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9 July 2009
Abuja — Governor of the Central Bank of Nigeria Lamido Sanusi won strong approval from foreign investors when he used his first policy meeting to unveil a root-and-branch reform of the country's chaotic banking system.
Once a darling of frontier markets, Nigeria's economy -- sub-Saharan Africa's second-biggest -- faltered with the sharp decline in oil prices and the global downturn. Regulators have scrambled to defend the local currency and capital markets in Africa's most populous nation.
In its first monetary policy meeting under Sanusi, a revitalized central bank (CBN) on Tuesday slashed interest rates by 2 percentage points, lifted foreign exchange controls and guaranteed interbank transactions for the next nine months.
"There will be no half-measures when it comes to resolving Nigeria's financial sector problems and supporting growth," said Razia Khan, Standard Chartered's head of Africa research.
"The steps taken (on Tuesday), initiated by the new CBN governor who has promised to prioritise the cleanup of the financial sector, are the most promising yet."
Sanusi, former managing director of Nigeria's First Bank said bold financial reforms were necessary to enable the central bank to impose effective monetary policy.
"The financial market has not as yet attained the depths that are necessary to have efficient transmittal of policy stance," he said at his first news conference -- at which he asked journalists to stop the tradition of standing when the central bank chief enters the room.
Sanusi blamed many of Nigeria's troubles on the banking sector, saying financial institutions have kept lending rates too high despite efforts to limit them by his predecessor.
"A major impediment to the realization of development through the intermediation role of the banking industry is the wide and persistent spread that exists between deposit and lending rates," he said. To help reduce this spread, the central bank reintroduced corridor interest rates of 8 percent for lending and 4 percent for deposits. It also guaranteed all interbank lending from July 2009 to March 31, 2010.
"The move to guarantee interbank lending until March 2010 will help restore trust in the interbank market and this will be key in re-establishing a stable rate environment in Nigeria," said Mike Hugman, emerging markets strategist at Standard Bank. Analysts expected financial institutions will be more open with the central bank under Sanusi, who built a strong reputation for corporate governance and conservative lending strategies at First Bank.
Sanusi has favoured market-driven bank consolidation and foreign investment to help alleviate the rising cost of doing business in Nigeria, where electricity and security are considered a luxury.
"We will encourage the banks to explore the idea of infrastructure sharing to improve efficiency and reduce cost of operations," he said. (Reuters)
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