Tuesday, 16 April 2013

Nigeria’s Banking Reform above the Curve

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CBN office, Abuja
When the Central Bank of Nigeria (CBN) embarked on the banking reform under the extant Governor, Mallam Sanusi Lamido Sanusi, some stakeholders raised questions about the genuine and intuitive intentions of the reform agenda. Suffice to note that this group of stakeholders had no fundamental understanding of the breadth and depth of the rot within the Nigerian banking system as revealed by the special audit of the banks, and if left unattended, the far-reaching implications for the Nigerian economy.

 The stakeholders with good grasp of the issues applauded the reform agenda, whilst the doubting Thomases accused the CBN and its governor of witch-hunting perceived enemies. Even, the legislature accused the apex bank of over-stepping its mandate and acting unilaterally. Undoubtedly, these opposing stakeholders failed to pay attention to the fact that regulators in the financial sector usually require swift actions to avoid all possible and unprecedented systemic effects that could arise from such actions.

Undeservedly, the CBN has paid heavily for its action through unrepentant criticisms from the section of the stakeholders looking for ways to hang the apex bank for its foresight, bold and corrective policies. Again, these stakeholders did not appreciate the fact that the Nigerian banks, and indeed, the financial system as a whole, were saved from incalculable disaster by the quick and timely intervention of the CBN. In fact, the 2009 banking sector reform that brought about the intervention and nationalisation of some banks, the sack of some Banks’ CEOs and the establishment of Asset Management Company of Nigeria (AMCON) to take over the toxic assets and to recapitalise the capital-deficient banks have been incredibly successful in safeguarding and strengthening the Nigerian financial sector.

Other policy measures taken by the Central Bank to safeguard the financial system included substantial liquidity injection into the system; a blanket guarantee for depositors which helped to maintain and sustained confidence in the sector to avoid overrun, as well as for interbank and foreign credit lines of banks extended for six-monthly periods until end–2011, was provided; AMCON was established to purchase banks’ nonperforming loans (NPLs) in exchange for zero coupon bonds and inject funds to bring capital to zero; regulations and supervision were strengthened and corporate governance enhanced; and the universal banking model was abandoned and banks instructed to establish holding companies or to divest their nonbank activities. These measures by the CBN saved the Nigerian economy from potential economic collapse thereby stabilised the economy, even, in the midst of weak global economic growth. However, there are still challenges including initiating policy thrusts to narrow the interest rate spread and improving the private sector’s access to credit to build on the CBN’s achievements, mitigate future economic vulnerabilities and ensuring sustainable growth. This however will require not only monetary policy actions, but structural reforms to achieve.

Available data suggest that the bank has achieved considerable success and that the reform now serve as a model for both developed and developing countries. A recent Financial System Assessment Program (FSAP) by the IMF in 2012 concluded that “the Nigerian commercial banking system as a whole can absorb most credit and market risk shocks, withstand liquidity pressures, and absorb moderate potential losses”. It also concluded that the banking sector “is now well capitalized, liquid, and profitable, with three small systemically unimportant banks demonstrating some weakness”. These three banks are in the process of being merged or acquired through the Asset Management Corporation of Nigeria (AMCON) and possess no systematic risk to the banking system.

Despite these assessment and validation of the process by world bodies and conditions on ground, the bank and its management has not received any commendation from the executive or the legislative branch for its foresighted and quick comprehensive actions taken to avert what could have been an economic disaster for the country to inimize and strengthen our financial sector, therefore, securing unprecedented economic growth for the country. The Central Bank should be commended for this action, at a time that other economies had lukewarm attitude to implementing needed reforms in the financial system at the peak of the financial crisis.

It is interesting to note that some of the bold measures taken by the Central of Nigeria are now being considered and implemented in other jurisdiction (see proposed reform in United States and United Kingdom) more than four years after Central Bank of Nigeria implemented its bracing but forward looking reforms. This timely, swift and carefully planned reform measures have no doubt put the Central Bank of Nigeria above the curve and has established it as a forward looking and proactive Central Bank. The Bank and its management has managed to establish itself as a leader and a model institution with policy direction and foresight in a continent usually seen as followers or at best late comers when it comes to initiating and implementing strategic policies or charting policy directions. The foresightedness and doggedness of Mallam Sanusi and the management of the Central Bank and all those that supported the reform agenda even in the midst of unpopular public acceptance must be commended for posterity.

Benchmarking the reform
The reform has resulted in improvement in banking supervision. Bank supervision has improved markedly since the financial crisis, through better onsite and offsite practices and higher standards of corporate governance. The Bank has introduced macro-prudential and systematic oversight measures and strengthened “conventional” micro-prudential supervision and regulation framework. It has developed new instruments and framework for improving supervision and regulation, including, enhancing stress testing techniques and better analyzes of financial data. In addition, the Bank has also enhanced the capacity of its supervision staff for better efficiency and effectiveness. Since Nigerian banks are increasingly becoming international, emphasis on cross-border supervisory practices and collaboration have improved as well. The Bank spearheaded the regional banking supervision body for West African countries which has now being adopted continent-wide under the umbrella of the Association of African Central Banks (AACB). Enhancing cross-border supervisory practices will continue to be a priority as Nigeria banking system could become vulnerable from other jurisdiction. Strengthening the safeguards of our banking sector and improving corporate governance can only help strengthen our financial system and promote inclusive sustained growth.

The abolishment of universal banking to ring fence depositors’ fund was a key aspect of the reform. The ring-fencing of depositors’ funds by eliminating universal banking was one of the elements of the reform in Nigeria that was touted as controversial at the time. This idea has since become one of the key elements being considered in the UK banking sector reform bill. The UK programme aimed at addressing the weaknesses exposed by the financial crisis of 2007-09 in the banking sector is implementing one of the key recommendations of the Independent Commission on Banking (ICB) of ring-fencing retail deposits from wholesale banking activities. Even the UK is recognising that having the activities of retail banking and investment banking side by side can be damaging to the culture and standard of banking “There is evidence to suggest that, as well as supporting financial stability and reducing the risk to the taxpayer, separation has the potential to change the culture of banks for the better and to make banks simpler and easier to monitor.” The UK Parliamentary Commission on Banking Service (PCBS) made specific recommendations on the objectives of ring-fencing, suggesting that ring-fencing will have the following benefits:

• Ring-fencing will make it easier to sort out both ring-fenced banks and non-ring-fenced banks which get into trouble, without the provision of taxpayer-funded solvency support;
• It will insulate vital banking services on which households and SMEs depend from problems elsewhere in the financial system; and
• It will curtail government guarantees, reducing the risk to the public finances and making it less likely that bank will run excessive risks in the first place.

This policy is already in place in Nigeria, but it is still being considered in the UK.
The establishment of AMCON has been a central part of the reform agenda. AMCON is a special purpose vehicle aimed at addressing the problem of non-performing loans in the Nigerian banking industry, recapitalizing capital deficient banks, among others. To inimize cost to taxpayer’s, a sinking fund to fund the activities of the AMCON to be paid for by the banks and with initial seed money from the CBN was created. The CBN shall contribute N50 billion annually to AMCON, while each of the participating banks shall contribute an amount equivalent to 0.3 per cent of its total assets annually into the sinking fund as at the date of their audited financial statement for the immediate preceding financial year. Therefore, the cost of the resolution to the Nigerian taxpayer is significantly minimized. The intervention of AMCON has seen the banking industry ratio of non-performing loans to total credit significantly reduced from 34.4 per cent in November 2010 to less than 5 percent at the end-December of 2012.

Under the reform, the bank identified key priority sectors and developed tailored interventions to support and promote their growth in particular, but targeting the wider economic growth through them. This includes the intervention in the agriculture sector, Power and Aviation, Small and Medium Enterprises. In addition the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) was established. The programme is a demand-driven credit facility that would build the capacity of banks to engage and deliver loans to agriculture by providing technical assistance and reducing counterparty risks facing banks. It also seeks to pool the current resources under the CBN agricultural financing schemes into different components of the programme. This intervention is similar to the one introduced by Bank of England in 2012 under the Funding for Lending Scheme, two years after CBN intervention Scheme in the priority sectors. Under the Funding for Lending Scheme, the Bank of England lent money at below market rates to the financial institutions for on-lending to private sector to spur economic growth for businesses and households.

 The CBN should be commended for their foresightedness, doggedness and determination at sustaining reform in the banking sector and securing our collective economic growth even in the face of global and domestic challenges.
Source: ThisDayLive

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