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Rise And Fall Of Nigerian Financial Sector

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By Whitehall Capital Partners

Rise and Fall of Nigerian Financial Sector

When will we learn?

Generally accepted benchmarks by which we measure the success and or efficiency of financial reforms have varied from decade to decade and thus been the topic of much discussion. However certain of them are generally accepted as standard within the financial sector as follows:

  • Increasing asset bases leading to an increase in lending activities to the real sector at lower rates.
  • Interest rate reforms leads to positive real savings rate, as well as the convergence, and/or narrowing down of the premium between the savings and prime lending rates.
  • Foreign exchange market reforms usually correct overvaluations and foster relative stability of the exchange rate vis-à-vis world trading currencies, in addition to eliminating divergence inherent in the multiple exchange rates system.

Reforms are aimed at the country at large and not just political or business elites that rule a country.

CBN Overview

The establishment of a Central Bank is premised on the need to promote and accelerate the economic growth and development in a country, which would invariably promote the growth of the financial market. This financial market comprises the Money and Capital market, assistance to development banks and institutions and the formulation and execution of government economic policies.

The Money Market is the market for mobilizing short-term funds with instruments such as Treasury Bills, Treasury Certificates, Commercial Papers, Certificate of Deposit (CDs), Eligible Development Stocks (EDS) and Bankers’ Acceptances.

In Nigeria the Central Bank of Nigeria (CBN) plays a major role in the Capital Market, which deals with long-term funds by fostering its growth through the annual subvention granted to them.

The CBN also helps to promote and assist the development banks and institutions. These include the Nigerian Industrial Development Bank (NIDB), the Nigerian Banks for Commerce and Industry (NBCI), the Nigerian Agricultural Insurance Company ((NAIC), the Federal Mortgage Bank of Nigeria (FMBN), the Nigerian Deposit Insurance Corporation (NDIC), the Nigerian Export-Import Bank (NEXIM) and the Securities and Exchange Commission (SEC).

In addition, the CBN is involved in the formulation and execution of viable economic policies and measures for the government. Also since 1970, the bank has been instrumental in the promotion of wholly owned Nigerian enterprises. Thus, the recent directive to banks to set aside 10% of their profits before tax to finance Small and Medium Scale Enterprises can be viewed in this context.

There have been four broad phases of banking sector reforms since the commencement of structural adjustment programs (SAP).

  • The first is the financial systems reforms of 1986 to 1993 which led to deregulation of the banking industry that hitherto was dominated by indigenized banks that had over 60 per cent. Federal and State governments’ stakes, in addition to credit, interest rate and foreign exchange policy reforms.
  • The second phase began in the late 1993-1998, with the re-introduction of regulations. During this period, the banking sector suffered deep financial distress which necessitated another round of reforms, designed to manage the distress.
  • The third phase began with the advent of civilian democracy in 1999 which saw the return to liberalization of the financial sectors, accompanied with the adoption of distress resolution programmes. This era also saw the introduction of universal banking which empowered the banks to operate in all aspect of retail banking and non-bank financial markets.
  • The fourth phase began in 2004 to date and it is informed by the Nigerian monetary authorities who asserted that the financial system was characterized by structural and operational weaknesses and that their catalytic role in promoting private sector led growth could be further enhanced through a more pragmatic reform.

The Central Bank under the military, like many other establishments in Nigeria, underwent processes of abuse, misdirection and organizational malady. Rulers, through their agents, single handedly panel-beat the apex bank in order to achieve conformity with their often greedy, self-centered image.

The government of the late General Sani Abacha, for instance, witnessed a direct, unchecked looting of the public treasury. CBN was in the eye of all that.

The current state and the future direction of the CBN, in the opinion of this author have been paved by 3 notable Governors over the last 11 years.

A major challenge facing the banking industry and the economy as a whole is the problem of maintaining macroeconomic stability – low inflation and interest rates, as well as stable naira exchange rate based on Nigeria’s economic fundamentals – in the face of fiscal dominance, poor and low economic productive base, poor infrastructure coupled with gross mismanagement and corruption.

This paper will provide highlights of the achievements of each of them and provide an insight into the direction the sector must move in order for the country to take its place amongst the economic powers of the world.

The legacy of Joseph Sanusi

When Chief Joseph Sanusi assumed the office of CBN Governor, it soon occurred to him that if he was to going to make any impact or give people hope in believing that the future would be better, he needed to restructure and reengineer to make the bank more responsive to the peculiar needs of the new millennium. That meant reorganizing the bank’s ways of doing business; restructuring its liabilities and assets to boost efficiency, bring back its lost glory and public confidence and cut down cost. Thus the advent of “Project Eagle”, the acronym which is all encompassing: E stands for efficiency, A-accountability, G-goal oriented, L – leadership E-effectiveness and S-staff oriented.

As stated earlier, prior to his assumption of office in June 1999, Nigeria was besieged with many institutional problems; problems which had led to hasty conclusions and a loss of public confidence in the system. Nigeria was characterized by irregularities, a turf for the free reign of malpractices, illegal accumulation of profits and unethical practices.

Sansui’s era, many believe, changed all that. CBN under him recorded competent and honest leadership and that Sanusi had successfully fulfilled the CBN’s mandate of promoting monetary stability and a sound financial structure in Nigeria.

In his valedictory message, Chief Sanusi laid bare what could easily pass as the crux of the matter as far as national survival is concerned in his words he says:

“The importance of capital as a cushion for supporting operations and absorbing unexpected losses cannot be over-emphasized. Apart from a few banks, which have not met the N1 billion minimum capital requirement prescribed for existing banks, some others have had their capital eroded by losses. There is need to respond positively to CBN initiative for mergers and acquisition so that some of the current weak banks that constitute a threat to systemic stability can be absorbed.”

“Banking, as a business, is a risky endeavor. However, because of the uniqueness of the sector, stringent regulatory and supervisory oversight is normally imposed on operators to ensure the protection of depositors, especially, in case of bank failure. While the Nigerian Deposit Insurance Corporation (NDIC) was established to instil confidence in the banking system and settle depositors in case of bank failure/revocation of banking licence, the CBN has been constrained in the past to the speedy enforcement of various distress resolution options available to the Bank. There are a number of marginal banks in the system that are good candidates for merger/acquisition or outright liquidation which are overdrawn with the CBN. The CBN could not speedily send them out of clearing for fear of triggering banking system contagion and crisis of confidence. Furthermore, the Bank could not liquidate the banks so as to settle the bank depositors in a timely manner because of legal constraints”.

The legacy of Professor Chukwuma Soludo

Professor Soludo came to national prominence in Nigeria in 2003 when, as former President Olusegun Obasanjo’s economic adviser, he helped formulate the country’s macroeconomic stabilization programme and pushed for a total comprehensive reform and consolidation of the country’s then inefficient banking system. He was an early and critical member of the Ngozi Okonjo-Iweala economic team that later turned out to be without doubt the most successful that Nigeria had since independence.

Professor Charles Soludo was appointed CBN Governor as successor to Chief Joseph Sanusi. He was provided a good platform to ensure continuing reforms of the sector. Prof. Soludo conducted a much celebrated reform of the banking system in Nigeria – what is called the bank consolidation exercise. He increased dramatically the capital base of the banks, encouraged bank mergers and acquisitions and evolved in the process what is referred to as megabanks in Nigeria.

The global best practice for banking is that each bank must have a minimum capital adequacy ratio in relation to its risk weighted assets. This is the yardstick for judging the health of banks and banking systems even in the countries that Soludo has chosen his examples from: Korea, South Africa, Malaysia, Singapore, etc. Rather than compare capital adequacy ratios of Nigerian banks with those of banks in his countries of choice, he compared the size of the capital base in isolation of the assets the capital base is being deployed to operate. ‘Weak capital base’ can only be established in relation to business done, or risk their assets, not in absolute terms.

The Nigerian economy is considerably smaller than the countries Soludo has been drawing his examples from in overall size of GDP, and even much smaller in per capita terms.

The sizes of Nigerian banks and their capital bases therefore commensurate with the size of the Nigerian economy. Except Soludo and the President’s economic team grew the economy to the size of any of the countries he was comparing Nigeria to, he really had no business forcing Nigerian banks into raising their capital bases to NGN 25 billion.

Soludo’s comparisons of the capital bases of Nigerian banks with those of banks in the above countries are therefore misleading. As a highly respected scholar, the CBN governor will do well to publicly retract his utterances in these regards, in the spirit of academic humility. Consequently, he should have withdrawn his proposal that all banks must raise their capital bases to N25 billion.

The exercise achieved a major consolidation of the banking sector, which was in itself a positive thing. There was certainly no need for 89 banks in this space. However it must be noted that a number of the 89 banks were in terrible financial condition. The consolidated entities in some cases inherited liabilities and doubtful assets over which they had little control over.

The consolidation exercise revealed very little about the state of the banks, whether they actually achieved raising the minimum capital or not. It spoke more about the ability of CEOs and their executives’ ability in raising capital (where the money came from and the consequences were never questioned). The only requirement at the time was raising N25 billion minimum capital. Little was done in terms of due diligence probing into the ability of our banking chiefs.

With the rapid growth of the banking sector post consolidation; Bank strategies have been influenced by league tables and growth. The landscape had changed without significant shift in management style, corporate governance or overall risk management capacity.

Soludo’s error was to encourage a second round of capital raising rather than actually “consolidating” the institutions that emerged from the rushed mergers and acquisitions of 2004-2005. The industry needed to deepen skills and competences, build institutional capacity in risk management, corporate governance, systems and processes etc. and the regulator itself needed to upgrade its ability to supervise the post-consolidation banking industry, but instead fed by hype and over-celebration, Soludo actually instigated multiple capital raising by banks who had not acquired the capacity to manage at their new “mega-bank” status.

Some of these errors resulted in the current problems in the banks which Lamido Sanusi is addressing and somewhat call to question Soludo’s legacy. But then in spite of the eight or ten banks which have run into fairly serious problems and the huge write-offs which the rest of them are having to make, the shape of the Nigerian banking industry going forward, will still have been determined by Soludo’s banking consolidation. It is impossible to visualize say Access Bank, Skye Bank, Stanbic IBTC, UBA, Ecobank, Diamond Bank, Fidelity etc. in their current forms without the consolidation exercise.

Whilst many argue that Soludo’s reforms may have helped to build and foster a competitive and healthy financial system, it is debatable if the structure of their portfolio of investments had the capacity to support the desired economic development aspiration of the proponents. Despite the rapid increase in lending to the economy (2006 – 2009), the share of production sectors of the economy especially agriculture and mining remained low and indeed declined proportionately over time suggesting that the new monies may have been channelled into miscellaneous activities.

In this way if Soludo is to be commended for the success of his consolidation, then his failure to regulate the banking sector should be condemned. It is very obvious for a long time that he was more concerned with the size of the banks than with good governance in the financial sector. Even the banking consolidation exercise carried out by Prof. Charles Soludo has come under fire from different quarters; his successor Sanusi Lamido has described the exercise as a “sham,” and that “many of the banks never raised the capital which they claimed they did.” Sanusi however said that “the bank consolidation helped to create bigger banks while it failed to overcome the fundamental weakness in corporate governance in many banks”.

Under normal conditions, mergers and acquisitions take time to consummate because there are a number of processes which must be followed. An example of this is that according to the Securities and Exchange Commission (SEC), eight important steps must be followed before a successful merger or acquisition can be accomplished. The steps are as follows:

  • SEC’s Approval-in-principle
  • Preparation of the Scheme document
  • Clearing of the Scheme document with SEC and the Nigerian Stock Exchange (NSE)
  • Application to the Federal High Court for the court to give orders that separate shareholders’ meetings of the companies be convened
  • The Scheme document and Notice of respective Court-ordered Meetings are to be sent to the shareholders of the companies, and the shareholders need a minimum of three weeks’ notice to hold their meetings. These notices of shareholders’ meetings must be published in the newspapers
  • Approval of the Schemes of Merger at the separate Court-ordered Meetings
  • The Resolutions of the Court-ordered meetings of companies are to be referred to SEC for approval
  • The companies are required to file an application for a Court Order Sanctioning the Scheme of Merger/Acquisition.

In addition to the above, the banks had to satisfy the following CBN requirements:

  • Pre-merger Consent
  • Approval-in-principle
  • Final Approval.

Based on the processes described above it is clear that 18 months is not enough time to effectively complete a merger or acquisition. In this way we witnessed mergers and acquisitions of banks that were hastily packaged in order to beat the CBN deadline. Mergers and acquisitions are supposed to be voluntary strategies for consolidation. Therefore, “the policy-induced M&As of the just concluded bank consolidation in Nigeria suggests that the relevant institutions are likely to be faced with serious post-consolidation integration challenges”1.

1 See Banking consolidation in Nigeria – Issues and Challenges (2007) by Dr Adeyemi (Executive Director UBA)

“Ironically, some banks found it difficult to find a group to merge with or find a big bank to acquire them because, initially some of them were foot-dragging and some had refused to cooperate with the banks that showed interest in acquiring them as they continued to give difficult conditions with regard to some important issues, such as, the worth and the value of their shares, quality of their risk assets, number of representation on the board of the new bank and general lack of transparency in providing a timely information” (ibid).

Dr. Adeyemi of Union Bank, already in 2007 indicated that in order to ensure that the synergy consolidation promises is fully harnessed, and to mitigate post-consolidation conflicts, “adequate steps should be taken to train and retrain the staff of all the banks that have scaled the capitalization huddle while the regulatory environment has to be tightened to close all the loopholes that could come up as a result of the increased size of the firms in the industry”(ibid).

A notable issue under the regime of Prof Soludo was that he placed less emphasis on supervision and paid more attention to price stability. Supervision of the banks was not that effective at that time. The examiners could only execute the management‘s directives.

A few months after the advent of the global financial crisis it became evident to all that a number of Nigerian banks were in distress. In the words of Atedo Peterside (Chairman of StanbicIBTC), one of Nigeria’s most notable economists and bankers, “At the very least, they were guilty of bad judgment”. It became clear that they had misread the severity of the economic downturn and the collapse of asset and commodity prices (including the Nigerian stock market index and crude oil prices) and had lent large sums of money to people (including some insiders) who did not have a semblance of a business plan. Their loan losses were so significant that they became clearly illiquid and became increasingly reliant on Government funds via continued reliance on CBN’s expanded discount window. Weak risk management and lopsided corporate governance practices did not help either”. At this time Prof. Soludo was quick to announce that the global crisis was no threat to Nigeria (as internationally the issue was due to sub-prime lending) and that the financial system was too strong to suffer.

In early 2009, for instance, Prof Soludo was persistent in his insistence that “the nation’s banks are healthy, sound and robust.”2 The CBN had also specifically come to the defence of Intercontinental Bank Plc, which has recently been riddled with rumors of ill health.3

2 See, for instance, Daily Champion, March 18, 2009

3 See for instance Punch Newspaper (March 17, 2009).

4 Quoted in Vanguard Newspaper, February 25, 2009. Also, according to the Economist: “[t]he top seven Nigerian banks, with a combined market value of almost $40 billion, are overvalued by as much as 56%, according to a report published in May [2008] by JPMorgan…. Part of the problem is that banks have used their own money to push up their stock prices by engaging in risky lending to corporations and individuals who invest in the banks’ own shares” (August 21, 2008).

Despite such assurances, indications remained that Nigerian banks may not be as healthy as the CBN stated. If such press reports are to be believed, PricewaterhouseCoopers in a report to the Federal Ministry of Finance had said as much. According to the Report, some of the banks have already signaled interest in Government intervention or part takeover of their operations. Furthermore, various “industry commentators have reported that banks are struggling with non performing facilities in excess of N300 billion to N400 billion.”4

Lamido Sanusi’s Mission

In June 2009, Sanusi took over and two months later, following a sector audit, sacked five bank executives whose banks had become serial borrowers of most of the N256.571 billion from the CBN in the previous two months. It became apparent that banks had excessively high level of non-performing loans, poor corporate governance practices, lax credit administration processes, absence or non-adherence to the banks’ credit risk management practices, significant capital impairment, which were all clear evidence of corruption.

The challenge before Sanusi was not to reinvent the wheel nor look for central banking model that has nothing to do with our unfortunate reality. Soludo did not look inward. I came across an article written in the Daily Trust Newspaper entitled “Lamido Sanusi: Player turned referee”, Issa Aremu 08 June 2009. In this article the author remarks as follows:

“The advice this writer gave his predecessor (Soludo) was to look inward. He should find out how late Dr. Clement Isong, Harvard trained economist, together with the then finance minister, late Chief Obafemi Awolowo managed the war economy without external borrowing and without inflation and naira devaluation. With existing level of unemployment, factory closures, low capacity utilization and social deprivations occasioned by poverty and Niger Deltalization of the whole land, the present day economy can indeed be likened to a war economy. We need a CBN that will be part of recovery and this call for activist bank regulator and NOT a passive CBN that bemoans economic decline through periodic reports of despair”.

During his confirmation interview at The Senate, he stated that the consolidation of the banking sectors by his predecessor in office, Professor Chukwuma Soludo, should never have been an end in itself. Consolidation was certainly a necessary step at the time it happened, Lamido Sanusi remarked: “I think it is a true statement that a good bank requires a lot of capital…. consolidation was not and should never have been seen as an end in itself… while it is true that a good bank needs a lot of capital, it is not true that every bank that has capital is a good bank”.

“When the capital market was going up and banks were lending to the capital market, somebody should have asked: what happens if the market crashes? Will these banks survive?”

“The risk managers in the banks did not ask those questions; the regulators did not ask those questions.”

This brings an essential point in that under Sanusi there has been a shift in the way things are being done. Whilst blame can be attributed to the Banks, as much blame must be apportioned to the regulators themselves. In this way Lamido Sanusi immediately set an agenda which would allow him to restructure the CBN itself as well as the banking sector as a whole. This has laid way to a total review of the financial services sector.

Each Central Bank Governor has been criticized at one time or the other for their methodologies. Each had a different approach in that they laid emphasis to one part or the other of the Project EAGLES put in place by Joseph Sanusi.

Joseph Sanusi did too little too late, whilst Prof. Soldo tried to do too much too quickly. Objectively Soludo’s acclaimed solution to the banking woes then, encouraged the unethical practices that Sanusi is now confronted with. These unethical practices by banks and their executives took place under the watchful eyes of Soludo. The CBN under Soludo was regulating the activities of the banks in a laissez-faire fashion, bank executives went on a borrowing spree to feed a rising ‘easy money’ culture. Today, banks are saddled with trillions of Naira in toxic debts. Margin loans given in order to purchase and speculate on the stocks of the same lender-banks drove a bullish Nigerian Stock Exchange to high heavens. Soludo’s CBN made matters worse by compromising its position as a regulator; was lenient with bank executives and never regulated their activities, exuberantly claimed that the Nigerian economy and banks were immune to the raging global financial crisis, when it was very clear that most of the banks were close to being insolvent.

The steps taken so far by the new Central Bank Governor to rescue those banks from imminent collapse deserve the commendation and endorsement of all well-meaning Nigerians. An article by Said Adejumobi entitled “Soludo, banking reforms and the high profile debtors” (Guardian Newspaper, 01 September 2009) accurately points out that “A bank is a not and cannot be a private property to anyone, even if it is owned by someone or a few. A bank is a public trust; it holds in trust and manages peoples’ funds and savings for them, and the credibility of the system is at the heart of financial stability and growth of any economy….The actions so far project a nationalistic approach designed to save the ordinary Nigerians who are usually the victims of failed and collapsed banks in Nigeria”.

Current Review of Universal Banking Model

Sanusi has subsequently provided a timetable for which he intends to dismantle the Universal Banking licences and therefore force banks to make decisions as to what line of banking they wish to follow. Banks will no longer be able to consolidate activities of traditionally non-banking activities such as Insurance, Underwriting, and Margin Trading; instead banks will focus on traditional banking activities. The CBNs preference is for banks to focus on banking business only.

The option of unbundling the current banking structure will entail the breakup of the activities of banks under the current universal banking regime into distinct and separate financial business lines for which specific licences must be obtained from the relevant regulator.

In this option, banking groups that choose to adopt the HoldCo model must demonstrate a business case for retaining any non-banking, but financial operations.

The Holding Company (HoldCo) shall own a bank (or banks) and may also engage in other financial services activities closely related to banking but only through non-bank subsidiaries. HoldCo would be permitted to own entities that perform banking, clearing house activities, capital market activities, insurance services or such other services permitted by the CBN.

The Holding Company may own, control or invest in companies involved in the following activities:

  • Banking business
  • Insurance agency and underwriting
  • Securities dealing and underwriting
  • Microfinance
  • Pension funds
  • Primary mortgage institutions
  • Other financial services (e.g. discount houses, financial advisory, etc.)

The holding company is intended to be a non-operating company, whose activities may include the raising and the allocation of capital.

Conclusion

The dismantling of the Universal banking model whether one agrees with all aspects of it or not, should be viewed as a positive one. It will ensure that banks focus on their core competencies; it should go a long way in discouraging the Banks’ boards from electing a CEO that doesn’t have the management prerequisites to run the institution. Several MDs of the past have been deal makers and individuals with great networks allowing them to chase lucrative and risky deals without paying sufficient attention to the running of the bank. The institution of the Holdco should ensure that effective Group Enterprise Risk Management solutions are implemented in each of its subsidiaries. Where the banks decide not to go with the Holdco approach this would indicate that they have decided to divest from various non-banking subsidiaries they currently own.

The change from a bank based system of financial intermediation (see legacy of Joseph Sanusi) to a market based system also created structural problems for bank regulators. This is because the securities sector has traditionally not been as policed as the banking sector. The emergent scenario encouraged regulatory arbitrage allowing banks to hide their activities using off balance sheet legal entities. The consequence of the above was that the existing regulation failed to keep pace with the changes in the financial system. The insurance of bank deposits became ineffective as it inadvertently meant open ended support for banks’ securities businesses.

The CBN and other financial service regulators are undergoing transformations. Risk management departments have been created at the NDIC and the CBN, these departments are charged with ensuring that the regulators themselves have robust systems for managing and mitigating both internal and external risks.

I would like at this stage to issue a word of caution to regulators as they continue to issue new guidelines; any changes implemented should not be merely a knee jerk reaction to the financial sector crisis. Guidelines should be implemented that are sustainable and rather that being restrictive they should continue to encourage innovation within the sector. To achieve this it is necessary for the regulators to ensure that whatever activities an applying institution wishes to undertake that the institution has the operational capability to successfully implement. For example Margin lending has become a swear word amongst bankers and stockbrokers as a result of the experience. It should be noted that issues with margin positions can easily be attributed to the greed and stock market manipulation that existed. Positions were not being monitored, tenors on margin positions were rarely adhered to (it appeared that both investors and banks had no issue with such positions being perpetual), lending was not done on the basis of discounted collateral valuations (such collateral valuations should be dynamic and discounted on the basis of risk. Risk in this case includes timing to liquidate positions, liquidity of the stock and volatility at minimum.

One of the key factors in the process of regulating the financial services sector lies in the acceptance of all stakeholders in the system of the necessary regulatory frameworks. For example, bank customers must accept a higher level of discipline from the banks when engaging with them. They have to be prepared to face more scrutiny and provide more documentation when transacting through a bank. Furthermore, emphasis needs to be placed on the public’s discipline in all of their dealings with our financial institutions.

The most important question any financial institution (including the regulators) has to ask itself at all times is ‘how much do I have to lose?’ How much of my capital is at risk across the whole institution if any number of unpredictable internal or external events should take place?

The regulators have to ensure a workable and robust supervisory framework is in place and their capacity and skill set to oversee the sector needs to be improved. The same applies to the industry itself, which must work internally to ensure its adherence to the new frameworks. Legislation must not become prohibitive, but supervisory roles must be sufficient enough to safeguard all stakeholders. Let’s be pragmatic about the situation, we are not the first country to experience a crisis in the financial services sector and in fact, this is not the first time we have experienced such a crisis ourselves. What differentiates us is that in other countries, depositors funds have always been safeguarded because

frameworks and structures are in place to prevent the collapse of the system and the political will exists to act when necessary.

One of the key factors in the process of regulating the financial services sector lies in the acceptance of all stakeholders in the system of the necessary regulatory frameworks. For example, bank customers must accept a higher level of discipline from the banks when engaging with them. They have to be prepared to face more scrutiny and provide more documentation when transacting through a bank. Furthermore, emphasis needs to be placed on the public’s discipline in all of their dealings with our financial institutions.

At the same time, despite wishing to be competitive banks have to maintain discipline in all activities they undertake. The enterprise must avoid products and businesses it doesn’t understand. Proper risk management depends on knowing enough to comprehend the dangers that are faced. A product or a business that is delivering outstanding growth but is too complex for management to understand is a risk too far. Put another way, if you don’t understand it, don’t do it. The immediate focus of management and the board of directors should be to strengthen the risk management and control environments. Risk management will need to become pivotal to the decision making process in all areas of the banks (Credit, Liquidity, Market, Operational risks, etc.).

The overarching frameworks for best practice risk management already exist in the form of the Basel Accord. There is no need for us to re-invent the wheel. The Basel Committee exists and it has provided guidance for the global community of banks, it has formulated broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements – statutory or otherwise – which are best suited to their own national systems.

In our case, we must pay particular attention to the implementation of three pillars of Basel II. They are:

  • Banks should have capital appropriate for their risk-taking activities – capital is prescribed at minimum for Credit, Market and operational risk.
  • Banks should be able to properly assess the risk they are taking, and supervisors should be able to evaluate the soundness of these assessments.
  • Banks should be disclosing pertinent information necessary to enable market mechanism to complement the supervisory oversight function.

When the structures and frameworks for risk management exist alongside the will to implement them to the level required, our financial system will have the sound basis on which to grow strongly and sustainably for the benefit of our economy as a whole.

Our experiences must show us as a nation the need for strong leaders both in terms of the regulators and the players. We only have to look at the nation as a whole to realise that the issues being faced in the financial sector are not unique. The CBN in itself is a product of the Nation as a whole, we cannot blame a particular governor for the issues faced; the problem lies beyond a specific sector. Issues exist across the Nation, from Public to private sector, from INEC to the NNPC, from PHCN to the NFF.

Notwithstanding the above the CBN and other regulatory institutions in Nigeria still have a major role to play in order to help improve the health of the financial institutions in the country as well as the overall economy. A starting point will be for CBN to focus on its core objective of promoting macroeconomic stability. It is only by effectively doing this that the true potentials of the Nigerian economy can be unleashed. Stable macroeconomic conditions are no doubt one of the key ingredients necessary for enhancing the investment opportunities in most African countries. “It is only when such investment opportunities are enhanced that banks can refocus their attention from risky short term speculative activities like share trading (casino banking) to longer term investments in the productive economy”5

5 Rethinking Regulation for Financial System Stability in Africa by Chibuike U Uche (Abuja: May 3-6, 2009)

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