Major causes of bank failure is poor credit quality, risk assessment’
By Cherno Omar Bobb
Dr. Paul Mendy, second deputy governor at the Central Bank of The Gambia has said that, records have shown that one of the major causes of bank failure is poor credit quality and credit risk assessment.
Dr. Mendy was speaking on behalf of the Governor of Central Bank of The Gambia during the opening of a week-long joint AFRITAC West 2/WAIFEM Regional Workshop on Credit Risk Analysis and Provisioning at African Princess Hotel when he made the remarks yesterday, Monday.
He added that failure to identify and recognise deterioration in credit quality in a timely manner can aggravate the problem. He further said that inadequate credit risk assessment policies and procedures may lead to deficiencies and untimely recognition and measurement of loan losses, undermine the usefulness of capital requirements, and hamper proper assessment and control of credit risk exposures.
He also underscored the importance of credit risk analysis, which he said is an integral part of the process of determination of the repayment ability of borrowers and the probability of honouring their obligations.
“The goal of credit risk management therefore is to maximise a bank’s risk-adjusted rate of return by maintaining credit risk exposures within acceptable parameters. The effective management of credit risk is a critical component of a comprehensive approach to the long-term success of any banking organisation,” he stated.
“In our sub-region, generally, banks rely on subjective methods of evaluation of creditworthiness of their clients. The traditional approach evaluates the main characteristics of the borrower, commonly referred to as the 5Cs of credit. These are prone to human errors and misuse. In our part of the world, the problem is exacerbated by poor access to historic data on credit for the computation of probabilities of default, poor quality loan applications, credibility issues surrounding the valuation of collateral, and structural challenges such as ineffective commercial courts to facilitate foreclosures,” he further said.
“The Covid-19 pandemic has caused severe negative economic shocks that translated into a sharp rise in non-performing loans. Due to the deterioration in the asset quality, banks provisioning requirements have increased significantly. Additionally, the capital adequacy ratio of financial institutions has been affected through higher risk-weighted assets, while the increase in provisioning and reduction in interest income negatively impacted profitability,” Dr Mendy also said.
He pointed out that, despite the numerous challenges, financial intermediation remains the most crucial role of the financial industry.
Amadou Kora, Director of Financial Sector and Payment Systems Department at WAIFEM in his remarks on behalf of West African Institute for Financial and Economic Management (WAIFEM) Director General said strong credit risk management practices and discipline in IFRS 9 provisioning approaches is key to safeguarding the visibility of asset quality on banks’ balance sheets.
He added that the workshop will provide a broader understanding of the relationship between credit risk and provisioning for credit losses under the IFRS 9 and prudential reporting standards, and enhance participants’ knowledge in the assessment of credit risk in the loan portfolio and provisioning for non-performing loans.