Rules to strengthen Nigerian banking system
The apex bank of the land, The Central bank of Nigeria (CBN) is formulating a policy equipped with rules and regulations to prevent future banking crisis. The governor of central Bank of Nigeria Sanusi Lamido confirmed that as he addressed a forum of bank directors in Lagos. The CBN chief said the rules will be directed to the lenders and together with “international advisory panels” the banking crisis can be put to rest.
Nigerian banking crisis confronted the country's economy in the second quarter of 2009 and the banking integrity was badly threatened and damaged. The banking meltdown brought the marketers confidence on nadir level. There was a consequential liquidity problem and that slowed down the growing economy. Therefore it became logical that the Reserve Bank should come up with regulations to tighten and addressed the laxity in the system.
The CBN chieftain Sanusi confirmed that the new rules will “forestall the pitfalls of the past where corporate governance malpractices brought a number of banks to their knees" and the subsequent “bailout of some notable local banks in the second half of 2009 underscores the importance of sound corporate governance practices and professional ethics”.
At the time of the banking crisis, Sanusi’s Central Bank of Nigeria (CBN) announced the dismissal of managing directors of five banks in Nigeria - Intercontinental Bank PLC, Fin Bank, Union Bank, Oceanic Bank and Afribank. And on top of that many influential individuals and companies were fingered on not living up to agreements of the debts they own to those banks. The reason given by Sanusi Lamido’s CBN for letting them go is principally due to:
“Excessively high level of non-performing loans in the five banks which was attributable to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to the bank’s credit risk management practices. Thus the percentage of non-performing loans to total loans ranged from 19 per cent to 48 per cent. The five banks will therefore need to make additional provision of N539.09 billion. The huge provisioning requirements, have led to significant capital impairment. Consequently, all the banks are undercapitalized for their current levels of operations and are required to increase their provisions for loan losses, which impacted negatively on their capital. Indeed one is technically insolvent with a Capital Adequacy Ratio of (1.01 per cent). Thus, a minimum capital injection of N204.94 billion will be required in the five banks to meet the minimum capital adequacy ratio of 10per cent.”
The failed banks were later recapitalized by CBN at the tune of 620 billion naira ($4.1 billion) and injection of such a large fund probably solved the problem of liquidity but the danger of increasing inflationary trends looms with such a large injection of the fund. Nigerian inflation stood above 10 percent since the injection of the funds. We are not suggesting with certainty that the enormous fund injected did trigger the rising inflation but no enlightened market observer will deny the correlation between excessive liquidity and inflation.
Prior to the proposals of new regulations, Emeka Chiakwelu the Principal Policy strategist at Afripol stressed that CBN must go further and come up with a doable comprehensive blueprint to reform the banking sector. To look into the rules and ordinances of the banking and readjust them where there are lax and weakness in the system. At this time of global economic meltdown, the last thing Nigeria needs is to be weakening further by problems of the banking sector. The ramification will be capital flight and restriction of flow of capital for wealth creation in Nigeria. Already the Standard and Poor’s lowered Nigeria credit rating from BB-minus to B- plus.
Central bank of Nigeria (CBN) was said to be carrying out a banking reform in early 2010. With this new incubating regulation it means that the core of the matter was not solved nor resolved in the initial banking reform in Nigeria. To make laws to avert profligacy is one thing, but to implement the laws in order to check excesses is where efficiency, discipline and call to duty are urgently needed.
Nigerian Banks must not abandon the serious job of tackling inflation and building a stronger currency to the central bank. They can be a partner to monetary and fiscal policies of the government by adhering to rules and regulations of banking sector and not trying to exploit the loopholes for short time gain and by so doing weaken the banking sector.