Stop Digging Mr. Central Bank Governor

CBN Act of 1958 established the Central Bank of Nigeria which commenced operation on July 1, 1959.  As stated in the CBN act of 1958, the major regulatory objectives of the bank is to issue legal tender, maintain external reserves of the country, promote monetary stability and sound financial environment, act as banker of last resort, and financial adviser to the federal government.

One of the major functions of the Central Bank of Nigeria is to act as a government agency which controls and supervise Nigerian banking sectors, tailor monetary policy along the demand of the federal budget and monitor the balance of payments according to the demand of the federal government. Central bank also help to make credit available to neglected sectors such as agriculture and manufacturing.  One of the early failures of the central bank is its inability to curtail the high interest rates charged by Commercial banks and prevalence of short-term loan maturities commercial banks gives to businesses.

Not counting the current governor, Central bank of Nigeria has had 7 governors since its inception.  The last governor before the current one is Professor Charles Chukwuma Soludo whose tenure ran from May 29, 2004 through May 29, 2009.  By 1990, the liberalizing agenda of the Structural Adjustment Program instituted by former military president, General Ibrahim Babangida in the 1990’s lead to unprecedented growth in the Nigerian banking sector.  Unfortunately, most of the merchant and commercial banks established in the 1990’s was weak and under-capitalized which lead to mass bank failures and run on the banks by depositors.  Some depositors lost their deposit as a result.

Former CBN governor, Charles Soludo instituted far reaching reforms especially in consolidation of Nigerian commercial banks by mandating minimum capital base of 25 billion naira for each commercial bank with December 31, 2005 deadline.  Banking license was withdrawn from commercial banks who could not raise the capital or merge with other banks to meet the requirement.  Banking sector consolidation program was necessitated by the pervasive weakness and uncertainty in the banking system.  The consolidation program  was a huge success which provided much needed stability and confidence in the Nigeria banking sector.

The result was that Nigerian commercial banks performed better than other sectors in the Nigerian Stock Exchange and some of their peers in African.  Investment in the banking sector quadrupled and shares were being snapped up.  Press statement released by Nigerian Central bank in Abuja on June 12, 2007 stated that “over $1 billion of foreign investment has gone into the sector within the last 12 months, and several hundred millions of dollars are still pouring in.  The non performing loans as percentage of total loans have gone down from about 23% before consolidation to less than 8% currently: total deposit have almost doubled, and credit to private sector grew astronomically”.

Professor Charles Soludo made outstanding and indisputable contribution to Nigeria banking sector which benefited the country.  However, Mr. Soludo did not fair so well in his post consolidation regulatory oversight.  Somewhere along the way, he allowed his oversight responsibility over commercial banks to slip.  He become cheer leader of some bank chiefs.   The negation of his oversight function resulted in him letting the inmates run  the asylum.  By inmate, I mean some bank chiefs who use to own some of the under-capitalized banks forced to merge in-order to meet CBN capital requirement.  Even though the merged banks are publicly traded and owned by shareholders and investors, some of the bank chiefs still ran the banks as their private enterprise. Some Bank chairmen and CEO’s sized the opportunity to steal millions and billions of Naira of investor’s money.  Former CBN governor Charles Soludo once accompanied Mrs. Cecilia Ibru, former chairman of Oceanic Bank to London to launch a branch of the bank.  That is not the responsibility of the chief regulator who should avoid conflict of interest, be above board and impartial.

Now comes the current CBN governor, Sanusi Lamido Aminu Sanusi who was appointed by late president Umaru Yar’dua on June 3, 2009.  Mr Sanusi Lamido swung into action as soon as his appointment became official.  He promptly sacked chairman of 5 banks and recommended their prosecution by the Economic and Financial Crime Commission (EFCC).  EFCC quickly went after the ousted bank chiefs and recovered substantial amount of money from some of them, notably over $1 billion dollar recovered from Cecilia Ibru, former chairman of Oceanic Bank.  He injected hundreds of billions  in those banks saying that they are out of capital.  He limited bank chiefs tenure to 10 years.  He wanted to sell the 5  banks but back tracked after encountering stiff push-back from investors.

The billion naira question is how long can the CBN governor keep digging this hole in Nigerian banking sector.  He has basically dug a huge hole in the Nigerian banking sector  and seem lost as to what to do next to salvage the 5 banks nobody wants to buy.   I know the CBN governor is been celebrated by a lot of people in Nigeria.  He even won couple of awards at home and abroad.  Winning awards does not mean that all his policies are right.

The best way to evaluate current CBN governor’s achievements or lack of it so far is to look back at the CBN act of 1958, the intent of the legislation and compare them to what he has done so far.

The most important function of the Central bank of Nigeria is to promote monetary stability and sound financial environment.  Have governor Lamido Sanusi’s actions so far promoted monetary stability and sound financial environment ?

Confidence is of utmost importance in banking anywhere in the world.  Confidence in Nigerian banking sector is so low now that financial sector that use to record big volumes in Nigerian stock exchange have taken a nose dive.  Investors are scared of investing in banking stocks because of uncertainty created by recent CBN actions.  They are worried that the federal government will one day take over their investment and nationalize it like we are seeing today.   The governor took over the 5 banks, renamed them and created Asset Management Company to take over the banks. I thought Nigerian government are done with excessive government intervention in private sector.  Nigerian government ran banks in the past and it became corrupt ridden enterprise like the rest of government run operations in Nigeria. Remember African Continental Bank of Nigeria which ultimately expired due to mismanagement and corruption.  CBN governor traveled overseas and sought investors but there was no takers.  He renamed and nationalized the banks when it became clear that nobody is interested in acquiring any of them.  So CBN governor have not succeeded in promoting monetary stability and sound financial environment as envisioned by the CBN act.  He seems to be digging bigger hole with each step.

Another function of the Central bank is regulation of commercial banks and lender’s of last resort.  One may argue that CBN are probably over regulating the banks.  CBN governor should have limited the tenure of the bank chiefs first which will ease them out without panicking the market and stakeholders and then refer corrupt ones to EFCC for prosecution.  Yes, CBN have always acted as the lender of last resort to Nigerian commercial banks not individual businesses or neglected sectors.  CBN have failed to  channeled loans to  emerging industries.  The result is that Nigerian businesses are experiencing serious credit crunch right now.  Interest rate charged by commercial banks is too high for businesses to make good returns on their investment.

Establishment of Islamic banking was not handled properly by the Central bank governor, Sanusi Lamido, Nigeria is suppose to be a secular state. Why not call it non-interest banking so it will conform with the secular nature of Nigerian constitution and gain wider acceptance.  Non- interest banking will gain wider acceptance across  the nation and will ensure that the bank will be located in all parts of the country.  Calling it Islamic banking will ensure that you will only have the branches in the northern part of Nigeria.  Limited acceptance may translate to limited customers and smaller capital base which can make it difficult for them to compete with regular commercial banks.  Non-interest bank is in existence all over the world so it is not a new concept.

The Central Bank of Nigeria governor, Mr. Lamido Sanusi is a nice, honest and hardworking man but his drama prone and sometimes erratic policies may have done more harm than good to Nigerian banking sector.  I think the CBN governor may be better suited as Economic and Financial Crime Commission (EFCC) chairman than CBN governor which requires diplomatic speaking style compared to his blunt style which panics investors and shakes confidence of depositors. Nigerians do not want to see another run on the banks like what we saw during Babangida era.  If Mr. CBN governor have the qualification for EFCC chairmanship, I think he should be appointed chairman.  I think he has what it takes to rid or significantly reduce corruption in Nigeria.  His take-no-prisoner and no-nonsense approach are what Nigerians desire and want in the current comatose war on corruption.  Nigeria is riddled with corruption to the extent that the country cannot advance with this level of corruption.  Governor Sanusi Lamido have proven that he knows what ails Nigeria which is corruption and mismanagement.  He will make more impact at  EFCC compared to the current and past leaders of the agency.  This proposition should not be regarded as insult to the CBN governor.  People are just good at different things.  I think CBN governor is tailor-made for EFCC chairmanship.  He will do the most good there and help Nigeria in the process.