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By Chima Nwokoji | Lagos
S&P Global Ratings has said that Nigeria’s inclusion in the Financial Action Task Force’s (FATF’s) grey list could raise financial transaction and compliance costs for the Nigerian banking sector and exacerbate already severe foreign currency shortages.
The FATF’s grey listing reflects deficiencies identified in Nigeria’s framework for tackling money laundering and combating the financing of terrorism.
However, S&P further noted that these risks are largely captured within its existing ratings on the sovereign and Nigerian financial institutions.
The Nigerian authorities have committed to improving legislative and regulatory gaps. The expectation is that not only financial institutions, but also designated non-financial businesses and professionals such as accountants and lawyers, will need to demonstrate their ability to identify and address these risks.
But, given significant systemic gaps, these initiatives are likely to yield benefits only over time.
“We believe that the protracted militant insurgency in the north of Nigeria, tensions in the Niger Delta, issues in neighbouring countries and the large informal sector exacerbate risks of illicit domestic and cross-border transactions.
“Nigeria’s financial system is also highly reliant on cash transactions due to the large informal sector. These factors threaten the country’s anti-money laundering/combating the financing of terrorism (AML/CFT) regime.
“Our ‘B-‘ long-term rating on the sovereign and the negative outlook are partly influenced by significant regulatory and governance shortcomings,” the rating agency stated.
It also said that based on observations in other African countries on the grey list, it is expected that Nigerian banks will manage to maintain their correspondent banking relationships, but due diligence, compliance and transactions costs will likely increase.
S&P however observed that despite some reputational risk and potentially higher cost of compliance, the implications of grey listing for Nigeria’s banking sector are likely to be contained.
It stressed that banks’ digital capabilities could help facilitate the identification and reporting of AML/CFT gaps in their risk-management frameworks. The banking sector’s digital transformation has led to the strengthening of client on-boarding and traceability over time.
This was further underpinned by the mandatory issuance of a National Identification Number to citizens in 2015. This is used, for example, to open a bank account.
The banking sector, according to the rating agency, has benefited from significant reform momentum, with the CBN issuing guidance on emerging risks such as sustainable banking and cyber risks. Nevertheless, disparities in information technology and human resources persist across the sector.
In addition, it states that the CBN’s adoption of global best practices has been lagging. For example, full adoption of Basel III’s capital buffers remains elusive, given the persisting scarcity of foreign currency in the banking sector and the weakening naira.
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