the off-site assess the overall condition and future prospects of the financial institutions. This means that the examiners have direct access to the books, records, files, audit reports and any third party review. The reports generated from the examination normally depict the institution’s whole picture.
With regard to banks, it is also critical to include them in the situational analysis and this is achieved through a survey and present knowledge about the bank. The banks in Lesotho already have risk management structures although they are at different levels depending on the character and nature of that bank. One of our banks introduced risk management gradually since 2003 and has at present a fully-fledged risk management unit. The banks have always been managing their risk so the emphasis is in ensuring that they do have an enterprise wide risk management mechanism so as to judge the interdependence of their risks and the overall risk. It works as a checkpoint to ensure that the financial institution recognises all its risks. The banks still have to align their risk management structures in line with the Risk Management Guidelines that the CBL will issue.