Ijeoma Nwogwugwu
10 November 2008
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Lagos — The governor of the Central Bank, Professor Chukwuma Soludo, and president of the Chartered Institute of Bankers of Nigeria who is also CEO of Intercontinental Bank Plc, Erastus Akingbola, have been talking up the Nigerian banking system.
In the process, they have been quick to remind the public that the sector-wide consolidation exercise embarked upon by commercial banks from 2004 to 2005, has strengthened our banking sector and shielded it from the global credit crisis. In comparison, they say banks overseas are undergoing what Nigeria was smart enough to do earlier.
Yet they cannot explain away the forbearance granted the banks not to make the necessary provisions for non-performing margin loans as required under the prudential guidelines of the Central Bank. The last time I recall banks were given any form of forbearance by the CBN was before the consolidation exercise when a significant number of them were ailing. It was after that failed to achieve the desired result, that the Bank forced the banks to increase their capital requirements to N25 billion.
A major indicator that all is not well with our financial system and that the regulators are being economical with the truth, is already manifest in the capital market segment of the financial services industry. At present, several stock broking firms and investment banks that were used as conduits for margin facilities to trade in bank shares are in dire straits. Most of them are defaulting on their obligations to the banks and cannot even meet their monthly wage bills. It is for this reason that the push for a government bail out for the stock market has been loudest from capital market operators that been the worst hit since the market's downturn.
After considerable pressure was mounted on the CBN to disclose the level of margin lending, it announced that banks' exposure to the equities market amounted to some 8 per cent of gross banking assets, which in itself was opaque. A few days later, CBN conjured up a figure saying total margin facilities in the banking sector amounted to some N900 billion. If the amount is that insignificant, then the level of core capital and so called profits declared by the banks should give them adequate capacity to absorb the loss provisions. But by allowing the banks to restructure their margin loans, the CBN has given them a blank cheque to keep posting paper profits and declaring dividends on bad loans. It is for this reason I am inclined to believe that figure announced by the CBN is grossly understated.
The only reason I can fathom as to why the CBN is being dishonest with the rot in the system is complicity on the part of the regulator. As a result, it has become necessary for the Federal Government and the National Assembly to wake up from their slumber and start implementing far reaching measures through the enactment of new laws that will strengthen supervision and surveillance in the financial services sector. Some of the measures are as follows:
An Oversight Body for Financial Sector Surveillance and Supervision
The executive arm of government or presidency should send an Executive Bill to the National Assembly that will result in the review, amendment and eventual repeal of all the laws governing the financial services sector and its operations, and the enactment of a new law for the establishment of an independent oversight body responsible for financial sector surveillance and supervision. This new body will comprise the relevant departments/units that will be responsible for overseeing the banking sector, insurance sector, pension funds, clearing houses, and capital market operations. The establishment of this oversight body will achieve a number of objectives that are not necessarily limited to the following: One, it will take away the responsibility of financial services surveillance from the CBN which will enable it concentrate on its core functions of monetary policy implementation and inflation targeting. Two, this will lead to a considerable reduction in the discordant tunes emanating from the regulators whenever a problem arises. Right now there are too many regulators - the Securities and Exchange Commission (SEC), Nigerian Stock Exchange, National Insurance Commission of Nigeria, National Pension Commission of Nigeria and the CBN - that are working individually and at cross purposes. Three, the establishment of a single oversight body will provide the perfect platform for peer review mechanism for what each of the departments under it and their heads are doing at any given point in time. Four, it will engender transparency and improve disclosure.
Five, the law establishing the new oversight body must include a corporate governance code that stipulates the relationship between the regulatory departments/units and the operators in each of the sub-sectors in the financial system; not excluding an arms length approach that eliminates the incestuous camaraderie that currently exists between operators and regulators. The corporate governance code must include provisions barring the heads, management and staff either directly or indirectly through proxies and relatives from buying and owning shares in companies operating in the financial services sector; and taking loans from the institutions. This rule barring the ownership of shares in financial institutions must be extended to include external auditors that audit the books of operators in the financial services sector and/or independent firms that may be appointed from time to time by the oversight body to review the books of operators under its supervision. Five, the new body must have a strong risk control unit that shall be responsible for periodically reviewing prudential risk of operators in the financial services sector. This unit shall be made up of competent hands responsible for credit, market and liquidity risk assessment, and make it mandatory for banks and other operators in the financial system to make full disclosure on the nature of their loans, non-performing loan portfolios and their exposure to various economic segments/sectors, in order to enable the public differentiate risk portfolios particularly in banks.
In establishing the new oversight body, the National Assembly can learn a lot by understudying similar institutions such as the Financial Services Authority (FSA) of the United Kingdom and the Australian Prudential Regulation Authority (APRA). For instance, the FSA in the UK is responsible for the Investment Management and Regulatory Organisation that oversees unit and investment trusts; Lloyd's; insurance companies; recognised exchanges, which include the London Stock Exchange and commodity markets; professional bodies; banks; clearing houses; wholesale markets; and the Security and Futures Authority. Even though the FSA has been criticised in the past for rarely taking on wider implication cases, its success in curtailing systemic crisis in the British financial system, is today, compelling US authorities to evolve a similar model following the collapse of several venerable Wall Street institutions a few weeks ago.
Merger and Acquisitions
In recent weeks, there has been a growing clamour among financial market analysts for another round of consolidation in the banking sector. While this may instill confidence in the banking and investment public, tackle systemic risks and volatility in the industry, and reduce cut throat competition that is pervasive in the sector today, however the last round of forced consolidation has shown that mergers and acquisitions must be business driven. The problem with Nigerian banks is not necessarily size but the quality of their earnings. This is the only country in the world where banks consistently post growths in profits in the face of difficulties imposed by lack of infrastructure, high level of systemic risk, and general economic and political risk.
Beside, Nigerian banks take far too many risks than their peers in other developing economies ranging from operational to market risks. Even specialised credit risk management in the banking system is almost non-existent. A typical example was the manner a banking syndicate lent Transcorp $600 million for its acquisition of NITEL despite the absence of a balance sheet and no visible income stream. The decision by the banks to put together the facility was borne purely out of cronyism and political considerations. To make matters worse, the banks in this syndicate, from what I gather, have still not started making loan loss provisions on the facility even though it was extended to Transcorp three years ago and the company has been defaulting on its debt service obligations ever since.
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