In line with international best practice, the Central Bank of The Gambia (CBG) will introduce risk-based supervision of financial institutions starting on a pilot basis in the coming months of this year.

This was disclosed on Monday by the first deputy governor of the Central Bank of The Gambia, Basiru Njie, at the opening ceremony of a week-long regional workshop on "Risk-Based Supervision" held at the Paradise Suites Hotel in Senegambia.

The workshop was co-facilitated by the Office of the Superintendent of Financial Institution (OSFI) of Canada and the Central Bank of The Gambia.

The introduction of risk-based supervision has become an urgent necessity to maintain financial stability in an economy. Financial stability, according to Deputy Governor Njie, is a situation where the financial system is operating efficiently and able to withstand large economic and financial shocks. Financial stability, he also said, is an important prerequisite for sustained non-inflationary economic growth.

"The maintenance of financial stability is, therefore, an important concern to the Central Bank of The Gambia and supervisory authorities worldwide," he said. "It is also an on-going challenge in part because of the rapid innovation and continuous structural evolution that characterise financial systems."

Another factor, he further noted, is that recent changes have included the development of a wide array of new financial instruments and growth in the number of new cross-sectoral participants, many of which have a global reach. "These developments have resulted in an increased number of potential channels through which economic and financial shocks can be created and transmitted," he said.

Of further concern, he also said, has been the "untested nature" of new risk management techniques and financial instruments that have not been subjected to an extended period of stress.   "These developments have raised the fundamental question of how best to effectively supervise and examine the financial sector," he added.

Deputy Governor Njie further said the CBG's current on-site examination framework "gives equal emphasis" to all areas of a bank regardless of the size, complexity and risk profile.  He however noted that the process "is usually lengthy and results" in examinations taking too long to conclude.

He said: "In line with international best practice, the Central Bank of The Gambia shall introduce risk-based supervision starting on a pilot basis in the coming months of 2008.

Risk-based supervision is about the targeting of resources on the riskiest institutions with a view to achieving a more effective and efficient supervision. Put differently, risk-based supervision emphasises a thorough understanding of the supervised entity's risk profile. Supervision programmes and activities are then tailored to suit the specific risk profile of the particular institution."

Carrying out the assessment and determining the level of risk, he further noted, "are the biggest challenges" faced by regulators in the sub-region.

The deputy governor emphasised that market confidence is fundamental to any successful financial system, adding that "only if it is maintained will participants [in the financial sector] and users be willing to trade in financial markets and use the services of financial institutions".

"Maintaining this confidence involves preserving stability in the financial system and the reasonable expectation that it will remain stable," he added.

He commended the facilitators from OSFI, whose team was headed by Mr James Clarke Bruce, for their prompt response to the request for such a training and assistance.