Reports on Observance of Standards and Codes

Cameroon and the IMF

Cameroon ROSC
I.  Fiscal Transparency
II.  Transparency of Monetary and Financial Policies
III.  Banking Supervision
IV.  Insurance Supervision
V.  Payment System

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III.  Banking Supervision
Prepared by a staff team from the International Monetary Fund and the World Bank in the context of a Financial Sector Assessment Program (FSAP), on the basis of information provided by the Cameroonian authorities.

May 2000

Observance of the Basel Core for effective
banking supervision

1. Since the late-1980s, the authorities have forcefully implemented a program of liquidation, recapitalization, and privatization during two waves of bank restructuring, and have reinforced regulatory and supervisory capacity. As a result, a large part of the banking system--dominated by foreign-owned banks--now respects prudential ratios. Nevertheless, some banks are still in a precarious situation, there is a high degree of indirect credit risk and loan concentration, and there is important liquidity risk. Also, the scarce information available on the financial situation of microfinance institutions points to soundness issues.

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.
2Broadly compliant.
3Broadly non-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).


II. Transparency of Monetary and Financial Policies        Cameroon ROSC         IV. Insurance Supervision