Action Plan for Banks in the West African Monetary Union

Mon 16 Oct 2017

A new prudential framework applicable to banks and credit institutions in the West African Economic and Monetary Union (WAEMU) is set to come into force on 1 January 2018. However, a significant delay has been observed in implanting reforms in the majority of banks, where the scale and implications of the necessary work are widely under-estimated.

Endorsed by the WAEMU council of ministers on 24 June 2016, the measures will entail an in-depth reform of risk management and coverage, and will also promote a new risk culture.

This new framework is based on the Basel II and Basel III rules, including the introduction of concepts such as leverage, long-term and short-term liquidity ratios, and risk distribution ratios, and aims to foster the preservation of a resilient, robust banking system that meets the needs of the WAEMU economies, together with a well-managed risk profile.

The framework replaces the 2000 prudential regulation, which lagged behind both international standards and comparable jurisdictions and did not take into account changes in the banking environment. In particular, the development of sub-regional banking groups and the intensification of banking activities characterised by the arrival of new products with different risk profiles.

The Central Bank of West African States has undertaken a tailored transposition of Basel II and III, designed to take account of the circumstances and condition of the banking system. Certain methods have been prohibited and others amended. Apart from convergence with the best international standards, the Central Bank hopes that this new framework will give banks better access to external financing, encourage greater confidence between players in the Interbank market and strengthen overall financing capacity within the economy.

The framework (156 pages) is much more complex than its 27-page predecessor and local players will also have to take it on board. In addition, it is accompanied by a reform of the banking chart of accounts, reflecting the need for genuine coordination.

Contrary to observations received, this reform does not only affect the banking system. Commercial undertakings too must understand the reforms, since they need to grasp the assessment criteria applied by bankers and the indicators that will enable them to analyse their own risk profile, in order to improve and shape their funding envelope and its contractual conditions.

Because of the complexity of the project, the Central Bank requires banks to produce an action plan and periodic reporting.

In order to control the project, it is essential for all players in the banking sector to:

• have an external resource validate the Gap Analysis that compares the requirements of reforms with what is currently in place, and the consistency, relevance and feasibility of their action plan;
• provide training for all banking players, differentiating the programmes to reflect their roles; certain entities will need awareness raising, while others will need more in-depth training and discussions;
• obtain assistance in the form of a Project Management Office (PMO) to monitor and steer the project optimally; governance and management must be kept regularly informed of the progress of the project, its risks and difficulties;
• seek, if necessary, help in approaching the projects set up through the action plan; establishing procedures, developing ICAAP (Internal Capital Adequacy Assessment Process) tools or stress tests, etc.

Importantly, it is vital that the governance of each bank takes charge of this project so as to avoid any disruption or critical risk in implementing the task and to ensure the requirements of the regulatory authority are fully observed.