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CBN Reforms: Where Gusau erred

Gusau told the newly inaugurated ministers at a seminar in his office that CBN’s intervention when it axed the Managing Directors of the troubled banks…

Gusau told the newly inaugurated ministers at a seminar in his office that CBN’s intervention when it axed the Managing Directors of the troubled banks last August, seemed to have damaged economic activities in the banking sector to the detriment of the economy, rather than for its benefit. He impliedly indicated that the MDs of these distressed banks should have been allowed to continue on their seats for any corrective measures to be implemented on the banks, rather than deposing and prosecuting them, as the governor of CBN did: “the fragility of the economy further dictates that offenders be interdicted without damaging the sector,” Gusau emphasised.

Gusau’s pronouncements could possibility hold water only in the political circles, but not in the realistic arena of business and economics. From Mid-August 2009, when the first five banks were found to be in troubled situation by a combined special examination of CBN and the Nigerian Deposit Insurance Corporation (NDIC), till today, nobody ever came out to dispute that these banks had for months been living on borrowed money from the CBN’s Expended Discount Window (EDW). This situation indicated that the banks had lost a substantial amount of their shareholders funds, and were trading on both customers’ deposit and borrowed funds. What is more disturbing to those familiar with the macro aspect of the finance industry is that, the banks were going down into more trouble as both the depositors’ funds and the borrowed EDW funds were at cost to them.

All known financial indices indicated that the banks were clearly unable to repay their obligations, and the removal of their MDs and other directors further revealed how these bankers were living like medieval kings on people’s sweat.

Furthermore, they were discovered to have employed all unorthodox ways under the sun to cover their tracts.  And as a result of their spread as universal banks, operating across the various sub-sectors of the economy, such as insurance mortgage, stock brokerage, investments etc, their collapse could affect the entire economic system. Should CBN, in this situation, allow these MDs to remain on their seats? Therefore, contrary to NSA’s claim, I will argue that the position of these banks, the financial sector and the entire economy in this regard, are better off now than before the removal of those directors, and there was no better alternative than the position CBN took at that moment.

The problems of the present Nigerian banks generally dated back to the Structural Adjustment Program era, when banking licenses were being issued to whosoever wished to take at the presentation of a certificate of incorporation from Nigeria Corporate Affairs Commission and evidence of N2 million deposit with CBN. Many bankers and contractors opened shops, at times in their living rooms. Majority of these quasi institutions were one branch affair based in Lagos, few were able to open a second branch in the hinter land. Their staff  were mainly unemployed relatives and bankers who could not make it in the existing banks, or relatives and spouses of a high net worth customers of the banks. These baby banks had no regards for ethics and regulations of the industry.   

Universal Banking compounds the problems

In 2000, CBN permitted banks to practice a system of banking that allows a bank to practice the normal commercial banking as well as all aspects of merchant banking, in addition to offering other non-banking financial services like insurance services and capital market business.  CBN as a single regulator adopted a holistic approach to the supervision of these banks that now operate other non-banking businesses. Therefore, it could not offer effective regulatory control given the regime of different enabling laws which established the different regulatory agencies in Nigeria, especially as the relevant regulatory bodies in the country had in the past focused on institutions rather than on functions which had minimized regulatory overlaps. The development of an effective regulatory and or supervisory framework is very important for universal banking, countries that practice this type of banking usually establish single financial supervisory authority a sort of a super regulatory agency for the entire financial services industry.

   The banks also lacked culture of self-regulation and transferency that are also essential for to the practice. Competition for survival and intense desire to maximize profit could not allow banks to let the supervisory framework to achieve the desired objectives. Universal banking hiked insider abuse and other unethical behavior in the industry as well as many sharp practices.

Inadequate capital was also another major constraint for the development of universal banking in Nigeria. The available capital in the banking industry was not enough to offer efficient universal banking services in the country.  There was not enough capital for the accusation of relevant IT systems required for smooth modern Banking operations, that is why most of the banks in the country are now synonymous with the expressing “the system is down”. The statutory capital requirements for the take-off of universal banking was inadequate, and the banks could not subsequently build up their capital bases, as such operated with inadequate capital up to the time of Soludo’s reforms, when they were forced to either merge or raise more capital.   

Universal banking exposed the banks to more risky activities as they offer a wider range of services with diverse risk profiles. There are also risks being transmitted through IT and globalization, like ATM and internet frauds, and lose associated with foreign corresponding banks etc.

Dearth of skills in banking, insurance and securities business in Nigeria.

One of the country’s colonial heritage was lack of managerial man power, as the colonialists did not waste their time towards that endeavour. Mass creation of institutions of higher learning in the late 1970s helped to ease the problem. This problem first manifested itself in the banking industry with the creation of the baby banks, where all types of graduates, both qualified and unqualified, found their way into the banks. The subsequent degeneration of higher education in the country worsen matters, and proliferation of Master of Business Administration (MBA) aggravated the situation, as it became a certificate being bought than worked for, because most of its holders in Nigeria cannot defend its acquisition, since many did not attend lectures, few that did, did in a hostile academic environment with unqualified teachers.      

The astronomical number of the banks also generated high staff turn-over, where someone could work and be promoted in two or three banks in a year, and a fresh graduate could become a branch manager within five years after leaving school. This Phenomenon is still lingering in the industry.   

Soludo Reforms of 2004

When professor Chukwuma Soludo became CBN Governor in 2004, he introduced series of reforms to sanitised not only the banking industry, but the financial industry in general. In a paper he presented at Financial System Strategy 2020, on the 18th of June 2007, entitled “Nigeria’s Financial System Strategy 2020 Plan “Our Dream” , in which he confirmed the foregoing and rightly stated that before 2004, Nigeria’s financial system could not deliver on its defined roles as it was characterised by: Low aggregate banking credit to the domestic economy (20% as percentage of GDP); systemic crisis, with growing resort to Central Bank bail out; banks inadequate capital base; oligopolistic structure, with10 out of 89 banks accounting for over  50% of total banking system asset; poor corporate governance, and low banking/population density  of one bank to 30,432 people.

Soludo introduced Banking Industry Consolidation as part of the reforms, in which banks’  capital base was increased from $15 million  to $200 million through: merger and acquisition, and/or injection of fresh capital; adoption of risk focused  and rule-based regulatory framework; adoption of zero tolerance in data returns by DMBs; automation of the banking system through e-FASS; plan to establish an Assets Management Company as an important element of distress resolution; strict enforcement of the contingency planning framework for systemic banking distress; enforcement of dormant laws; adoption of new code of corporate governance, and deployment of IT in all banking operations.

   With these the then existing 89 banks were reduced to 25, and later 24 as two merged. The problem of capital inadequacy persisted, as some of them were discovered, as late as the end of 2009, they have not fully generated the $200 million Naira minimum capital. Others had their MDs issuing million of shares to themselves and family members without paying. Many of the banks embarrassingly kept on returning to the capital market for more funds so frequently to the extent that the National Assembly had to call the attention of the Security and Exchange Commission (SEC) and the management of Nigeria Capital Market to stop them.

The reforms created mega banks under family enclaves, characterized by hereditary leadership, poor corporate governance, official sleaze, sharp practices, nepotism, and organised connivance with supervising officials of the CBN to steal and distort procedures. Banking traditions of probity, accountability, transparency, integrity and stringent financial reporting standards were all thrown to the dogs. Rather Phoney world class status were evolved in which the banks rush to West African countries to open branches and paid praise singers to offer them ‘Bank of the Year’ or ‘Managing Director of the Year’ awards.

When current reforms that Gusau criticised were introduced by Sanusi Lamido Sanusi, who became CBN Governor in June last year, he bailed out the banks by injecting funds into them immediately after annexing their directors. Stringent regulatory supervision was put in place, and proven and diligent banks were appointed to temporarily run them with the assurance that CBN will not allow any of the banks to fail. Reversing of universal banking is also in a high gear.

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