As somebody who worked closely with the former Central Bank of Nigeria (CBN) Governor, Professor Charles Soludo, what do you make of the recent reversal of his policies, especially, the unbundling of the Universal Banking Structure?
The universal banking arrangement actually came in 2002 and Soludo came to the Central Bank in 2004. So, it was there before he came, but the 13 point agenda he drew up was a comprehensive strategy to address the banking sector crisis and issues of instability. But you will discover that central banking is a very dynamic process. And when there are changes, you may have to change certain policies. Most recently, the media reported that there has been a new policy that tends to reconsider that programme. As the CBN governor, may be there are reasons he wants to reverse that but my worry is that everybody has acknowledged the failure of regulation. Banking regulation has failed and the monetary policy transmission mechanism is also defective There are two major roles of the central bank: that of maintaining monetary price stability, and the banking sector regulation. If both of them have been acclaimed to have failed, it means what is needed actually is not a change in any policy. The problem is not with the policy, the problem is in two major areas. The first major problem area is: instead of building a very strong institution, we are building a very strong personality around a very weak institution. That is what is happening at the central bank and most other Nigerian institutions. You build very strong individuals and then you weaken the institution, instead of the reverse. They don’t bother about building strong institutions.
They keep over emphasizing the individuals in positions, thereby removing the institutional concept that make systems work. There is no amount of policy reversal, there is no amount of ingenuity in policies that will improve the system. Let me tell you that if there is no fundamental restructuring of the central bank, very honest restructuring of the central bank, the entire banking system will collapse in the next five years. It is a very bad situation. I am a professional in banking as well as accounting and I have seen the indicators. The signs are too clear that the banking sector is due to collapse in the next five years if we continue playing this ostrich game. The problem is not whether you are doing universal banking or whatever form of banking. The problem is that the structure, the institutional framework for effective discharge of the central banking functions is not adding up in the CBN. It is excessively over-politicized. The issue is more of populist programmes rather than core monetary policy agenda for the economy.
What indicators are there to predict that in the next five years, the banking sector will collapse?
Number one is that the issue of banking sector failure has become cyclical. That is, in every four or five years, we must witness a major bank failure. So, when it becomes a cyclical event, it means it is leading to a system collapse. It is like a child who falls ill every month. Obviously, the child has a very weak immune system. The correlate of that in the Nigerian banking sector is that the immune system of the banking sector is weak. Terminally weak because you see a lot of sectional interests playing into the central banking arrangement. You see a lot of political pressure on the CBN. And that is why you see their urge to always advertise. Always wanting to tell you what they are doing. That is a sign of somebody who is not performing.
Do you see the reversal of the universal banking structure policy, and the rolling out of the categorization and specialization policy as part of the political pressure that you talked about?
That is part of it. Then another technical dimension of it is the fact that the banks are not lending. There is credit contraption. The issue of lending has been criminalized. And there are serious lapses by those who are supposed to be performing oversight functions. In Nigeria, nobody regulates the regulator. The central bank accounts to nobody. And you see heavy amounts of money being dished out by the CBN financing developmental programmes and all that and nobody checks that. You have just seen N500 billion injected into the power sector when we all know that funding is not the problem of the power sector. How can such an amount come out of the coffers of an agency of government without passing through appropriation? That is a sign of collapse.
Some few months ago you also saw that N620 billion was injected into the banking sector without passing through the parliament, without passing through any technical debate, without passing through critical scrutiny within the economic environment. That is a sign of failure.
Didn’t you see that as a timely intervention to save the banking system from collapse?
The banking sector in that context had already collapsed. That intervention worsened the situation. That intervention did not consider the macro-economic and inflationary impact of such intervention. Remember that banks are private businesses. And when businesses fail to stand the test of the market, they should be allowed to fail. What the CBN ought to have done was guarantee the creditors funds, to guarantee the contingent liabilities of all these creditors and increase the market value of their assets and clean up the balance sheets terminally. So, those banks were actually supposed to fail. So, what we are having now is an accumulation of losses which by the time you net it up with the CBN’s balance sheet, you will be shocked that our own CBN is almost going bankrupt. Otherwise, let them bring out their balance sheet. Let us net up all these interventions and you will see that they are also in debit.
Against this background you don’t see the CBN’s reform of old policies as an effective strategy to address the weakened banking system?
Call it categorization or specialization, it is mere policy semantics. It is coming without concrete analysis of where we are. As I am talking to you now, nobody can tell clearly the level of deficit in the credit that is required by the real sector. Nobody can tell you the extent of the bad loans that are existing in the country. Nobody can tell you the extent of bad loans that are foreign denominated. Nobody can tell you the extent of those loans that are insider related. These things are kept out of the purview of the public. There is no transparency. There is also a disconnect between the central bank and what should come out of the state. Approach an average commissioner of finance in any state, he does not know anything about monetary policy. The problem is that the CBN itself is narrow in its assessment of the country.
When the CBN embarks on excessive advertisement to defend its policies, you begin to see a lot of institutional attempt to provide evidence to back up government positions. That is not the role of a central bank. A central bank is supposed to be operationally independent. It is supposed to be independent of political authorities and it is supposed to put economic considerations above political considerations. But what we are seeing now is a situation where the monetary authority is tilting along the lines of political opinions. If you look at the newspapers, you see the monetary authority trying to argue with people who are not happy with their programmes. Does it matter! You are not a political party. So, that N500 billion intervention in the power sector is unconstitutional and an indication of a failed monetary policy institution because it is not supposed to inject that volume of funds into the system without passing through the National Assembly. When you put yourself in a position and give the impression that you operate outside the law, it becomes a problem. Between 1999 and now, the CBN has had seven cases up to the Appeal Court and Supreme Court and lost all of them. What does that tell you about the institution? Is it a lawless institution?
And a situation where the actual corporate governance that is being preached by the CBN is not being upheld in the CBN, then where are we going? The governor of the central bank is also the chairman of the board of the bank. But in the commercial banks, no chairman of the board can be the managing director at the same time. The only thing that can save us is when we see institutions outside ourselves. Today, you may be there enjoying it, but tomorrow, you may be at the receiving end. So, the issue of universal banking is not a problem. What I have been canvassing is to separate regulation from monetary policy. The central bank should concentrate on monetary policy while a totally different institution should concentrate on banking sector regulation because that is purely an operational function.
So you don’t see the CBN doing well in banking regulation?
They are not doing well and they have acknowledged it. They can never do well because it is not their fault. It is a structural problem. Banking regulation requires a thorough knowledge of banking operations. It means you must have been an operator, you must be very vast in accounting, auditing, finance and then aggressive private sector business processing. Then you must have intensive information technology knowledge, electronic audit and in-depth analysis of forensic accounting.
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