The Reserve Bank of Malawi (RBM) is equipping commercial bank staff responsible for credit and operational risk management on how to quantify credit and operational risks according to the Basel II minimum capital requirement.

Speaking during the opening ceremony of a week-long workshop in Mangochi on Monday, RBM Director for Bank Supervision, Noel Mkulichi, said credit and operational risks are major risks which exist inherently in all banking institutions.

“This is why these risks form part of Pillar I of the Basel II Accord. As such, all banks are required to quantify them and set aside appropriate capital charges for the risks,” said Mkulichi.

He said capital adequacy requirements will be a reflection of the quantification of all material risks faced by banks.

“Banks which will adopt best risk management practices will be rewarded with lower capital requirements. Enhanced risk management practices will also improve banks’ ability to offer new products to customers and allow for better risk-adjusted pricing,” he said.

Mkulichi explained that credit risk has increased tremendously in recent years following the introduction of credit product innovations into financial markets.

He said this was reason enough for development of more resilient risk management structures in banks.

“Basel I measures credit risk based on a simple risk weighting method. However, [Basel II] goes deeper. Under the Standardised Approach of measuring credit risk, which we will have adopted upon implementation [of Basel II], risk weights are aligned to the probability of default or ratings of credit facilities or borrowers,” said Mkulichi.

This, he says, makes Basel II more risk sensitive than Basel I.

“Basel II is also flexible because banks are allowed to use their own models to measure credit risk in their portfolios under the International Ratings Based Approach or the Advanced Internal Ratings Based Approach,” said Mkulichi.

He said all banks in the country will first have to adopt the Standardised Approach of measuring credit risk before migrating to advanced approaches.

Mkulichi said the central bank took the decision to allow banks to enhance their risk management structures before adopting the advanced approaches which tend to be complex and require comprehensive data and systems.

“The only challenge which we are going to face as we will be implementing the Standardised Approach is that banks, corporate and other entities in the country are not rated. As such, risk weights allocated to unrated entities, as stipulated in the Basel II Accord, shall apply,” he said.

The workshop is facilitated by consultants, Bianca Ruddy and Oliver Houghton, both from KPMG Financial Services in South Africa.