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A review of CBN’s Financial reform

By Bamidele Adekunle
Sequel to my article -AMCON: CBN’s Controversial Reform -published in ThisDay on the 28th of March, 2010. I received numerous emails imploring me to be clear about my stand and to review other policies and activities of the Central Bank of Nigeria (CBN). As a result of this, I present below a review of some of the reforms already implemented or in the process of development by the CBN.


First, the replacement of the universal banking licence with other types of licences is not well-thought. It is true that there are issues with the present universal banking in Nigeria but total removal/replacement of universal banking is a serious policy reversal which might lead to lack of confidence in the banking sector.

The CBN in its circular (BSD/DIR/GEN/CIR/04/012) dated March 30, 2010 indicates that the weaknesses in the present universal banking include lack of expertise, exposure to high risk situation, mismanagement of depositors fund and inefficient monitoring of subsidiaries.

The CBN has a faulty impression that the creation of specialized smaller banks will resolve these issues. This is not true, because most of the banks that failed in Georgia State (USA) are small banks and this state has the highest number of failed banks in the United States. In Nigeria, the National Board for Community Banks (NBCB) has issued around 1,366 Community Banks licences. Most of these banks collapsed and the few remaining ones have converted to MicroFinance Banks (MFB). These evidences prove that economic/ systemic risk (too big to fail syndrome) is not a problem of so-called big banks alone but rather a general phenomenon in the financial sector.

In order to reduce the problem of systemic risk the CBN wants the banks to concentrate on their core banking services. This is normal but the CBN should also introduce a little bit of flexibility in the definition of core banking services. Flexibility is important because core might be a function of expertise, capability and prevailing environment. Another thing I find confusing in the review of Universal Banking is the use of non-operating holding company (HoldCo) model with subsidiary companies -SubCo, for banks that wants to retain their non-core banking operations. This is a very complicated system that might make the financial system worse off. This arrangement leads to questions such as; are the holding companies going to have the same capital base? Will the number of subsidiaries be restricted? Is it appropriate to issue the same holding company licence to different banks when their subsidiaries are involved in different activities? I will rather suggest a graduated licence based on the capability and expertise of the different banks.

The new licence regime should be well defined and properly administered. For example, I totally reject the creation of regional banks because it is anti-competition and they might not be able to mobilise resources for their activities within their regions.

Rather than create a licence tagged as regional licence, I think we should let banks decide the locations that are viable for their operations/activities. If the Non-Interest Banks as suggested in the CBN circular mentioned above can operate anyway, why should the CBN tag some banks as regional banks? The CBN should also review the tax system (the version in the circular is not clear) so that the banks which are capable of retaining their non-core banking functions will not be double taxed.

The second issue is corporate governance. The CBN started the restructuring with the removal of the Chief Executive officers (CEOs) of the troubled banks and the use of EFCC to recover misappropriated fund. This is a commendable approach, in the sense that is good to put in place a system that will serve as a deterrent to other people who might want to mismanage shareholders/customers money in future.

But the CBN has not really addressed the crux of the issue. The main issue is that the CBN should restructure its activities and monitor the banks as required.

There is also the problem of bad corporate governance, which is a problem all over the world because nobody will ever think corporations like Enron and Arthur Andersen will collapse. Based on this premise, the CBN should look at the way and manner board of directors are appointed rather than being rigid on the number of years used by the CEO.

To be democratic, tenure should be left to the shareholders to decide. If they still want a particular CEO after completion of a term that is fine. The only downside to this is that influence in public liability companies is based on number of shares held -few people will decide the board members. Effective corporate governance coupled with efficient CBN audit and monitoring will stem any unethical behaviour in the banks.

Third, there is little or no regulation in the banking sector in Nigeria. I also question the expertise of some of the employees of the CBN, or maybe it is corruption-solicitation and bribery-that has eroded their capabilities and logical analysis. Regulation should be developed in consultation with all the stakeholders and the decision should be participatory.

The procedure involved in the audit of banks (monthly) should be clear and not ambiguous. In the case of the employees, they should be exposed to relevant training and not just trips abroad to earn estacode. Incentives should be put in place to improve employees’ productivity and the environment structured in a way that truth telling will be a dominant strategy. This will lead to the development of cross functional teams that can audit, advice and aid the productivity of the banks. This is attainable once performance is measured based on clear and achievable output standards.

Fourth, the Asset Management Company of Nigeria (AMCON) should be revised to accommodate the realities of the 21st century and the business environment in Nigeria. I will suggest that the bill be revised in consultation with stakeholders (especially shareholders).

The equity share that will belong to AMCON out of the toxic bank equity should be clear and proper valuation should be done in a transparent manner. Who will value the toxic assets (at least they are not valueless)? Since valuation of toxic asset is extremely difficult, the CBN/Ministry of Finance (MOF) will need the help of experts and private companies that are comfortable with handling toxic assets. It is also desirable that the assets are auctioned and sold to the highest bidder in a competitive manner rather than closed bidding that can lead to under-valuation and erosion of shareholders investment. It is unfortunate that the CBN is trying to socialise private business at the expense of Nigerian taxpayers. The CBN should be clear what the Nigerian taxpayers stand to gain from this exercise.

Fifth, it is not really clear what the CBN is doing to encourage banks to invest in the real sector. The CBN should make it clear to the banks that they are not supposed to gamble with investors’ money in the stock market.

This is important because any transaction based on imaginary concepts and not strong financial fundamentals -backed with policies-that are context specific is bound to fail. I wonder how our banks can declare huge profits when there is little or no output from the real sectors of our economy.

To reverse the current trend to a desirable economic situation, all stakeholders should be involved to address issues such as compensation/bonus given to bank officials and investment in the real sector of the economy rather than speculative capital market trading. I am surprised that our banks can give people loan just to trade in the capital market while we have fertile soil/climatic condition for agricultural production and entrepreneurs who are willing to trade in products that are in high demand by consumers both within and outside Nigeria. The investments mentioned above can generate employment to thousands of unemployed graduate we have in Nigeria.
In my own opinion,

I think our banks should be involved in financing small enterprise development and corporate organisation expansion in a concurrent manner. Nigeria’s economy is sustained by the informal sector (although crude oil contributes a substantial amount to the Gross National Product) and they constitute more than 80% of the businesses in Nigeria.

If our banks want to be sustainable, they will have to support small businesses -some of them don’t even use the bank at all. A context specific banking, with recognition of the small enterprise sector will make people who are currently excluded from the formal banking sector to be included. Most of these micro-enterprises belong to associations which the banks can pass through if the banks are of the opinion that these individuals are not bankable. In disbursing funds to these entrepreneurs the banks should note that micro-entrepreneurs do not separate consumption and production expenditure.

In the case of corporate organisations, the banks could finance projects that people (consumers) will consume or need. Projects of such nature include cultivation of cash crop (food and non-food) for local consumption and export, production of value-added crops, Private-Public Initiative -that is private sector led (Eko Atlantic City) and private sector business that will promote the image of Nigeria (Arik Air).Finally, I think there are a lot of issues that the CBN need to revise before the financial reforms can be successful.

Bamidele Adekunle, PhD; University of Guelph, Canada


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