Sufuyan Ojeifo
22 October 2008
Abuja — No Nigerian bank will be allowed to fail, the Governor of the Central Bank of Nigeria (CBN), Professor Chukwuma Soludo, told the Senate yesterday.
He said the CBN was ready to take any necessary step to save the banks in the event of distress - including taking over "toxic assets" in the banks'balance sheets.
Soludo, who said it would take a while for confidence in the financial system to be restored after the stormy season, stated: "There are other measures that could potentially be taken. We have said it to our banks and I want to say this to this distinguished Senate today (yesterday) that we stand ready from where we see our banks, where they are today and the contingency plans that we have in place, no Nigerian bank will be allowed to fail."
He maintained: "No Nigerian bank will be allowed to fail. At the extreme, we have opened our windows to be the lender of last resort. That is part of our functions as a Central Bank, to be able to extend any credit that they want, and we can actually extend credit up to 360 days now to them and with lenders of last resort. No Nigerian bank will be allowed to fail.
"Second is that in the limit of it. Let us even assume that the banks' exposure to the capital market gets bad, at most, we could also have arrangements to take off some of those assets from their balance sheets and then free them up from those assets."
Soludo, who was briefing the Senate on the state of the Nigerian economy in the face of global financial crisis, said: "We did not wait for our banking system to collapse before we did our own recapitalisation (consolidation in 2004). If you recall, I did mention that part of the crises today, in many of these markets, is that they reacted too late.
"We did not wait for our banking system to collapse before embarking on recapitalisation. So, we have finished our own recapitalisation, which is part of what they are doing today."
He said on guarantee of private sector deposits, "we did the same thing then; and, we still insist today that none of the banks will fail."
Soludo stated further that "we restricted government ownership in banks and restricted foreign ownership of our banks too; and, this has proved with the benefit of hindsight to be very, very beneficial because many of these things have been transmitted via some of those foreign-owned banks."
He explained that the CBN also proposed an Asset Management Company during consolidation programme, but pointed out that the programme was not approved by the National Assembly.
According to him, "We proposed an Asset Management Company during consolidation programme; but it was not passed by the National Assembly. This is the time, President of the Senate, most distinguished senators, to pass the Assets Management Company where banks and other financial institutions could go to sell or deposit some of their distressed assets."
Soludo further disclosed that there was liquidity surge in the banking system, adding: "We suspended mop-up operations and extended our discount window and ready for one term lending to the banks.
"We have allowed our banks to restructure some of their exposure to the Capital Market up to end of next year. We have taken steps to safeguard Nigeria's foreign reserves and the Securities and Exchange Commission (SEC) has also reduced transaction cost on the exchange and arrangements to appoint market makers and also it instituted circuit breakers on the Nigeria Stock Exchange, of +5/-1 [share prices cannot rise above 5 per cent or fall below 1 per cent in a day]."
He continued: "The summary of what I have said so far is that the circumstances of our banking and financial system happen to be different from what is happening in the rest of the world.
"Much of what they are doing as a reaction is actually what we had done a few years ago. But in order to pre-empt and make sure that the contagion does not wipe out our own system, we have also taken out proactive measures by making sure that the system is as liquid as possible and we have opened our lending window to be able to extend credit to any bank that needs it as much as it can.
"This is why the collaterised window of the inter-bank rates today is still slightly less than 10 per cent. It is old collaterised path that is trailing about 15 point something per cent today in terms of the inter-bank markets. This is much better than what had happened in the much rest of the world."
He added: "Today, the market is fairly liquid; we are trying to expand further to make it even more liquid. Credit to the private sector, as I mentioned up to the end of September was about N2.3 trillion more than the Federal Government's spending and the banks will be expected in the future to still play even greater roles.
"The banks' exposure to the Capital Market is barely about 9.6 per cent of their aggregate credit. On annualised basis, the credit to the private sector as at end of September had grown up to about 71 per cent from the end of December, last year.
"This is against the target growth rate of 30 per cent. The target that was set was 30 per cent. So, even if they do not extend any kobo as credit for the rest of the year, they have already exceeded the target for the year."
Soludo also pointed out that the total non-performing loans of the nation's banks were miniscule at about 5.9 per cent, adding that "the stage it gets and you begin to think of the stress is 20 to 25 per cent."
He said contrary to claims, the US dollar was now much stronger, noting: "This is the good news of the global financial crisis - that it has not yet metamorphosed into a currency crisis. In fact, the dollar has in recent weeks strengthened against major currencies in the world."
The CBN Governor stated that one of the buffers that "we have as insurance in Nigerian economy is that our productive sector is still dominated by the non-oil sector.
"It is still dominated by agriculture at about 40 per cent and this is not so much responsive to the global financial crisis and this is why output is still expected. We are not likely to get into a recession."
He told the Senate that the second quarter Gross Domestic Growth (GDP) rate was about 8.5 per cent for this year "and I do not think that will be greatly dampened by next year."
On the issue of foreign reserves, he said Nigeria was not yet experiencing a currency crisis.
"As at end of August, the total Foreign Direct Investment (FDI) was $8.5 billion compared to total last year. It is expected that the FDI will exceed the total for this year and trade finance has not fallen. I have tried to lay out in details the difference between the two regimes - what is happening and where we are and why we would likely survive it.
"But there are challenges going forward and that is the responsibility for the Senate. I think there are several bills before the National Assembly that need to be passed like yesterday that are needed to strengthen the financial system," he said.
He listed the bills to include the Banks and Other Financial Institutions (BOFI) Act, which he said had been in the National Assembly since early 2006.
According to him, "It still requires amendments to strengthen the regulatory capacity. There is also a bill for Consumer Credit. It is before the National Assembly; there is a bill for mortgage reforms before the National Assembly.
"These bills need to be passed urgently because they are required to unleash the boom in Nigeria's financial system and also useful for moving the economy forward.
"There are several other legislations pending here that are required and I think my recommendation will be that we could treat them like the US Congress treated their own Stabilisation Act- an emergency- and we could say that within the next 100 days, let us pass 10 most critical legislations required to strengthen the financial system and move the economy forward.
"We can select those 10 major legislations and several of them have been pending here for years now. This is the time to have that as an emergency."
Soludo, who stressed that there was no cause for alarm at this point in time going by the level of the country's foreign reserve which is currently put at $62 billion, explained that the Nigerian foreign reserve would serve as a buffer, adding that all Nigerian banks were very safe.
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Professor Chuma Soludu has proven the nay sawyer wrong. The current global financial crisis has stood as a litmus test that the recapitalization was a life saver for Nigeria.
It is true that people resist change but it is compounded when it is base on an intellectual complex. The fact is that when people cannot operate at your level they would quickly give you a name to justify their handle on the situation. Finally the global financial crisis has turned out be a litmus test for the bold recapitalization program.
On this note the National Assembly has now seen that… [Read Full Text]