The Central Bank of Nigeria (CBN) has completed the audit of the remaining 14 banks. While some CEOs had been axed and the affected banks get bailout to the tune of N620 billion, it is incontrovertible that the banking sector is suffering from crisis of confidence. Already a vast number of people are unsure if there will not be a re-occurrence of the insiders’ abuse and account cooking.
Earlier this week, Minister of State for Finance, Remi Babalola, maintained that there is a need for the restoration of confidence in the Nigerian financial system so that the sector could play its roles in the economy. He is right. Right now the banking system faces a number of challenges which include stiff competition among players, stakeholders’ expectations and adoption of risk based premium assessment. Restoring confidence does not come by sheer luck. It is achieved through a combination of factors which include those who take key decisions at the apex bank.
Except lessons learnt from this crisis are well absorbed and supervisory activities of CBN are well manned, a crisis of higher magnitude might re-surface in no distant time. Of course, no one would have expected the current happenings in the financial sector given the rate of bank liquidation in the 90s and the recent consolidation. The apex bank needs to ensure banks conform to regulations and be able to nip in the bud whatever problems that surface before they mature. The present crisis therefore is a lesson for everyone on how not to supervise banks. It simply means the regulator should change the way banks are supervised.
Determined to address this, President Yar’Adua nominated Dr. Kingsley Moghalu as the CBN’s Deputy Governor for Financial Sector Surveillance (FSS) subject to Senate confirmation. If confirmed, he will directly supervise the banks. To nominate is one thing and the ability of the nominee to perform creditably well is another. The real issue now revolves round the ability to effectively monitor and supervise banks so as to forestall future occurrence.
The primary functions of deputy governor (FSS) are; firstly, prudential supervision and regulation of deposit money banks and corporate governance oversight; secondly, managing development finance – policy formulation on microfinance, guaranteeing credit schemes and other initiatives to support economic development through the real sector including agriculture and small and medium scale enterprises, and lastly regulating other financial institutions such as micro-finance banks, mortgage banks, finance companies and bureau de change.
Obviously, these roles are multidisciplinary, and go well beyond the technical confines of traditional commercial banking. Occupiers must be able to discharge this effectively and be able to make robust contributions to policy formulation at board of directors’ level. Informed policies are important at this time to block the inherent gaps in the system and position our banks for competition in the global financial market. The CBN governor has once admitted the apex bank needs to be strengthened in order to be more effective in its roles.
Given previous experience, banks supervision requires individuals who have strong track records of accountability and transparency, risk management, and corporate governance. In addition, such individuals should also be able to bring a high level of credibility to the regulatory role of the CBN. The public policy implication is that it will help to restore the confidence of investors, depositors, and a wide range of stakeholders in the financial sector.
Moghalu’s track record inspires confidence. Aside being a professionally certified risk manager, he has managed portfolio and strategic risk for a Geneva-based global fund with $21 billion in assets under management, redesigned the accountability and regulatory compliance system of the United Nations as a member of a high-level panel appointed by Secretary-General Kofi Annan, led money-laundering and asset tracing investigations against indicted war criminals responsible for Rwanda’s genocide, and has more recently been a risk management and corporate strategy consultant to global corporations, including one of the world’s biggest banks after leaving the UN.
What usually compromises regulator’s effectiveness is the unethical and unprofessional camaraderie that existed between the regulator and the banks. It is quite easy for the regulator to be captured, particularly if those at the helms are mostly from within the industry. With this consideration in mind, it is necessary to ensure that anyone in charge of bank surveillance has no direct affiliation or pecuniary interests in the banks. The nominee’s profile shows he is coming outside of the banking system which will enable him to look at issues objectively and dispassionately.
Above all, crisis like this also requires the need for new regulatory framework. This is because operators may have perfected methods of manipulating the existing regulatory system. Financial crises often expose weaknesses in the underlying regulatory frameworks and the supervision systems that are supposed to reinforce them. This no doubt calls the need for design of structures that will ensure that adequate information is at the disposal of the Central Bank. It behoves the apex bank to be alert to such information and act in a manner that will break the cycle of corporate governance violations that is increasingly threatening the future of the Nigerian financial system.
Around the world, SMEs are the superstructure on which sound and sustainable economy is built. In recent time, there has been utter neglect of the SMEs. The lending practices are skewed against them even with genuine and verifiable collaterals. Experience in development finance, particularly through consistent records of performance and leadership roles in first-rate global institutions, are critical in understanding the importance of SMEs as engine for growth.
Finance is a risky business. Regulation and supervision alone cannot completely eliminate crisis. However, upon his confirmation it will be Moghalu’s responsibility to ensure that sound corporate governance, accountability and simple but stringent reporting standard become the hallmark of our nation’s financial system. This is the surest way in which confidence can be restored.
Thompson Ayodele is the executive director of the Initiative for Public Policy Analysis, a public policy think tank based in Lagos