Vibrant boards critical in Basel II implementation
03/05/2011

The Reserve Bank of Malawi (RBM) says boards of directors of commercial banks have a critical role to play in the successful implementation of Basel II.

RBM deputy governor Mary Nkosi was speaking in Mangochi on Friday at the start of a day-long Basel II orientation workshop for directors of boards of commercial banks.

Basel II, according to Investopedia, is a set of banking regulations put forth by the Basel Committee on Bank Supervision, which regulates finance and banking internationally.

Basel II attempts to integrate Basel capital standards with national regulations by setting the minimum capital requirements of financial institutions with the goal of ensuring institutional liquidity.

Unlike the first accord, Basel 1, where focus was mainly on credit risk, the purpose of Basel II is to create standards and regulations on how much capital financial institutions must have put aside. Banks need to put aside capital to reduce the risks associated with its investing and lending practices.

"The implementation of Basel II is complex and expensive, but worthwhile. Without being blind of these challenges, no one is better placed to implement Basel II rather than ourselves. RBM has, therefore, drawn up a road map for its successful implementation," said Nkosi.

She said as part of the road map, the central bank will conduct self assessments to gauge each bank's readiness to implement Basel II.

"Further, after the first quantitative impact study, which I am sure you are all aware of, each bank has been requested to come up with an internal capital assessment process. These tasks will require a high level involvement of the boards of directors since the strategic direction and running of affairs of the banks are your responsibility," said Nkosi.

Malawi is the fourth country in the Southern Africa Development Community (Sadc) after Namibia, Mauritius and South Africa to migrate to Basel II.

Migrating to Basel II will, among other things, help local commercial banks to pay lower premiums on lines of credit they will try to enter with other international banks.

"There will also be improved sovereign ratings for Malawi. Banks will also be able to draw what we call risk retain profiles and risk adjustment performances comparable across business lines and measurable for the entity as a whole, which will result in value addition to shareholders.

The fact that Malawian banks will be adequately capitalised will result in resilience on the part of banks against economic shocks," said RBM director of bank supervision Noel Mkulichi.

But critics of Basel II say its implementation could lead to a reduction of total credit to developing economies, both domestically and internationally. This, they argue, will see a reduction in financing of investment and growth in developing economies.

Malawi is expected to completely migrate to Basel II by 2014. However, the developed world is expected to launch Basel III in 2012.

Bankers Association of Malawi (BAM) president John Biziwick said his grouping is excited with the progress made towards Basel II implementation.

He said BAM has been pushing for Basel II implementation for some time.

"Our relationship with correspondent banks will be different. Before that, they were obviously looking at us as all risk banks. Once we adopt Basel II, it will give as an advantage," said Biziwick.

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