Keeping to core principles: Cameroon's success in satisfying IMF regulation
By Philip Forsang Ndikum
Posted: 23rd November 2012 10:27
Cameroon is a member of Communauté Economique et Monétaire de l'Afrique Centrale (CEMAC), a group of six countries with a common central bank, Banque des États de l'Afrique Centrale (BEAC). The Commission Bancaire de l'Afrique Centrale (COBAC) is the national and supranational watchdog for finance within CEMAC.
Regarding the financial sector, an IMF May 2000 report confirmed that since the eighties, Cameroon has implemented liquidation, recapitalisation, and privatisation during two waves of bank restructuring, thus reinforcing regulatory and supervisory capacity. As such, a large part of the banking sector respects prudential ratios. The report confirmed that a handful of banks and financial services institutions were nonetheless in a precarious state.
Also relevant is the high degree of indirect credit risk, loan concentration and important liquidity risk. In addition, soundness issues abound in the financial sector because little information is available to assess the almost 800 microfinance institutions in Cameroon.
In this connection, COBAC has the role of undertaking banking supervision, with clear responsibilities and objectives for controlling adherence to banking regulations. It also controls companies in the financial sector, and undertakes the establishment of prudential ratios and the management of crises in financial institutions.
It is fortunate that COBAC regulates the financial sector uniformly in Gabon, Cameroon, Chad, the Central African Republic, Equatorial Guinea and the Republic of Congo. The discussion below shows how it ensures observance of the Basel Core Principles for Effective Banking Supervision in CEMAC and Cameroon in particular.
COBAC has clear responsibilities and objectives for banking and microfinance supervision in CEMAC, pursuant to many regulations and ordinances – chiefly Regulation COBAC R-2001/07 of 5 December 2001 and Regulation 01/02/CEMAC/UMAC/COBAC of 13 April 2002. The Commission works hand in hand with the finance ministry of each member country to grant licences to banks. In this connection COBAC and the various finance ministries have a smooth relationship. The Commission and the finance ministries ensure capital adequacy requirements, which enable banks to operate safely.
Both also consider the ownership structure, operational plan, internal controls, projected financial condition including capital base, and the fit-and-proper requirement of directors and senior management, important for determining the integrity of bank operations. COBAC supervision is conducted both on-site and off-site and the accounting system has been modernised. Prudential data submissions from banks are now processed electronically, which benefits the quality of off-site supervision.
The Commission has powers to implement prompt corrective measures when prudential requirements are not met, when there are regulatory violations and when the depositor base of an institution is materially threatened. However, national authorities may be tempted to interfere in the application of corrective measures. COBAC's discretionary powers give it the necessary flexibility for handling financial difficulties, but its independence can be compromised by external pressure and interference.
Cross-border supervision is now a top priority for COBAC. The growing importance of foreign banking institutions in CEMAC increases the need for cooperation and extensive information exchange with the home country supervisors and the country institutions of such banks. COBAC has signed conventions with foreign prudential authorities to facilitate the exchange of information.
Areas for Improvement
COBAC shows weaknesses in enforcing the observance of the Basel Core Principles for Effective Banking Supervision. In internal controls, regulation is not reviewed in light of the limited professional training in the banking sector; but it must be reviewed as such to improve quality of supervision to international standards.
Furthermore prudential regulations and requirements within CEMAC – including capital requirements, risk-concentration and internal control mechanisms commensurate with the nature of the business activities being conducted – are less stringent than international standards. In addition, the high operational risk and the fragile legal and judicial system within the community countries provide little protection to banks.
Most important to that for banks to function safely within the community, capital requirements should be much higher than in countries with more reliable legal systems. Financial commentators have suggested that as a first step the minimum solvency ratio of 5% should be raised to the international level of 8%. Lending rules are too lenient and must be reinforced. The international guidelines on money laundering should also be incorporated into the regulation.
Another relevant matter is that the governor of BEAC is the de jure chairman of COBAC. COBAC depends on BEAC for its financial and human resources. IMF observers feel that this intimate relationship may compromise its supervisory independence, which is necessary for effective banking supervision.
On top of that COBAC has no legal authority to determine the content of banks' annual reports. National governments legislate and regulate in this area. However, COBAC has a policy to extensively publicise all decisions taken against banks for infringing legal and regulatory requirements. This should set as precedent for national governments to improve relevant supervisory legislation and regulation. Lastly, COBAC lacks adequate human resources for effective banking supervision. However, since 2000 it has been recruiting relevant personnel.
Despite all of that an IMF assessment of Cameroon's observance of the Basel Core Principles for Effective Banking Supervision states that Cameroon complies only partially. However, the report confirms that the regulatory framework in Cameroon is well able to cater to the country's financial markets. The report also says that the legal and regulatory framework appears to be compliant with the core principles.