Since last year, the National Assembly has been trying to amend the Central Bank of Nigeria Act of 2007, which confers operational autonomy on the banking sector watchdog, following the condemnation that trailed that move, the proposal did not succeed. Obinna Chima writes on latest move by House of Representatives to initiate a legislation that would strip the banking sector regulator of its banking supervisory role
The health of the economy and the effectiveness of monetary policy depend on a sound financial system. By supervising and regulating financial institutions, central banks are able to make policy decisions.
Banking supervision involves monitoring and examining the condition of banks and their compliance with laws and regulations. Central banks also supervises banks in order to protect depositors' against avoidable losses, thereby contributing to confidence in the financial system, promoting the smooth operation of the payments system, avoiding systemic failure of financial institutions, amongst others.
In Nigeria, presently, the Central Bank of Nigeria (CBN) in conjunction with the Nigerian Deposit Insurance Corporation (NDIC) plays an overall supervisory and regulatory role for banks. CBN/NDIC's supervisory process involves both on-site and off-site examinations.
On-site examination includes an assessment of banks corporate governance structures, internal control systems and the reliability of information provided in statutory returns. On-site examinations can be classified maiden, routine, target, or special.
The banking sector regulators also carry out off-site examinations and risk-based supervision. In fact, it was a special risk-based examination supervision in 2009, which uncovered the danger that was in the then rescued banks.
Nevertheless, from all indications, it looks like the House of Representatives is no longer comfortable with the banking supervisory role of the regulators as it has announced plans to strip them of their oversight over the banks and transfer the responsibility to an independent body.
The proposed law, according to the lawmakers, would result in the withdrawal of the banking supervisory function of the central bank, leaving it to oversee monetary policies and currency management.
Chairman, House of Representatives Committee on Banking and Currency, Hon. Jones Onyereri, who disclosed this, said that the independent body might be named the "Financial Supervisory Committee". Onyereri had explained that the move became necessary so as to make the CBN focus more on its mandate of price stability and monetary policy.
"We are trying to take that banking supervisory function away from the CBN because if you look at it closely, especially in Nigeria, most of the problems we have in the industry has to do with supervision. For some reason, we believe that the hands of the central bank are full. Creating an independent body will enable the CBN to focus on its mandate of price stability and monetary policy," he had said.
Overview of the Policy
Globally, since the economic crisis emerged, there have been debates on who should supervise the banks post crisis. While some analysts have argued that creating an independent regulatory body in form of the Financial Services Authority (FSA) is not a one size fits all solution to banking failure, as it failed to help banks in the United Kingdom avert the crisis, others have also pointed out that even central banks, such as the Federal Reserve Bank in the United States failed during the global economic depression.
However, while banking supervisory role in Canada and Germany is performed by independent federal institutions, in Africa, central banks still undertake this responsibility.
But in Nigeria, THISDAY learnt that a paper by the CBN in 2009, had recommended a total restructuring of the supervisory role of the apex bank, with the objective of taking that function out of the Bank by creating an independent body. The report had argued that an independent body would make bank examiners to embrace ethics and professionalism.
Who Should Supervise the Banks?
Group Managing Director/Chief Executive Officer, Skye Bank Plc, Mr. Durosinmi-Etti, advised that with the role played by the CBN in resolving the banking crisis, its banking supervisory function should not be removed.
He explained: "In the UK, years ago, they took out the supervisory role from the central bank and created the FSA. After the crisis, they have said the FSA did not do a good job and so they want to return that function to the central bank. But we are thinking the opposite. So, there is no one that is right and there is no one that is wrong.
"But the question I would ask is what is motivating them to do that? What is their motivation? The central bank has done a very good job in sorting out the banking crisis and they are supervising banks much better than before. I think it is more of the focus and the leadership that drives the result as opposed to the structure. Either structure could work."
Also, London-based Emerging Markets Strategist, Standard Bank Plc, Mr. Samir Gadio, argued that the creation of an independent banking supervisory body is not a bad idea in principle, but insisted that it does not automatically guarantee that future crises in the financial system would be avoided.
"However, it remains to be seen whether the new supervisory body in Nigeria would have the skills and resources required to ensure the stability of the financial industry. At this stage, the Central Bank of Nigeria is probably the most competent institution to regulate the banking system given its proven track record and established credentials.
"It also has the necessary tools and authority to intervene decisively and prevent a major crisis should stress points in the banking system become unbearable as in 2009. Perhaps as the Nigerian market becomes more sophisticated in the future, there will be a rational to initiate this project, but at the moment this looks more like an attempt to weaken the CBN," he declared.
Also, Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the move by the lawmakers was precipitated, saying that "we cannot come out with a therapy without diagnosis."
According to Rewane: "There is no one size fits all solution, but I am saying that in terms of financial services industry regulation, I do not see that as an urgent problem. I think we should focus more on making sure that monetary policy is aligned with the broad macroeconomic policies of the country other than trying to cannibalise the powers of the CBN in any form."
Speaking on the allusion that the legislation would make the banking sector regulator concentrate on monetary policy and price stability, Rewane said: "But we have price stability already! So, I don't understand why they are talking about that. So, based on what data is he making that judgment?"
He added: "When we carry out a study on the cause of banking crisis in Nigeria, and it is proved empirically that it is as a result of poor supervision and that the poor supervision is because of the fact that it is domiciled within the central bank, then we can come out with a solution. I don't think we can come up with a therapy without diagnosis. With all due respect to the honourable member, I think that is therapy is not based on any diagnosis."
On his part, a Senior Analyst at BGL Securities Limited, Mr. Femi Ademola, described the banking sector as a very sensitive sector in the economy, saying that in most case, it is a direct barometer of the economy. As a result of this, Ademola stressed the need for the sector to be carefully managed and supervised to the benefit of the economy.
He explained: "The experience of the Nigerian banking sector in recent years has not been very pleasing due to the avoidable disruptions that had been following the appointment of a new CBN Governor. The consolidation exercise of 2005 and the banking reform that started in 2009 created unnecessary disruptions in the economy which perhaps led to the plans by lawmakers to take away the banking supervisory role from the CBN.
"By creating an independent body to oversee banking supervision, Nigeria would have decided to adopt the British system. However, due to the perceived failure of this model to prevent the banking crisis in the UK, the British government has decided to remove banking supervision from the FSA and added to the mandate of the Bank of England (BoE), the same model we currently operate in Nigeria."
Furthermore, Ademola pointed out: "What this means is that even the proposed plans of the lawmakers may not work. However, we wouldn't know until we have tried it. Different economies choose different models as appropriate.
"While I am not a fan of political inference in the financial system, in response to the global financial crisis, most countries are trying out alternative models to determine which is most appropriate. The lawmakers must carry the public along, be receptive to contrary views and conduct adequate investigations before deciding on what model to adopt."
But a source at the CBN, who pleaded to remain anonymous for fear of retribution, supported the idea of taking away the function from the Bank.
"If it is removed and the CBN focuses on price stability, then it won't be a bad idea. I am a member of the central bank family, but I must say that we have not been doing a good job on banking supervision," he added.
According to the source, the move would also allow the NDIC to concentrate insurance, saying that "for NDIC to be supervising banks is moral hazard."
Similarly, research by economists at the University of California Berkeley- Prof. Barry Eichengreen, and Nergiz Dincer, on the matter showed that the ratio of non-performing loans to Gross Domestic Product is lower in countries where supervision is delegated to a government agency with statutory and budgetary independence.
"Supervision is more likely to be undertaken by a non-independent agency in countries coded as having efficient governments and high-quality regulation. Supervision is more likely to be assigned to an independent agency where public-sector accountability is high, accountability being a standard quid pro quo for independence,"
From the foregoing, with weak structure of institutions in Nigeria as well as high level of corruption in public sector, creating an independent body to oversee banking supervision in the country may worsen the plight of the industry.