The risk-based supervision exercise to be introduced in the course of the year by the Central Bank of The Gambia (CBG) is a step in the right direction, as it will focus on maintaining a risk-free financial transaction in the economy in the wake of the marked increase in the number of commercial banks operating in the country.

The focus of this exercise also strikes on the ultimate goal of encouraging and maintaining a credible and dependable up-market trade of financial assets and instruments in the Money and Capital Markets.

As the 1st Deputy Governor of the CBG, Basiru Njie, said recently at the Paradise Suites Hotel while delivering a paper by the Bank governor on the occasion of the opening of a seminar on risk-based supervision, there are fundamental reasons for such a seminar and the risk-based supervision exercise which will be introduced soon by the CBG, in line with international best practice.

One of these reasons is “the untested nature of new risk management techniques and financial instruments that have not been subjected to an extended period of stress”.

Before going further into the essence of risk-based supervision, let me briefly unravel some basic characteristics of financial instruments and markets. A financial instrument, also known as financial asset, is an asset held by an economic unit which is also a liability or claim on future income of another economic unit. In other words, it is an asset to the buyer of the instrument and a liability to the issuer of that particular instrument.

Examples of financial assets are Treasury Bill and Development Stock, which are liabilities of a government managed by the Central Bank; Ordinary and Preference Shares, Bonds and Commercial Papers, which are liabilities of Business firms; Insurance Policies, which are liabilities of Insurance companies; Demands, Savings and Time Deposits, which are liabilities of commercial banks.

Unlike real or tangible assets, which provide a flow of services, financial assets are intangible and do not provide a flow of services but rather provide mechanism for mobilization of savings and the channeling of these savings into investment in productive resources (real assets).

Financial assets are beneficial to an economy because they not only generate savings but also simultaneously channel savings mobilized to investment. Investment, it is widely known, serves as the ‘engine’ of productivity and economic growth for an economy. Thus trade in financial instruments should be encouraged in an emerging economy like The Gambia’s. It takes financial transaction and the economy of a country a notch higher and pulls sufficient finances which go into investment that yields substantial returns to concerns and the government, as well as creates more employment opportunities.

In The Gambia, financial institutions are the main players or participants in this type of trade which is conducted in a financial system categorized into Money and Capital Markets, and Primary and Secondary Markets. Since the ultimate goal of a central bank is to obtain a buoyant, fluid and developed economy through prudent monetary policy, trade in financial instruments becomes an aspect which must be put on the table and be allowed to take its course. It must, however, be monitored and supervised to meet its required objectives. This leads again into the essence of risk-based supervision.

The CBG has demonstrated its awareness of the responsibility of monitoring the financial flow and market of The Gambia by taking up the onerous task of ensuring that seminars on risk-based supervision are undertaken to equip central bank personnel with the necessary skills, for the task of engaging in a proper and efficient manner in the supervision of financial entities to have a thorough understanding of the entities’ risk profile.

Having a through understanding of entities’ financial risk profile is essential in the wake of the growing number of financial instruments being introduced by financial institutions in the country. This is because market confidence is fundamental to any successful financial system.

As Governor Momodou Bamba Saho of the CBG stated, only if market confidence is maintained will participants and users be willing to trade in financial markets and use the services of financial institutions. Maintaining this confidence therefore involves preserving stability in the financial system and “the reasonable expectation that it will remain stable”. This and other factors make it imperative that a risk-based supervision is conducted to pave the way for a safe up-market financial transaction in the country.