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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.
Nigeria’s economy is churning along after the problems of liquidity and banking sector meltdown that nearly crushed the financial market. The economy is progressively in recovery and it looks like the confidence of Nigerian consumer is gradually rebounding. But we cannot say for sure the exact figure because quantification of confidence has not been documented nor recorded. All the economic indicators are pointing in affirmative and right direction. Therefore the economy can be say to be relatively healthy, the key economic indicators including the inflation rate is at 11% in the month of May. The increasing inflationary pressure which subsided from 12.5% to 11% year-on-year is a good response and these recent indices were documented by Nigeria’s National Bureau of Statistics (NBS). The food price inflation also came down in the second quarter from 14.3% in to 12.3, a sign that the gripping hands of inflation around the economy is waning.
Without doubt the monetary policy coming from Sanusi’s Central Bank of Nigeria (CBN) has a positive outlook on the economy which has been growing at the rate 7.3% and attracting investments mostly in petroleum sector.
The "revised estimate for real Gross Domestic Product (GDP) by the National Bureau of Statistics (NBS) indicates that the economy grew by 7.23 percent first quarter of 2010 as against 6.7 percent it had earlier projected for the quarter." This is impressive compares to the world economy that has been expected to be growing at the rate 3.9 % in 2010 as result of the global recession.
The greatest threat to Nigeria’s standard of living other than inflation is unemployment; even with progressively growing economy at the rate of 7.3% the economy is not producing enough jobs to make a reasonable impact on employment. The Finance Minister Olusegun Aganga stated that unemployment in Nigeria was about 19.7% but financial and economic experts at Afripol Organization quantified that the real unemployment figure might be higher when rural and urban joblessness among the Nigerian youths are factored into equation. The collecting of data on employment will be probably cumbersome, if not difficult in rural areas where modern technology is scare and out of reach.
It must be noted that Nigeria has trade surplus with many western countries including United States at the tune of $5.5 billion. The executive arm of the government must work hard to rectify the inability to successfully implement the federal budget as it was written. As a result of shortfalls from oil revenue, Nigeria proposed issuing bonds of about N867.5 billion to finance its deficit. On the financing of budget deficit including the 2010 current expenditure the Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo reminded Nigerians that government is now borrowing from the capital market and particularly by issuing bonds to raise money. On borrowing Dr. Nwankwo did emphasis that: "Borrowing is a normal feature of all economies. Nigeria is currently one of the lowest in terms of ratio of debt to GDP (Gross Domestic Products). This does not mean Nigeria is doing well, as what is more important is whether the proceeds is being used judiciously." Therefore it is imperative that borrowed money or any money allotted for the budget is prudently utilized in its implementation.
President Jonathan reaffirmed the deficit issue on the letter he wrote to the lawmakers: "Specifically, recent revenue developments indicate significant shortfalls in both oil and non-oil revenue which may well continue for the rest of the fiscal year with adverse implications for the financing of the budget. Consequently, given the recent drop in international oil prices from over US$80 per barrel to under US$70 per barrel; it is prudent to revise the oil bench mark price to a more realistic level." He further states that, "The 2010 budget was predicated on a revenue benchmark of $67 per barrel of crude oil. But in his letter to the Senate, President Jonathan asked it to "revise downwards the aggregate level of expenditure from the N4.608billion approved in the 2010 Appropriation Act and adjust the budget details accordingly."
Daily Trust editorial, added: "In a bid to balance the budget, the federal government has also resolved to borrow from domestic and foreign sources. The 2010 budget will receive $500 million USD (N75 billion) from international bonds and has projected to borrow N897.3 billion from an already ailing domestic financial system. Several banks in the country have for several months survived on life line provided by the Central Bank of Nigeria (CBN) but the federal government still expects to suck such huge amount to finance the budget deficit."
The manufacturing sector recorded a lower output from " 7.03 percent in 2009 to 6.43 percent in 2010" due to lack of electric power and paucity of credit. Nigerian manufacturers do import a reasonable amount of raw materials from abroad and foreign exchange becomes an impediment to free flow of raw materials coupled with the government higher tariffs.
Mr Aganga, Nigerian minister of finance and a former managing editor at Goldman Sachs expected the economy to grow at 10 percent by 2012. According to him, Nigeria is making the requistive moves especially with rebuilding of the infrastructure, diversification and privatisation to ensure the positive economic growth.
Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.