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When the Central Bank of Nigeria (CBN) embarked on the banking reform under the extant Governor, Mallam Sanusi Lamido Sanusi, some stakeholders raised questions about the genuine and intuitive intentions of the reform agenda.  Suffice to note that this group of stakeholders had no fundamental understanding of the breadth and depth of the rot within the Nigerian banking system as revealed by the special audit of the banks, and if left unattended, the far-reaching implications for the Nigerian economy.
The stakeholders with good grasp of the issues applauded the reform agenda, whilst the doubting Thomases accused the CBN and its governor of witch-hunting perceived enemies. Even, the legislature accused the apex bank of over-stepping its mandate and acting unilaterally.  Undoubtedly, these opposing stakeholders failed to pay attention to the fact that regulators in the financial sector usually require swift actions to avoid all possible and unprecedented systemic effects that could arise from such actions.

Undeservedly, the CBN has paid heavily for its action through unrepentant criticisms from the section of the stakeholders looking for ways to hang the apex bank for its foresight, bold and corrective policies.  Again, these stakeholders did not appreciate the fact that the Nigerian banks, and indeed, the financial system as a whole, were saved from incalculable disaster by the quick and timely intervention of the CBN. In fact, the 2009 banking sector reform that brought about the intervention and nationalisation of some banks, the sack of some Banks’ CEOs and the establishment of Asset Management Company of Nigeria (AMCON) to take over the toxic assets and to recapitalise the capital-deficient banks have been incredibly successful  in safeguarding and strengthening the  Nigerian financial sector.

Other policy measures taken by the Central Bank to safeguard the financial system included substantial liquidity injection into the system; a blanket guarantee for depositors which helped to maintain and sustained confidence in the sector to avoid overrun, as well as for interbank and foreign credit lines of banks extended for six-monthly periods until end–2011, was provided; AMCON was established  to purchase banks’ nonperforming loans (NPLs) in exchange for zero coupon bonds and inject funds to bring capital to zero; regulations and supervision were strengthened  and corporate governance  enhanced; and the universal banking model was abandoned and banks  instructed to establish holding companies or to divest their nonbank activities.  These measures by the CBN saved the Nigerian economy from potential economic collapse thereby stabilised the economy, even, in the midst of weak global economic growth. However, there are still challenges including initiating policy thrusts to narrow the interest rate spread and improving the private sector’s access to credit to build on the CBN’s achievements, mitigate future economic vulnerabilities and ensuring sustainable growth. This however will require not only monetary policy actions, but structural reforms to achieve.

Available data suggest that the bank has achieved considerable success and that the reform now serve as a model for both developed and developing countries. A recent Financial System Assessment Program (FSAP) by the IMF in 2012 concluded that “the Nigerian commercial banking system as a whole can absorb most credit and market risk shocks, withstand liquidity pressures, and absorb moderate potential losses”. It also concluded that the banking sector “is now well capitalized, liquid, and profitable, with three small systemically unimportant banks demonstrating some weakness”. These three banks are in the process of being merged or acquired through the Asset Management Corporation of Nigeria (AMCON) and possess no systematic risk to the banking system.

Despite these assessment and validation of the process by world bodies and conditions on ground, the bank and its management has not received any commendation from the executive or the legislative branch for its foresighted and quick comprehensive actions taken to avert what could have been an economic disaster for the country to inimize and strengthen our financial sector, therefore, securing unprecedented economic growth for the country. The Central Bank should be commended for this action, at a time that other economies had lukewarm attitude to implementing needed reforms in the financial system at the peak of the financial crisis.

It is interesting to note that some of the bold measures taken by the Central of Nigeria are now being considered and implemented in other jurisdiction (see proposed reform in United States and United Kingdom) more than four years after Central Bank of Nigeria implemented its bracing but forward looking reforms.  This timely, swift and carefully planned reform measures have no doubt put the Central Bank of Nigeria above the curve and has established it as a forward looking and proactive Central Bank. The Bank and its management has managed to establish itself as a leader and a model institution with policy direction and foresight in a continent usually seen as followers or at best late comers when it comes to initiating and implementing strategic  policies or charting policy directions. The foresightedness and doggedness of Mallam Sanusi and the management of the Central Bank and all those that supported the reform agenda even in the midst of unpopular public acceptance must be commended for posterity.
Benchmarking the reform
The reform has resulted in improvement in banking supervision. Bank supervision has improved markedly since the financial crisis, through better onsite and offsite practices and higher standards of corporate governance. The Bank has introduced macro-prudential and systematic oversight measures and strengthened “conventional” micro-prudential supervision and regulation framework.  It has developed new instruments and framework for improving supervision and regulation, including, enhancing stress testing techniques and better analyzes of financial data. In addition, the Bank has also enhanced the capacity of its supervision staff for better efficiency and effectiveness. Since Nigerian banks are increasingly becoming international, emphasis on cross-border supervisory practices and collaboration have improved as well. The Bank spearheaded the regional banking supervision body for West African countries which has now being adopted continent-wide under the umbrella of the Association of African Central Banks (AACB). Enhancing cross-border supervisory practices will continue to be a priority as Nigeria banking system could become vulnerable from other jurisdiction. Strengthening the safeguards of our banking sector and improving corporate governance can only help strengthen our financial system and promote inclusive sustained growth.

The abolishment of universal banking to ring fence depositors’ fund was a key aspect of the reform. The ring-fencing of depositors’ funds by eliminating universal banking was one of the elements of the reform in Nigeria that was touted as controversial at the time. This idea has since become one of the key elements being considered in the UK banking sector reform bill.  The UK programme aimed at addressing the weaknesses exposed by the financial crisis of 2007-09 in the banking sector is implementing one of the key recommendations of the Independent Commission on Banking (ICB) of ring-fencing retail deposits from wholesale banking activities. Even the UK is recognising that having the activities of retail banking and investment banking side by side can be damaging to the culture and standard of banking “There is evidence to suggest that, as well as supporting financial stability and reducing the risk to the taxpayer, separation has the potential to change the culture of banks for the better and to make banks simpler and easier to monitor.”  The UK Parliamentary Commission on Banking Service (PCBS) made specific recommendations on the objectives of ring-fencing, suggesting that ring-fencing will have the following benefits:
• Ring-fencing will make it easier to sort out both ring-fenced banks and non-ring-fenced banks which get into trouble, without the provision of taxpayer-funded solvency support;
• It will insulate vital banking services on which households and SMEs depend from problems elsewhere in the financial system; and
• It will curtail government guarantees, reducing the risk to the public finances and making it less likely that bank will run excessive risks in the first place.
This policy is already in place in Nigeria, but it is still being considered in the UK.
The establishment of AMCON has been a central part of the reform agenda. AMCON is a special purpose vehicle aimed at addressing the problem of non-performing loans in the Nigerian banking industry, recapitalizing capital deficient banks, among others. To inimize cost to taxpayer’s, a sinking fund to fund the activities of the AMCON to be paid for by the banks and with initial seed money from the CBN was created.  The CBN shall contribute N50 billion annually to AMCON, while each of the participating banks shall contribute an amount equivalent to 0.3 per cent of its total assets annually into the sinking fund as at the date of their audited financial statement for the immediate preceding financial year. Therefore, the cost of the resolution to the Nigerian taxpayer is significantly minimized. The intervention of AMCON has seen the banking industry ratio of non-performing loans to total credit significantly reduced from 34.4 per cent in November 2010 to less than 5 percent at the end-December of 2012.

Under the reform, the bank identified key priority sectors and developed tailored interventions to support and promote their growth in particular, but targeting the wider economic growth through them. This includes the intervention in the agriculture sector, Power and Aviation, Small and Medium Enterprises. In addition the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) was established. The programme is a demand-driven credit facility that would build the capacity of banks to engage and deliver loans to agriculture by providing technical assistance and reducing counterparty risks facing banks. It also seeks to pool the current resources under the CBN agricultural financing schemes into different components of the programme.  This intervention is similar to the one introduced by Bank of England in 2012 under the Funding for Lending Scheme, two years after CBN intervention Scheme in the priority sectors.  Under the Funding for Lending Scheme, the Bank of England lent money at below market rates to the financial institutions for on-lending to private sector to spur economic growth for businesses and households.
The CBN should be commended for their foresightedness, doggedness and determination at sustaining reform in the banking sector and securing our collective economic growth even in the face of global and domestic challenges.

Last week, the National Security Adviser, Lieutenant-General Aliyu Gusau (rtd), made a statement that the banking reforms carried out by the Central Bank of Nigeria (CBN) lead by Lamido Sanusi, CBN Governor, were damaging to the Nigerian economy. Additionally, the NSA represented that the CBN reforms have been selective and partial.

Since the statement was made, several individuals including the National Chairman of Independent Shareholders Association of Nigeria (ISAN), Mr. Adebayo Adeleke, have come out with comments supporting the National Security Advisers statement. As noted in the April 23, 2010 issue of the Vanguard, Mr. Adeleke made the following comments:

1. He believed that the “The statement credited to General Aliyu Gusau (rtd), National Security Adviser to the government has clearly vindicated ISAN and some other shareholders of the troubled banks.  

2. When the reforms were instituted and the actions taken against the banks’ chiefs were executed, ISAN mentioned that the actions were not in the best interest of the economy. Therefore, for the NSA to make such a statement, it shows that the Presidency is not happy and comfortable with some of the reforms and actions of the CBN Governor, Malam Lamido Sanusi.

3. Those who supported the reforms initially were looking at the effect from a myopic perspective.

4. CBN reforms have a multiplier-effect and that is what we are seeing. Every sector is suffering from the effect; industry and commerce, agriculture, energy, aviation, private and public sectors.

5. It is time for the Presidency to intervene and call the CBN to order. The reforms will cause more damage if urgent steps are not taken. When banks refuse to lend, how can the economy as a whole move forward? What is the primary responsibility of banks in any country? As our banks have refused lending, the economy will soon be crippled. If it were in advanced economies, the CBN governor would have resigned if the public and even the government came out to declare a vote of no confidence in him. “It is a shame that the man is still there, he should resign.”


It is a free world and a free country. Therefore everyone is entitled to their own opinion and their own view point in any issue. Nevertheless, everyone is not entitled to their own set of facts because facts are undisputable.  

While I am not hundred percent in support of all aspects of the CBN reforms, I believe that some aspects of the reforms have been more beneficial to the Nigerian Economy than harmful.  

To illustrate, one of the reforms I vehemently disagree with was the implementation of tenures for CEOs’ of public companies, and the CBN’s requirement that all potential CEOs’ have to be approved by the CBN. Traditionally, these roles are solely for shareholders and the Board of Directors. In my humble opinion, the CBN is over reaching in this respect. Although it might be okay for the CBN to appoint, or remove CEOs’ of bailed out banks since technically, the Federal Government is the majority shareholder, it is not the traditional role of the CBN to appoint or remove CEOs’ of publicly traded companies that are duly owned by shareholders.


However, with this said, I believe the critics of the CBN should back their claims with facts. For example, when the CBN took over the nine (9) bailed out banks in the 2nd quarter of 2009, some of these banks had been using the expanded discount window (EDW) for long-term borrowing as opposed to short term fund needs. Majority of these banks were unable to pay back the funds because they were in precarious cash positions.  

Recently, Dr. Kingsley Moghalu, CBN Deputy Governor, Financial Sector Stability, noted in one of his speeches “that beginning in October 2008, CBN had offered financial support to the ailing banks by providing liquidity through the Expanded Discount Window (EDW), adding, however, that the financial hemorrhage continued and the financial condition of the banks continued to deteriorate even as the EDW was abused”.  

It would really be mind bugling to assume that these critics would prefer that the CBN continued to allow these banks to keep borrowing with reckless abandon from the EDW; thereby furthering the perpetration of the little or no regulated lending policies which eventually would have plunged the Nigerian economy into a deeper crisis.

Furthermore, are we also to assume that the National Security Adviser’s claim that the banking reform was partial and selective is true? I will not dispute this claim, since I do not have any evidence to the contrary. However, this type of statement from the NSA who is exposed to information that the average Nigerian is not predisposed to is damaging to the credibility of the CBN and the CBN Governor, because an official in such a prominent position definitely knows more than the “average joe”.

Therefore, I challenge the NSA to divulge his proof that the reform was selective and partial.

It is my educated guess that it is not only the nine (9) bailed out banks who had problems with non-performing loans or who used the EDW for long-term borrowing due to cash flow problems. The bailed out banks were probably the biggest abusers of the system. Banks like Zenith Bank, First Bank, UBA, and GTB, who were deemed to be financially strong by CBN had gone to the bond market to raise funds, or made their intentions known that they will be raising new capital either through the bond market or secondary offerings since the conclusion of the bailout scheme.

In light of the fact that these banks raised substantial sums of money less than 3 year ago from the capital markets, one can conclusively deduce that these banks all had cash flow problems, and the problems were therefore, not exclusive to the bailed out banks. However, like I previously noted, the bailed out institutions must have been the biggest abusers of the EDW and other financial infractions.

For example, as I noted in my October 2009 article “Corporate Bond Craze and Its Implications on Financial Institutes in Nigeria” - http://proshareng.com/blog/?p=35 - There is no doubt that FBN is one of the better run banks in Nigeria. However in 2007, FBN had a hybrid offer of public offer and rights issue. The offer was oversubscribed and the bank raised more money than was originally projected. However, FBN decided to keep only N250 Billion and returned the excess funds to subscribers in spite of objections from several influential shareholders. Therefore FBN’s current intentions to approach the bond market to raise expensive funds that might be detrimental to the future growth of the bank and its stock price barely two years after it refused to keep the cheap non-interest bearing shareholders funds is problematic and proof that the bank has tight cash problems.

In attempts to further explain the notion that the CBN reforms are detrimental to the Nigerian economy, the National Chairman of the Independent Shareholders Association of Nigeria (ISAN), Mr. Adebayo Adeleke noted that Nigerian continue to refuse lending to businesses which will eventually cripple the Nigerian economy. It is my professional opinion that the CBN cannot entirely be faulted for the lack of lending to individuals and businesses by Nigerian Banks. 

The primary problem is that prior to the CBN interventions, most Nigerian banks had very lax and questionable lending standards. Majority of the loans made by these banks were either uncollateralized or lacked proper/stringent collection procedures as evidenced by the recent CBN listing of several non-performing loans. 

Again, the lack of lending by banks is not unique to Nigeria. For example, the United States government invested over $600 Billion Dollars to bail out most of their major banks and financial institutions in 2008. However, since the infusion of these funds, lending by these banks has dried up. Most of the Banks in the United States had very lax lending standards which caused rising mortgage defaults and credit crisis that virtually froze inter-bank lending prior to the financial crisis. Individuals with very questionable credits and no visible source of repayment were given loans to buy Million Dollar homes and expensive cars. 

It now appears that after the bail outs, most of the banks learnt their lessons and have developed very strict lending standards. This is happening around the world and Nigeria is not an exception. Banks gave several uncollateralized loans and margin loans supported by worthless assets and over priced/over- valued stocks in Nigeria which contributed to the economic and financial crisis. However, the CBN’s sanitization program revealed these excesses. The banks are now more prudent and do not want to loan money without proper standards and collateral.  


Finally, I believe that the sanitization of the banking sector by the CBN has been good for the Nigerian Economy and the average investor. Some of the benefits of the reform program include the following:

1. The reform program forced many large borrowers with non-performing loans, who did not have any intentions to pay back their loans to scramble to pay back or make payment arrangements; thereby reducing the number of non-performing loans and the need for larger loan provisions for most of the banks.

2. Banks with questionable uncollectible and non-performing loans were forced to set up proper loan loss provisions, which revealed the true financial health of most of the banks in Nigeria.

3. CBN’s decision to set up an Asset Management Corporation gave financial institutions the optimism that some percentage of their bad assets will be absorbed by the corporation. Also, investors had renewed confidence that absorption of some bank bad assets will free up capital to banks which will eventually trickle down to investors and the capital market. Although the AMC is not a panacea to most of the problems with the banking sector, the notion of its implementation helped spur the bullish resurgence that the NSE has experienced since the beginning of 2010.
4. Many foreign investors who had taken hiatus from the Nigerian capital markets are now returning as they are now comfortable with the transparency that the CBN reform has ushered.
5. CEOs’ who did not act as shareholders custodians, and who thought that the banks were their personal properties were given the boot, dispelling the illusions by most of the former CEOs’ that they owned the banks and were not answerable to the shareholders.
Although I have listed some of the benefits of the CBN reforms, there are many Nigerians and investors who might disagree with my view points. This is the essence of a healthy debate (if one is needed at all). 
However, as I previously noted, we are all entitled to our opinions, but not entitled to our own set of facts. I believe that the NSA, investors, financial institutions, and the Nigerian public are all interested in having a strong capital market with strong transparency because an improved capital market will have a positive impact on all other sectors of the economy. 
While some of the recent CBN rules (.i.e., tenure limits, approval of CEOs’, etc) are somewhat over reaching in terms of regulations, the current CBN Governor has been good for the banking system. This is not the time to be calling for his removal. The position of the CBN governor should not be politicized. My recommendation is that if the NSA has evidence that the CBN was selective and partial in their reforms, the NSA should provide proof, because off-the-cuff comments are truly unhealthy and will hamstring the CBN in implementing their policies.
 Finally, the NSA, investors and any financial institution who believes that the CBN reforms have damaged Nigerian economy should present the public with such evidence to help us all understand the issues, impact and next steps.
Recent reforms in the banking sector, coupled with the global financial crisis no doubt, have exposed a lot of anomalies and policy oversights on the side of our policymakers. This is especially obvious since the nation’s oil production declines each successive year coupled with the lagged effect of liquidity squeeze that still impacts negatively on real economy.
 Not a few participants, especially at the recently concluded conference on banking reforms in Nigeria organised by BusinessDay titled “Banking reforms in Nigeria: What next after CBN’s interventions,” heard several analysts view on the Nigerian economy and how Africa’s second largest economy was caught napping even before the global crisis caught up with it.

Frontier African (emerging) markets had seen the most dramatic rise in deposit mobilisation, even as Nigeria and other African economies are still essentially cash economies. The key question now is whether happenings in the banking sector will stand as a stumbling block to the general economic performance of the Nigerian economy. Razia Khan, regional head of research for Africa at Standard Chartered Bank London, said we need to recognise what had been going on in the wider African context, noting that there were lots of positive things happening in Africa that were also happening in Nigeria as well.

The causes of banking crisis in Nigeria, according to her, relate to: ambitious banking sector consolidation; short timeframe for increased capitalisation (middle 2004 to end 2005) – that was remarkably fast; all happenings in the context of rising commodity price, rising oil earnings, increased liquidity; and the inevitable rush to increase return on shareholders’ equity.

“It is very much important that the recent gains are not reversed. Sustainability is still the key. It is the rising level of consumption that has drawn Africa’s Gross Domestic Product (GDP) growth. Non-oil GDP had kept the economy going because the oil sector, since 2005, has not been making contribution to the economic growth. But it is interesting to know those growth in sectors were not necessarily reliant on credit,” Khan stated.

International economic watchers, according to her, can recall that there is a surprising high correlation between oil price and the performance of Nigeria Stock Exchange (NSE), despite banks dominating capitalisation. “There was a noticeable correlation between oil price movement in positive direction and NSE performance. The question remains how real were the gains?” she noted.

Going by what is happening in the Nigerian economy today, especially in the banking sector, the key point according to the analyst is that there is combination of shocks that exacerbated the crisis in the sector, which has direct relationship with risk management. “There just need to be a new culture of corporate governance. There has to be direction to sustain the reforms,” she added.

Luca Del Conte, executive director of treasury and capital markets at London-based MediCapital Bank, believed that “politicians influence too much in what happens in the real economy in the capitalist economy.” According to Sanusi Lamido Sanusi, governor, Central Bank of Nigeria, before the recent reforms his administration is spearheading, the word ‘fastest growing’ kept coming on every facet in banking sector discussions “but we didn’t understand the risk of growing fast. The real economy was not growing because it was not able to absorb the liquidity in the system.

“This was so because the single biggest factor impacting on the Nigerian economy was oil. Variations in monthly disbursement of oil revenue therefore made it difficult for government to manage developmental projects. Liquidity from oil revenue found its ways into the banking sector and the capital market. Other countries with oil revenue were more efficient in managing their resources than Nigeria.” 

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