By Babajide Komolafe
The new prudential guidelines recently released by the Central Bank of Nigeria (CBN) have run into stiff opposition in the banking industry.

“The requirements of the prudential guidelines are very tough, and if complied with, I wonder if any bank would make profit at all,” a senior banker and Chartered Accountant told Financial Vanguard.

Financial Vanguards’ investigations revealed a groundswell of opposition to some sections of the guidelines which operators labelled impracticable.

Reliable industry sources told Financial Vanguard that while some banks had written to the CBN on the contentious sections, some banks’ chief executives have already discussed their reservations in private meetings with the CBN Governor, Mallam Sanusi Lamido Sanusi, the architech of the amended prudential guideline.

Further investigations revealed that the apex bank had agreed to review the guidelines in response to the opposition while some industry sources have said that the guidelines may have been withdrawn temporarily because of the growing opposition to it.

The new prudential guidelines was issued in May 2010 and was to take effect from June 1st.  The  76 page document  has 15 sections covering risk management, corporate governance, Know Your Customer and anti-money laundering, project finance, objects, real estate and commercial real estate, small and medium enterprises, agriculture financing, microfinance loans, retail financing, regulations for auto loan, credit cards, housing finance and loan loss provisioning.
A senior banker said the issue is that the transparency demanded by the guidelines is difficult to practice without running into serious problem with some key stakeholders.

One of the contentious sections of the guidelines  is section 15.4 which require banks to make general provisioning of, at least, 2 per cent for all loans. The section states “Banks should make general loan loss provisions of, at least, 2 per cent of loan. Portfolio not specifically provided for, in addition to specific provisions, to provide against the unidentified losses which are known to exist in any portfolio using a systematic method which should be consistently followed from period to period.”

This provision, according to sources, is killing and would seriously erode banks’ profitability. Bankers said such level of general provisioning after you have made provision for any loan that is not performing after three months is tantamount to double provisioning.

Investigations revealed that at the last Bankers Committee meeting, the banks strongly expressed opposition to this section  and, as a result, the CBN promised to look into their complaints.

However, the section that  seems to be generating the greatest concern among banks is section 3.26 on reconciliation of inter-branch accounts and treatment of suspense account entries.

It states, “(a) All entries outstanding in the Inter-Branch Accounts (by whatever name called) and/or suspense Account must be reconciled/cleared and taken to the proper head of account within two months from the date the entry is made in the above named accounts. (b) All outstanding items in the Inter-Branch Accounts which are not reconciled/ cleared within two months shall be classified in accordance with section 15.9.

(c) Banks shall institute an effective internal control system for the operations of Inter-Branch and Suspense Accounts, which ensures reconciliation/clearing of the entries in shortest possible time and also clearly fixes the responsibilities on the official(s) for neglecting the timely reconciliation and clearance.”

Operators told Financial Vanguard that the implication of this is that banks would not be able to use suspense accounts for the various purposes which they are presently used for now and it would also result to further huge provisioning in a lot of banks.
A chartered accountant with more than a decade experience in the industry explained that among other things, banks usually use suspense accounts to cover  a host of fictitious and fraudulent transactions.

He said they also use it as temporary warehouse for problematic transactions, which might be due to system problems,  till when they are resolved. But with the requirement that every item in these accounts must be reconciled within three months otherwise they would be classified as loses, the apex bank has denied banks a major hiding place for fictitious transactions.

He said in addition to these, some banks will record huge losses because of the huge amount in their suspense accounts. The amount involved in some banks are very huge and have to do with transactions that took place long time ago.

He said in a particular new generation bank, the suspense account contain items of close to N 10bn and above. He said in most of the banks that consolidated many unresolved issues like staff loans, which were also fraudulently inflated were buried in the suspense account. He said also in the old generation banks, their suspense accounts contain items as old as 30 years hence it will be difficult to reconcile  as required by the CBN.

“The requirements are not bad,” he said. “They are good for the banks in the long run as it will make everybody to sit up. But initially it will take banks books to the cleaners”, he said.