Background:
The Supervision Department continued in 2003 to perform its core functions and other additional activities that play a major role in enhancing the supervisory responsibility. The Department used complementing tools of off-site surveillance and on-site inspections. The Department continued to monitor the financial soundness of financial institutions as well as their compliance with the relevant statutory and regulatory provisions through analysis of regular financial and compliance returns submitted by those institutions to CBL. It is the Bank’s policy to examine each licensed bank at least once every eighteen months. In line with this policy a routine examination of all the three banks operating in Lesotho was conducted in 2003. The banks were found to be well capitalised, profitable and highly liquid with compliance ratios far in excess of the prescribed minimum.

In 2003, the banks’ capital amounted to 24 per cent of risk weighted assets. At this level, the capital was three times the prescribed minimum requirement. As at the end of 2003 the ratio of non-performing loans to total loans stood at 3 per cent, showing a marked improvement from its previous year level of 11 percent. While on the one hand the banks were found to be financially sound and generally in compliance with the statutory and regulatory requirements, on the other hand the level of financial intermediation continued to be unacceptably low with a loans-to deposit ratio of 22.7 per cent. With the assistance of the Lesotho Government Privatisation Unit, under the Lesotho Utilities Sector Reform Project, the Off-Site Surveillance Section was able to visit the Financial Services Board in South Africa. The purpose of the visit was to build capacity in the supervision of the insurance industry and collective investment schemes. This visit enlightened the team on regulatory reporting requirements. In addition to the examination of banks, the On-Site Examination Section inspected one unit trust management company and four insurance companies.

In recognition of the need to harmonise and enhance the quality of supervision, with particular emphasis on the off-site surveillance function, the East and Southern Africa Banking Supervisors Group (ESAF), in conjunction with the SADC Central Banks, embarked on a joint project to automate the supervisory function within the region. This resulted in the conception of the Bank Supervision Application (BSA). The system definition, design and development that started in 2002 were successfully completed in 2003. The system was first implemented and tested in Mozambique in 2003. The system rollout to the rest of the region will be undertaken in 2004 starting with Zambia to be followed by Zimbabwe and Lesotho. Deployment of the system in Lesotho is expected to start in July 2004. In preparation for the envisaged system implementation in Lesotho, the Central Bank of Lesotho appointed a task team to work on all arrangements necessary to ensure that the implementation is effected as smoothly as possible. The task team was mandated to specify returns to be submitted by reporting institutions, to establish and document the CBL specific parameters to be used by the system, to identify and document the CBL specific processes and workflows as well as to specify reports to be generated by the system. The task team comprised of staff from the Financial Institutions Division, Supervisory Policies and Regulation Division, Policy and Exchange Control Division, Development Finance Division as well as the Information Technology Division. The exercise has since been completed.

BSA in Lesotho
 In preparation for the deployment of the BSA in Lesotho in 2004, the Financial Institutions Supervision Technical Committee (FISTC) accepted a proposal to establish - The Bank Supervision Application Implementation Project Task Team to carry out the following tasks:

• To specify the returns, their formats and the reporting time-frames;
• To establish and document the CBL specific parameters to be used in the Bank Supervision Application
• To identify and document the CBL specific processes and workflows to be used in the BSA
• To specify the reports to be provided by the BSA.

In initiating these tasks, it is anticipated that the time to be taken during implementation at the CBL will be greatly reduced.