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Tasks before the new CBN Deputy Governor
By Thompson Ayodele
THE Central Bank of Nigeria (CBN) has completed an audit
of 10 out of 24 banks, of
which only five banks scaled through. Consequently, the
Managing Directors (MDs) and
Chief Executive Officers (CEOs) of the affected five
banks were fired, followed by an injection of
about $2.6 billion in
convertible loan to stabilize the affected banks and
preserve public confidence.
As at now, the government has injected funds and
guarantee loans of the 'Five'.
However, this should be seen as a temporary rather than
an ultimate solution. Account
cooking might actually increase as other banks
may risk insolvency in the future, believing that
the government can always bail
them out when in distress. Injection of funds should be
considered a temporary measure pending
determination of an exit plan,
either through merger and acquisition or failure.
That the CBN governor has acted swiftly and decisively
in restoring
confidence in the banking sector does not automatically
imply that the issues facing
the banking sector are now fully resolved. Rather the
CBN response provided an
avenue to more appreciate the degree of regulatory
failure and inadequate corporate governance in
the Nigerian banking industry.
The CBN response is a vindication of the positions that
have been long expressed by
local commentators and public policy analysts calling to
question whether all is well with the Nigerian
banking sector. For example,
questions have been raised as to the actual state of
health of the banks, which
hitherto had been shrouded in secrecy with guesswork
being completely at work.
Even as questions were being raised, both the banks and
the CBN have had to debunk the
visible indications that accounts of many of the bank
might actually be in the red.
But one would hesitate discountenance their
defense given the billions of Naira in profit
that these banks often declare
quarterly or half yearly. One wonders whether these
banks compete on the basis of
such declarations, albeit falsehoods. Many of the banks
have won awards within and outside the country,
while their ratings had soared
higher. The public now knows better. What can be
inferred from the CBN
governor's sacking the 5 bank CEOs is an admittance that
Nigerian
banks tend to be reckless. A great deal of banks'
problems has been traced to
unsafe exposure to margin loan. Banks gave out loans in
excess of their single obligor
limit. Often most of these loans are either backed by
inadequate collaterals or dubious collaterals.
Although who a particular bank
grants its loans to is its business, but it is a core
banking practice that must
meet some regulatory procedures. In this case,
strengthening the quality of credit risk analysis
and moderate the size of
exposure of individual bank is equally important.
More specifically, the signal that the affected banks
were indeed
distressed relates to their transactions at the CBN's
Expanded Discount Window (EDW).
The EDW enables banks borrow funds for a onger period
(e.g. as long as 360 days) as
against the overnight arrangement that was in
place previously, which ultimately allowed banks
easy access to funds anytime
they are in need. According to the CBN governor, the
affected five banks accounted
for 90% of the whole of EDW transactions, whereas their
non-performing loans stand at about 40% of the
total for the whole industry.
Thus, if five of 10 banks that have undergone
comprehensive audit failed,
that the remaining 14 banks will scale through is less
obvious.
The argument that the signs of distress in the affected
banks started only a few
months earlier is misplaced. Rather, the crisis reveals
severeshortcomings in corporate governance of the
Nigerian financial
institutions generally and the banks in particular.
There seems to have been a
systematic cover-up and failure of the regulatory bodies
to perform their required
functions. Potential bank failures have not been
acknowledged.
Credibility has always been an issue in the banking
sector. Defective
supervision of the banks has brought the crisis of
confidence into the banking
industry. Also, the apparent unethical and
unprofessional camaraderie
that characterised the regulators and industry operators
has compromised regulators and
made effective supervision weak.
The ownership and management structure of Nigeria Banks
appears to be structurally
defective. This ought to be addressed. Some banks are
built around certain
individuals (e.g. MDs/CEOs). This provides incentives
for such individuals to
exercise excessive power in those banks. In theory,
shareholders own those banks but it is oligarchy
in practice. In Nigeria, such
individuals have been seen to be very powerful to the
extent of manipulating
shareholders. Not a few thought the CEOs actually owned
their banks because they were
seen competing for political relevance with
politicians at the expense of their banks. The
role of the regulator has been
less obvious in this regard.
The above suggest that the existing regulatory framework
have failed to provide the
checks and balances that banks need in order to
cultivate sound finance and
banking practices. Thus the crisis can be seen as a
crisis of corporate governance. The appointment
of Dr. Kingsley Moghalu as a
Deputy Governor (pending Senate confirmation) is
expected to put improved
corporate governance at the centre of banking practices
in Nigeria. In this regard, he
will have to rise over and beyond mere slogans
and be a problem solver as his profile shows.
Good and improved corporate governance is a key element
to the integrity of Nigerian
financial institutions and markets, and central to their
health and stability. A key task before the
deputy CBN governor is to
institute a reform of regulatory framework emphasising
greater corporate governance
in the finance and banking sector. This will involve a
set of processes, policies,
laws, and institutions to affect the way the banks
are directed, administered and/or controlled.
Also, the principal stakeholders will include the
shareholders, management, the
board of directors, and the public. An important public
policy element here is to recognise a set of
interrelationships among these
stakeholders and the goals for which they are governed.
For example, the corporate
governance system should ensure the accountability of
certain individuals (E.g. MDs/CEOs) in individual
banks through mechanisms that
reduce or eliminate agency problems. Agency problems in
the banking industry arises
when the banks act on behalf of the
shareholders/customers
under conditions of incomplete and asymmetric
information such that MDs/CEOs
pursue own self-interests rather than the interests of
those they represent.
Independent reports, public disclosure procedures, and
public information about the
state of health of banks can potentially eliminate
agency problems and positively impact on the
efficiency and competition of
the banks. The ultimate effect is a regulatory framework
that enhances public welfare.
Obviously, regulation and supervision alone might not
completely make the business
of finance and banking less risky. However, through
effective corporate
governance, it is expected that Moghalu's office will
ensure that taking excessive
risks becomes less frequent, less costly, and not a
drain on public purse.
Ayodele is the Executive Director of Initiative for
Public Policy
Analysis, a public policy think-tank in Lagos and a
fellow of American
Enterprise Institute, a Washington DC think tank.
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