By Chinedu Onyesoh

The Secretary General and Director, Legal Department, Nigeria Deposit Insurance Corporation, (NDIC) Alheri Bulus Nyako has attributed various risks associated with most off-balance sheet transactions in Nigeria to the principles behind their operation.

Speaking recently in Lagos during a programme Organized by the Chartered Institute of Bankers of Nigeria tagged “Guarantees, Bonds and Indemnities”, Nyako said that Guarantees, Bonds and Indemnities are classified in the financial statement of banks as contingent liabilities and it presents a variety of risks to a bank as an institution.

He maintained that for the banks to manage the challenges associated with off-balance sheet, the Board of Directors should put in place a written policy on the type and level of off-balance sheet risks a bank will undertake and should be regularly informed of the off-balance sheet risk exposures of the bank.

He further opined that “The management should ensure that there is a well defined division of responsibilities between dealing accounting and internal supervision, adding that the bank should identify risks inherent in new products and activities and ensure that they are subject to adequate controls before being undertaken.

A “Major initiative should be approved in advance by the Board or it should establish and enforce operating limits and other practices that maintain exposures within levels consistent with its risk appetite”. Nyako said, “that the system should be adequate to capture monitor and report all of off-balance sheet exposures and related risks, while internal controls should be regularly evaluated for adequacy and intergrity.There should be an effective internal audit” he added.

Finally he said that banks should also evaluate the legal structure of the countries in which it is operating, to ensure that its customer’s obligation can be legally enforced and that the management should ensure that the structure of the bank’s business and the level of interest rate risk it assumes is effectively managed.

In addition, Nyako talked about addressing risks arising from contingent liabilities. He said contingent liability refers to a liability that will only occur if a specific event happens. And that it is also a liability that depends on the occurrence of a future and uncertain event.

When asked about the roles of supervisors and regulators in the banking industry, He said, supervisors and regulators in the banking industry play a critical role in ensuring that a bank management reduces the risks inherent in of-balance sheet transaction such as guarantees, bonds and indemnities.

Also,some of the risks inherent in off-balance sheet transaction are, credit risk, interest rate, risk liquidity, funding risks and foreign exchange risk. and in other to limit imprudent risks taken by banks, supervisors and regulators should be satisfied by banks have in place a comprehensive management process (including appropriate board and senior management oversight) to identify, measure, monitor and control all off-balance sheet risks. Finally, he said regular view and supervisory policies to ensure that they take full accounts of developments in off-balance sheet business should be encouraged.