|
2. The mission assessed observance of the Basel Core Principles for Effective Banking
Supervision, and found that Cameroon--and other countries that share the same regional
supervisory arrangement--complied only partially. The regulatory framework in Cameroon is
relatively well-developed for the state of development of the financial markets of the country, but
there are important shortcomings. Improvements are needed in the area of adequacy of staffing of
the regional banking commission (COBAC), and coverage of nonbank deposit-taking financial
institutions by the regulatory framework. In addition, the required capital adequacy ratio of five
percent is too low for the level of risk with which the Cameroonian economy is
confronted.
3. The assessment of observance of each of the 25 Core Principles (30 after subdividing the
first Core Principle into six sub-principles) has revealed a number of weaknesses (Table 2). The
legal and regulatory framework appear to be compliant or largely compliant with 18 of the 26
Core Principles that are relevant (four Core Principles are not applicable to
Cameroon).
Table 2. Cameroon: Observance of the Basel
Core
Principles
| CP
|
Principle
|
C1
|
BC2
|
BNC3
|
NC4
|
NA5
|
Comments and Corrective
Actions
|
| 1.1
|
Clear Supervisory
Responsibilities
|
X
|
|
|
|
|
Further possible improvements are the
introduction of a regular review of the supervisory process and a modernization of the activities of
the COBAC.
|
| 1.2
|
Independence and Resources
|
|
|
X
|
|
|
COBAC has insufficient (human)
resources. The situation risks deteriorating further as a result of the decision to move COBAC to
Libreville, and the possibility it will be given new responsibilities without commensurate new
resources. COBAC's needs should be given priority in BEAC's budget.
|
| 1.3
|
Legal Framework
|
|
X
|
|
|
|
Further substantial improvement is
possible in the microfinance sector. A regulation is being drafted.
|
| 1.4
|
Supervisory Powers
|
|
X
|
|
|
|
COBAC should use more rapidly its
regulatory powers and draft a regulation on market discipline and corporate
governance.
|
| 1.5
|
Legal Protection
|
X
|
|
|
|
|
COBAC staff enjoy immunity from
prosecution for their job-related acts.
|
| 1.6
|
Information Sharing
|
|
X
|
|
|
|
Further improvement would consist of
stricter procedures for information gathering and confidentiality.
|
| 2
|
Permissible Activities
|
|
X
|
|
|
|
Further action to take: enforce the
regulation on misuse of the word "bank" and sale of banking products and services by
institutions without a banking license.
|
| 3
|
Licensing of Banks
|
|
X
|
|
|
|
Further action to take: it would be
better if COBAC had sole responsibility for bank licensing.
|
| 4
|
Transfer of Ownership
|
X
|
|
|
|
|
|
| 5
|
Acquisitions and Investments
|
|
X
|
|
|
|
|
| 6
|
Capital Requirements
|
|
|
X
|
|
|
The current minimum solvency ratio is
too low, and does not take the significant operational risks into account. It should, as a first stop
be raised to the international level of 8 percent.
|
| 7
|
Loan Policies
|
|
|
X
|
|
|
|
| 8
|
Loan Classification
|
|
X
|
|
|
|
New rules are a big improvement, but
banks still have to make more efforts to classify loans on a case by case basis. COBAC could
make better use of external auditors by reviewing systematically their reports and debriefing them
after missions.
|
| 9
|
Management Information on Risk
Concentration
|
|
X
|
|
|
|
Further improvement: COBAC should
formalize and better organize risk management information systems.
|
| 10
|
Connected Lending
|
|
|
|
X
|
|
Legal provisions are insufficient,
although COBAC has been making efforts against malpractices.
|
| 11
|
Country Risks
|
|
|
|
|
X
|
|
| 12
|
Market Risks
|
|
|
X
|
|
|
|
| 13
|
Other Material Risks
|
|
|
|
X
|
|
Many important risks have not been
considered in the regulations.
|
| 14
|
Internal Controls
|
|
X
|
|
|
|
Texts and regulations could be further
perfected to include rules on audit committee, director's independence.
|
| 15
|
Money Laundering
|
|
|
|
X
|
|
There are no legal provisions in this
area, but COBAC is doing efforts to check on suspect money.
|
| 16
|
On-site/Off-site Supervision
|
|
X
|
|
|
|
COBAC's lack of resources is
hampering its supervision efforts, reducing the frequency of on-site supervision. More resources
and better use of external auditors could improve the situation.
|
| 17
|
Understanding Banks'
Operations
|
|
X
|
|
|
|
Communications are somewhat
hampered by the geographical vastness of the area under supervision. COBAC could improve
things by requiring banks to report their own irregularities with respect to prudential
regulation.
|
| 18
|
Prudential Reporting
|
X
|
|
|
|
|
|
| 19
|
Independent Examination of Prudential
Information
|
|
X
|
|
|
|
COBAC should try to improve its
communication and cooperation with the supervisory boards and the external auditors of the
banks.
|
| 20
|
Consolidated Supervision
|
|
|
|
|
X
|
|
| 21
|
Accounting and Disclosure
|
|
|
X
|
|
|
Increasing the role of the external
auditors would be helpful in accounting as well. The BEAC should issue publication and
disclosure requirements for banks.
|
| 22
|
Corrective Action
|
|
X
|
|
|
|
COBAC could take more vigorous
action in certain cases. Sometimes it is a bit too reluctant to implement corrective
measures.
|
| 23
|
Global Supervision
|
|
|
|
|
X
|
|
| 24
|
Cooperation with Foreign
Supervisors
|
|
|
|
|
X
|
|
| 25
|
Foreign Banks' Branches
Total
|
X
|
|
|
|
|
COBAC intends to conclude more
treaties with foreign supervisors, after having agreed upon such a treaty with the French
authorities.
|
1Compliant.
2Broadly compliant.
3Broadly non-compliant.
4Non-compliant.
5Not applicable. |
4. The Basel Core Principles assessment was based on an examination of key documents and
discussions with the supervisory authorities. The documents examined included the
self-assessment prepared by the COBAC Secretariat, the Compendium of Laws and Regulations
for the financial and banking system, the basic CEMAC treaties and conventions, as well as
numerous other documents obtained from the Secretariat (e.g., annual reports, bulletins, internal
papers describing the work processes of the supervisory departments, general reflections and
thoughts on supervisory issues). In addition, discussions were held with staff of the BEAC, the
Ministry of Economy and Finance, management and staff of four banks in Yaoundé and
Douala and with an international auditing firm. The assessment team enjoyed the full cooperation
of its counterparts and received all the information required.
5. The assessment of observance of each of the 25 Core Principles (30 after subdividing the
first Core Principle into six sub-principles), revealed that the most important weaknesses are
situated in the regulatory framework, and more specifically in the insufficiency of the available
human resources. This has delayed, among other things, the Secretariat's efforts to adapt and
modernize its working processes and instruments. The scope and frequency of the bank
examinations, as well as the follow up of their conclusions, has suffered as a result. Finally, the
shortage of human resources at the Secretariat should be tackled in a fundamental way to enable
the institution to address the challenges it will face in the future. To this end, the mission, without
modifying the institutional arrangements between COBAC and BEAC, would recommend that
COBAC be given a specific budget consistent with its need and that the latter be ranked top
priority. In addition, the costs involved by the transfer of the COBAC's headquarters from
Yaoundé to Libreville, since it results from a political decision, should be funded as a
specific regional project independent from BEAC's and COBAC's resources.
Core Principle 1: Responsibilities, objectives, operational independence, resources, legal
framework or powers, protection for supervisors, information sharing
6. Banking supervision in Cameroon is organized at the regional level to cover the six
CEMAC countries. COBAC, the regional institution, has been assigned nearly the full range of
powers that national prudential supervisory authorities have in other countries. It is in charge of
off-site and on-site supervision and issues prudential regulation. It shares responsibility with the
national ministries of finance for the licensing of new banks, and it has the authority to sanction
credit institutions, to revoke banking licenses and to decide on liquidation of banks.
7. Nevertheless, the division of responsibilities between a supranational institution and
national authorities can lead to frictions. Although a clear legal hierarchy has been established
under which supranational provisions override the national legal framework, in practice COBAC
has to rely on the respective national authorities' willingness to cooperate for the implementation
and enforcement of its decisions.
8. COBAC and its Secretariat have acquired a credibility and expertise unanimously
recognized by the CEMAC member states as well as by the banking community. COBAC has
become a well-respected and authoritative institution, and it has demonstrated its efficiency
through good management of a number of crisis situations.
9. The banking crises of the 1990s resulted in two comprehensive rounds of restructuring
which affected almost every bank in some way. All banks are now privatized, and all the larger
ones now have foreign ownership. After the nonperforming loan experience of the past decade,
banks now concentrate their credit activity on a limited number of highly credit-worthy
customers. This has left an opportunity for the development of microfinance, a sector which
operates to a considerable extent outside the boundaries of the legal and regulatory framework for
financial intermediation. This implies that the security of transactions carried out by the sector is
not guaranteed. A legal and supervisory framework is currently under development that should
allow the normalization and restructuring of the microfinance sector. However, assigning
prudential supervision for the sector to COBAC risks further straining its already overburdened
human resources. The regulation should aim at making sure that the mutual credit sector only
lends to members. The rules should be designed to make it easy to determine when any institution
is moving beyond that and into the nearbank sphere. One element of the solution is to define
closely the scope of permissible activities for credit cooperatives, essentially ensuring that they
stay within a certain size parameter and within some kind of affinity group.
10. Although legally independent, COBAC is intimately related to BEAC. The Governor of
the central bank is de jure chairman of COBAC, and he recommends the nomination of
the members of the banking commission to the BEAC's board. Furthermore, COBAC depends on
the BEAC for its financial and human resources. In this respect, it should be mentioned that the
persistent shortage of human resources has only recently been addressed to some extent through a
recruitment effort.
11. In 1997, the Secretariat estimated it needed 16 additional people. BEAC reduced this
figure to nine and eventually recruited six, the last three of which joined COBAC only recently. If
given responsibility for supervision of the microfinance sector, COBAC estimates it will need at
least 10 additional staff, in addition to the 10 people requested but not obtained earlier. Given the
need for a gradual integration of new staff, recruitment efforts will have to be spread out over a
period of three to four years, which makes it all the more important to start the recruitment efforts
without delay.
12. Assessment: COBAC's credibility and recognized expertise among the CEMAC
member states is commendable. However, it is not entirely in observance of Core Principle 1,
owing to its insufficient human resources and the absence of supervision on microfinance
institutions engaged in banking activities.
Core Principles 2-5: Licensing, ownership
13. The 1992 Convention gives joint responsibility for issuing banking licenses between the
national authorities and COBAC, with the latter having prime responsibility. COBAC's consent is
needed for every licensing act for banks and bank directors. However, this two-level licensing
process can cause unnecessary delays, and concomitant judicial validity and enforceability
problems for management decisions taken while a licensing decision remains pending.
14. Microfinance institutions are not yet subject to a real licensing procedure. The recently
introduced registration procedure is very superficial and needs to be further amended and
reinforced. At this stage, the procedure aims only at eliminating the worst cases and officially
registering the others.
15. Assessment: COBAC is largely compliant. Currently, microfinance institutions
are not licensed for deposit-taking, and some use the protected "bank" nomenclature.
However, this situation is currently being addressed as part of the microfinance census and
subsequent relicensing.
Core Principles 6-15: Prudential regulations and requirements
16. A number of prudential rules (including capital requirements, risk concentration, and
internal controls, etc.) are less stringent than international standards. These rules were established
several years ago in a context in which the banking systems in the region were facing sizable
problems. COBAC has already decided to strengthen the risk concentration rules and told the
mission it intends to review the capital requirements and the internal control regulation in the near
future. The authorities' aims are to eventually approach international standards.
17. Given the high operational risk the banking sector faces in a fragile legal and judicial
environment, capital requirements should be higher than in other countries with a more reliable
legal system. Furthermore, the diverse risk profiles of individual banks would seem to suggest that
COBAC should be able to tailor capital requirements to individual situations. Finally, capital
requirements should take the substantial macroeconomic risks facing the Cameroon economy into
account. As a first step the minimum solvency ration should be raised to the international level of
8 percent.
18. The internal control regulation should be reviewed in light of the current situation of
limited professional training and expertise in the banking sector. In addition, the rules regarding
connected lending are too lenient and should be reinforced. Also, the international guidelines on
money laundering should be incorporated in the current regulation.
19. Assessment: A number of practices in this category are not in compliance, in
particular the capital adequacy and risk concentration ratios; however, the authorities intend to
reach international standards in the future so as to comply fully with these principles.
Core Principles 16-20: Supervision approach, ongoing
supervision
20. The banking crises of the 1990s have led COBAC to prioritize the on-site-supervision of
banks. To cope with the limited number of staff, significant changes have been made to the
off-site-supervision process and instruments. In particular, the accounting system has been
modernized and prudential data submissions from the banks are now processed electronically,
which will benefit the quality of off-site-supervision.
21. Given the size of the geographic area to be supervised, and the current low frequency of
inspection visits, it is of paramount importance to contemplate increasing the involvement of
external auditors in the prudential supervision process.
22. Assessment: Despite its human resource constraints, COBAC should continue
to reinforce its supervision efforts, by adjusting supervision to the risk profile of the individual
banks, and by relying when and if appropriate more heavily on external auditors. Furthermore,
relations with the boards of directors of banks should be intensified in order to foster the
strengthening of the corporate governance culture and to improve internal supervision by the
board.
Core Principle 21: Information requirements
23. COBAC has no legal authority to determine the contents of banks' annual reports.
National governments are responsible for legislation and regulation in this area. Also, at present,
external auditors are not required to communicate with banking supervisors.
24. In order to strengthen market discipline, COBAC has adopted a policy of publicizing
extensively all decisions taken against financial institutions for infringement of legal and regulatory
requirements.
25. Assessment: as indicated earlier, a closer collaboration with the external
auditors should be worked out. Indeed, the efficiency of the contribution of the external auditors
will depend on adequate regulation. It is recommended that the authority for issuing rules and
guidelines for the public reporting of financial information by banks be transferred to COBAC
since this institution has the most expertise in this field. This should facilitate as well regional
harmonization as well.
Core Principle 22: Corrective actions
26. COBAC is duly mandated to impose corrective action on banks. However, national
authorities may be tempted to interfere in the decision process or in the application of corrective
measures. COBAC's discretionary powers give it the necessary flexibility for handling crisis
situations, but also make it vulnerable for external pressure and interference.
27. COBAC can only prevent a bank from distributing dividends if it does not comply with
minimum capital requirements, in which case COBAC has extensive power to enforce the
reconstitution of the capital base. However, COBAC does not have the authority to remove a
member of the board of directors.
28. Assessment: More stringent and automatic rules to handle infringements and/or
crisis situations would enhance COBAC's efficiency and shield it better from external pressure and
interventions.
Core Principles 23-25: Cross-border supervision
29. COBAC has recently signed a convention with the French prudential authorities to
facilitate the exchange of information.
Assessment: Although this convention is a step in the right direction, the growing
importance of foreign institutions in CEMAC banking systems increases the need for cooperation
and extensive information exchanges, with the home country supervisors as well as with the
parent institutions of those banks.
1This module was prepared in consultation with the Cameroonian authorities, the
BEAC, and the COBAC in the context of an FSAP mission conducted in Cameroon in March
2000. The work of the FSAP mission was coordinated by a joint IMF-World Bank team led by
Mr. Durand (IMF) and Ms. A.C. Rennie (World Bank) with assistance from
Mr. Driessen and Mr. Fonteyne (both IMF). The main contributors were Mr. Laurin
(World Bank) and Mr. Maes (formerly Belgian Banking Commission).
| 
