By Babajide Komolafe
Governor, Central BankÂ of Nigeria (CBN), Malam Lamido Sanusi, has said that the on-going reform in the banking industry will enhance the global competitiveness ofÂ Nigerian banks.
He said in Abuja last week, â€œThe sole objective of the reform is to move the Nigerian economy forward and to proactively position the banking system to become a sound and reliable catalyst of economic development.
â€œFor Nigerian financial institutions to compete effectively in the global financial markets, they need to embrace the global best practice in corporate gover-nance, ethics and pro-fessionalism, international reporting standards and disclosure and smooth and efficient banking/payment standards.
â€œThe recent CBN action is, therefore, aimed at reposi-tioning the banking system and making it ready to play its deserved active role in the global financial system.â€
Addressing the 3rd Annual Banking andÂ FinanceÂ Conference of the Chartered Institute of Bankers of Nigeria (CIBN), Lamido said, â€œAs far back as October 2008, some of the Nigerian banks showed serious liquidity strain. CBN had to give them financial support in form of access to the Expanded Discount Window (EDW). As at June 4, 2009, the total outstanding at the EDW was N256.6bn, most of which were owed by the 5 banks, representing 40 per cent of banking sector credit in Nigeria.
â€œMoreover, some of the instruments discounted at the window were of doubtful value and threatened to undermine its efficacy as a means of temporary accommodation for banks.Â Indeed, some of these banks became regular users of the standing lending facility at the CBN and, simultaneous-ly, were net-takers in the inter-bank placements market under the Bank guarantee arrangement, indicating that they had a deep-rooted liquidity problem.
â€œTherefore, to save the banks and strengthen the banking industry, protect depositors and creditors, and restore public confidence, the CBN injected N420bn into the 5 banks and removed their CEOs as related to failure of risk management and corporate governance in an effort to prevent a systemic banking crisis.
â€œThe injection of this fund (Tier 2, capital) into these five banks is sufficient to resolve and stabilize these institutions to enable them continue normal business operations. Arrangements are currently on going to recover non-performing loans from the banksâ€™ debtors.
â€œThe action is a positive one for the industry because it addresses one of the major concerns about the industry which is transparency, disclosure of bad loans and good governance. It is important to note that, the government is not interested in keeping stakes taken in the banks in exchange for the recapitalization.
The summary from the foregoing is that the Nigerian banking system faces enormous challenges which, if not addressed urgently, could snowball into a crisis in the near future. We donâ€™t have to wait for the crisis to explode before we act.
The CBN will continue to ensure proper functioning of our financial sector for exchange rate and price stability, manage interest rate for macroeconomic coordina-tion and pursue its developmental roles.Â We will concentrate on the theme of strengthening effective supervision of the banking industry, regulation, transparency, and risk management system as the new CBNâ€™s mission and strategies for integrating Nigeriaâ€™s financial system into the regional and global financial system.
Banks are also expected to imbibe best-practice, corporate governance, improve on self-regulation, enhance the capital base, risk management culture, and seek to be competitive in todayâ€™s globalizing world. Diversification of the productive base of the economy remains a fundamental challenge of economic management, and banks will increasingly be challenged to become more innovative in their intermediation function, and especially to increase financing to the productive sectors.â€