Sanusi Lamido Sanusi, Central Bank Governor Photo by Abiodun Omotoso Sector reforms place economy on firmer ground
Conclusions from the recent World Bank report on Nigeria’s financial sector capture the essence of the ongoing reforms by the Central Bank of Nigeria (CBN). Even though the report entitled, “Achieving Nigeria’s Financial System Strategy 2020: Making Finance Work for Nigeria” published last Thursday in Abuja does not disclose anything entirely new, it however reveals the depth of the morass which the sector was plunged into and the strides that have been achieved since the intervention.
According to World Bank’s lead Economist, Ismail Radwan, at the public presentation of a report, “It is only after the weaknesses in the banking system were fully revealed in August 2009 by the CBN’s bold actions that a political consensus emerged to tackle weaknesses in the banking system. It is not difficult to see why this would be of great importance to Nigeria’s future growth and development.”
Prior to August 2009, the country’s financial sector was reeling in crisis aggravated by manifest prevalence of poor corporate governance practices by operators who found easy profit in the overt and undue exposure to the capital market as well as unsecured loans to petroleum products importers.
The laxity in risk management practices and poor monitoring, supervision and regulation gave amplitude to distress signal through the frequent resort to the interbank market and the apex bank’s Expanded Discount Window (EDW) by banks for a financial lifeline.
Due to the absence of a culture of transparency and financial disclosure in the system, nothing suggested a need to halt the drift that recent banking sector estimates say resulted in accumulated cost of $15 billion in losses to the country’s economy.
Gaping hole
The CBN’s intervention, in conjunction with the Nigerian Deposit Insurance Corporation (NDIC), came after a stress test revealed a gaping hole in the books of many of the banks. This led to the sacking of the management of eight of the institutions and the eventual injection of over N620 billion in order for them to remain in business.
Though CBN’s direct involvement in the setting up of the Asset Management Corporation of Nigeria (AMCON) was criticised as capable of kicking up conflicts of interest, its activities since take off, particularly in the provision of over N1 trillion to acquire the toxic assets of the banks, have help provide the needed liquidity required by banks to resume their primary functions of lending to investors.
Besides, the reversal of the universal banking policy, which the Deputy Governor, Financial Systems Stability (FSS), Kingsley Moghalu, said operators exploited to engage in a number of ancillary operations that were non-core banking activities, would enable CBN to closely monitor, supervise and regulate operations of the banks towards overall sector stability. The CBN has already set May 2012 as deadline for all banks to fully divest from non-banking related enterprises.
World Bank’s Country Director for Nigeria, Onno Ruhl, said access to finance, particularly credits to agriculture, micro-finance, small and medium enterprises (SMEs), which is one of the essential ingredients to boost real sector growth, was hampered by policies that worked against financial sustainability.
Major intervention
To encourage direct intervention in some critical sectors of the economy, the CBN undertook a direct intervention in some sectors of the economy in order to improve banks’ lending capacity; empower small-scale entrepreneurs; generate employment; tackle poverty; ensure food security, and promote youth entrepreneurship.
Some of the major intervention activities include the N500 billion Infrastructure Intervention Fund, which allowed N300 billion to be used for power and aviation sector financing, with N200 billion set aside for re-financing and restructuring facility (RRF) of banks’ loans to manufacturers.
Similarly, N200 billion was set aside under the Commercial Agriculture Credit Guarantee Scheme (CASCS) to promote commercial agricultural enterprises, while N200 billion was allocated for the Small and Medium Scale Enterprises Guarantee Scheme (SMECGS) for disbursement through the Bank of Industry (BOI) to guarantee improved access to credit to manufacturers.
Already, the intervention of the apex bank has started yielding fruit, as reflected in the prevailing stable macro-economic environment, with year-on-year headline inflation rate moderating to 11.3 percent in April 2011 from 12.8 percent in March 2011, while core inflation at rose marginally to 12.9 percent from 12.8 percent for the corresponding period.
Improved collaboration
The operation of AMCON in the short period since its existence has strengthened the liquidity of the banks to discharge their primary functions, while the new regulatory environment has facilitated the introduction of fresh policies to help reduce the cost of funds to investors.
Director General, Securities and Exchange Commission (SEC), Arunma Oteh, said improved collaboration between the capital market regulators with other agencies in the financial system, including the CBN, has helped in the effective monitoring, supervision and enforcement of corporate governance rules and practices.
The stable atmosphere, she pointed out, has not only brought about better risk management profile for the regulators, but has engendered a stable financial system.
Despite the challenges still inherent in the system, the consensus appears to be that the reform process has set the country’s financial services sector on stable pedestal, while the country’s economy has garnered the impetus to strive towards attaining the national agenda of placing Nigeria among the world’s 20 largest economies by 2020.
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