Business News and Articles
StockNewsLine.com

Daily Independent Editorial: Banking Reform: Whither CBN?

Banking Reform: Whither CBN? Editorial

Last week's intervention by the Federal Ministry of Finance in the ongoing Central Bank of Nigeria-induced reform of the banking sector is a welcome development. For us, it was rather late in coming. A statement credited to the Minister of State for Finance, Remi Babalola, announced that the government was asking the CBN for a comprehensive blueprint of its reform programme in order to allow assessment of the direction of its policies and ensure that they are in tandem with the government's long-term objectives. If anything, the Minister expressed our own view and perhaps that of many other Nigerians by insisting that government wants to "know where the CBN is headed and, more importantly, be sure that actions are not just taken as the spirit directs". Given the need to ensure that the regulator is granted sufficient independence to effectively carry out its core duty of maintaining price stability by ensuring that interest rates are appropriate to galvanize the economy and check inflation, over-regulation of the banking sector by the CBN and the almost total absence of government supervision of the CBN seemed to have crept in, especially in recent times. It must be remembered that this practice, in most economies, was one of the reasons responsible for the last global financial crisis.

When CBN Governor, Sanusi Lamido Sanusi, started his banking sector reform, leading to the sacking of five bank chief executives on August 14 last year, though it was considered then by some as a controversial decision, many others - including this newspaper - applauded it, believing that the intervention was necessary to restore the confidence of both investors and the banking public.

However, it was also a matter of time before it became obvious that not enough thought had gone into the CBN's action. For instance, as criticisms mounted from several interest groups, it seems the CBN became confused and thereafter merely began to react to specific issues raised by the opposing groups. It is possible that even the recent statement by it indicating that the reform programme was four-pronged - namely, enhancing the quality of banking; guaranteeing financial stability; ensuring a healthy financial sector evolution; and also that the financial sector contributes to the economy - was another reaction to the barrage of criticisms trailing the reform process.

As the reform increasingly appeared like a journey without a clear destination, its several unintended consequences began to manifest. For instance, it weakened confidence in the sector, which initially caused panic withdrawals but later affected the entire economy. Furthermore, not only has it resulted in a drop in Nigeria's international credit rating, it has led to an avoidable liquidity squeeze, thus further frustrating businesses in the real sector. It also resulted in drastic job cuts especially in the banking sector; and the inability of foreign banks to continue to recognize letters of credit emanating from Nigeria's banks as a result of lack of trust.

At the same time, the action of the CBN is only symptomatic of Nigeria's casual attitude to long-term planning. In most cases, government officials only react to ad hoc challenges. They often act before thinking or planning, and once the initial mistake has been made, they are now bogged down trying to deal with the consequences of their actions. The CBN appears to have been caught in this trap; and that is why we welcome the intervention of the Ministry of Finance in this matter.

We recognize the CBN's regulatory and supervisory role as an integral part of the mechanism for ensuring safe and sound banking services. We are likewise against the manifest weak corporate governance in Nigeria's banking sector, unethical practices and lack of integrity, as well as the growing trend of frauds, forgeries and questionable data integrity, which seems to have become norm. Hence, our full support for any actions intended to sanitize the country's financial services and in particular its banking sector. But for such actions to succeed, they must be comprehensive, long term, phased and properly coordinated. The CBN must also be seen to be working towards restoring industry confidence, both from the client and industry investor points of view.

It is certainly not possible for the regulator to achieve this target if its own house is not in order. For instance, how does the CBN intend to succeed given that those who should have supervised the banks ab initio and failed to do so, or connived with the banks to perpetrate the rot, are still within the CBN? To what extent has the CBN sanitized its own systems and processes? Have the interests of the shareholders of these banks been taken sufficiently into consideration in packaging and implementing these reforms? These are among the issues that the CBN must address. Moreover, it is only fair that those who seek equity should do so with clean hands.

Regions : Africa

More articles on this topic: