Dr Mendy was speaking on behalf of the Governor of the Central Bank of The Gambia at the opening of a week-long Joint AFRITAC West 2/WAIFEM Regional Workshop on Credit Risk Analysis and Provisioning at the African Princess Hotel when he made the remarks yesterday, Monday. .
He added that failure to identify and recognize deteriorating credit quality in a timely manner can compound the problem. He added that inadequate credit risk assessment policies and procedures can lead to gaps and inappropriate recognition and measurement of loan losses, undermine the usefulness of capital requirements, and hinder proper assessment and monitoring. credit risk exposures.
He also stressed the importance of credit risk analysis which he said is an integral part of the process of determining borrowers’ ability to repay and the likelihood of honoring their obligations.
“The objective of credit risk management is therefore to maximize a bank’s risk-adjusted rate of return by keeping credit risk exposures within acceptable parameters. Effective credit risk management is an essential part of a holistic approach to the long-term success of any banking organization,” he said.
“In our sub-region, banks generally rely on subjective methods of assessing the solvency of their customers. The traditional approach assesses the main characteristics of the borrower, commonly referred to as the 5Cs of credit. These are subject to human error and abuse. In our part of the world, the problem is exacerbated by insufficient access to historical credit data for calculating probabilities of default, poor quality loan applications, credibility issues surrounding collateral valuation, and structural challenges. such as inefficient commercial courts to facilitate foreclosures,” he explained.
“The Covid-19 pandemic has caused severe negative economic shocks which have resulted in a sharp increase in non-performing loans. Due to deteriorating asset quality, banks’ provisioning requirements have increased significantly. In addition, the capital adequacy ratio of financial institutions was affected by higher risk-weighted assets, while increased provisioning and lower interest income had a negative impact on the profitability,” Dr. Mendy also said.
He pointed out that despite the many challenges; financial intermediation remains the financial industry’s most crucial role.
Amadou Kora, Director of the Financial Sector and Payment Systems Department, in his remarks on behalf of the Director General of the West African Institute for Financial and Economic Management (WAIFEM), said that sound risk management practices of credit and discipline in the provisioning approach of IFRS 9 are essential to preserve visibility. asset quality in banks’ balance sheets.
He added that the workshop would provide a broader understanding of the relationship between credit risk and credit loss provisioning under IFRS 9 and prudential reporting standards, and improve participants’ knowledge in the assessment of credit risk in the loan portfolio and provisioning for non-performing loans.