THE Central Bank of Lesotho (CBL) must hire more staff in its supervisory division to implement the necessary changes to guard against financial and operational risks in the banking sector.
This is contained in a report released after an International Monetary Fund (IMF) mission toured Lesotho from 4 to 14 March 2019 to provide the CBL with technical assistance on the implementation of Basel II.
Basel II is a set of international banking regulations put forth by the Basel Committee on Bank Supervision, which levels the international regulation field with uniform rules and guidelines.
It expands on rules for minimum capital requirements established under Basel I, the first international regulatory accord, and provides the framework for regulatory review, as well as set disclosure requirements for assessment of capital adequacy of banks.
Among other things, the IMF mission evaluated the progress made in the implementation process and provided guidance on the way forward.
The IMF said the CBL has made “very good progress” in its migration to Basel II regulations despite its critical staffing challenges.
“From the regulatory perspective, the CBL has a very small supervisory staff complement, so that it is not possible to dedicate the staff resources that would be necessary for a fast migration,” the IMF report published this month reads.
“The CBL should be mindful of the small number of the Banking Supervisory Division (BSD) staff, notwithstanding that it might be broadly commensurate with the small size of the banking sector.
“The small number of staff poses severe limits the extent of supervisory change that the CBL should transit, particularly while implementing Basel II. While the CBL must prioritise improvements to the regulatory framework, it must remain able to retain qualified staff and to attract new skills as needed.”
Supervisors must also be trained on International Financial Reporting Standards (IFRS).
“…The mission envisages that the CBL will need to train the supervisors and enhance pertinent skills on IFRS 9 and, to review pertinent regulation to banks for any necessary amendment or replacement.
“The CBL has made very good progress in its migration to Basel II. The drafting activities, consultations with the banks, and the submission of the banks´ first draft ICAAP report are good testimony to this.”
The IMF also indicated that Lesotho’s banking sector was largely foreign-owned with three banks being subsidiaries of South African banks and only one being owned by the government.
“The three foreign banks together accounted for 92 percent of the banking sector assets and 91 percent of total deposits, as of December 2018. This significant foreign presence represents a systemic vulnerability from external shocks that necessitates CBL attention. There are no secondary financial markets in the country.
“Banks owned by South African banks operate as full subsidiaries. Foreign banks do not operate as branches but are incorporated as full subsidiaries. Typically, they use their parents´ expertise where local expertise is not available, and are subject to their reporting requirements.
“Assessing the effectiveness and soundness of the local boards and senior management remains a challenge for the BSD,” the report reads.