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Monday, November 7, 2011

SANUSI LAMIDO BANKING SECTOR REFORM: A REVIEW


       The last three years has become one of the most tumultuous in the history of the world financial industry. The form and structures of the global financial order has been changed because of what occured between these times. A lot of important financial institutions that were known in the financial landscape for years have disappeared from the scene. Hundred of thousands finance industry workers have lost their jobs world wide, while some few others are languishing in prison cells. Currently, the global sovereign debt market is facing one of its most challenging period with countries across the world particularly in Western Europe facing multiple defaults. The current ‘occupy wall street’ protest is one of the repercussions of the global crisis that further bring to the fore the tensions that exist between the unemployed youth and the fat-cats called Wall Street bankers and other categories of wealthy individuals like them.  It is in this situation that Sanusi Lamido initiated his banking reforms which many see as the only option for any other CBN governor holding that office, and faced with banks in unhealthy state. Let go back to the early 90s, a period when Nigerian banking sector was speedily liberalized and many previous state own banks were sold to the private sector. The speed with which the sector was liberalized and the absence of required regulatory capacity to manage the phenomenon created as a result left the sector at the verge of collapse. Many banks were given license by virtue of applying for it not because they have the necessary capital, staff strength, managerial know how, and market spread to operate a commercial bank. Banks in those periods engaged most of their time in foreign exchange dealings instead of allocating their time and capital in most important areas like quality credit creation and shoring up of their capital base. The aftermath of that tumultuous period in Nigeria banking history was the increase in the number of failed banks and subsequent runs on banks by their customers, which later eroded Nigerians trust in the banking system. The failed bank tribunal of Abacha era was one of the unforgettable consequences of that period banking turmoil.



       The most controversial chapter in the Sanusi banking reform is his sacking of Managing Directors of five banks and their replacement with CBN appointed managers. Many people thought that was the end of Sanusi, because these were very rich and powerful people and nobody mess with them especially some body not well known like Sanusi at that period. Sanusi later followed that episode with the publication of the name of major bank debtors in the country who CBN claim owed those banks money. The list included the who’s who of the Nigerian wealthy and capitalist class. Some commentators still hold the opinion that the manner that Sanusi deal with the situation was too autocratic and it smell of communist era method of silencing those opposing a regime. The uniform year ending is one Sanusi reform that hit the nail on the head, before him Soludo had promised to unify banks financial year end to a single period. But up till the time he left office, he could not delivered on it. The uniform year end undertaking was credited with reducing the rate of dubious financial reporting by banks in the country whereby banks borrow deposit from each other to shore up their total deposit base on the final balance sheet. Banks unlike other private sector companies are very sensitive institutions that are critical to the health of any economy, because of that their activities are supposed to be monitored 100%. But when banks activities are shrouded in secrecy and the CBN itself who should know better aided in the process, people are bound to loss confidence in the system and develop cold feet at any sign of weakness from these institutions. Sanusi and his co travelers believed that CBN in the past two and a half years have been able to turn the tide against secrecy, and were able to increase the flood of information that is coming from both the CBN and banks it regulate.



     Ben Bernanke, the chairman of American Federal Reserve, is one Central Bank governor who is known world wide for his tactical manipulation of monetary information releases that many observers believe that our CBN got something to learn from. But despite there differences, Bernanke has things in common with Sanusi which is that they both happen to be crisis era governors. And, while Bernanke is tactical and gradual in his reforms approaches Sanusi is radical and revolutionary. Both were able to restore normalcy into their respective financial sectors, albeit using different approaches. Sanusi effort to improve corporate governance standards in the Nigerian banking sector is commendable, today the tenure of bank CEOs has been limited to two terms of five years. While heavy restriction has been placed on family ownership of banks and CBN power to monitor appointments into executive directorship positions of banks has been increased. Though banks did not totally abandon the earlier fatal competition for deposits that saw them undermining each other and sending their staffs on unethical quest for deposit, it has been contained a bit. Another area that Sanusi should be given a pass mark is his dogmatic insistence that no Nigeria bank will be allowed to fail or depositors to lost their money during the period of the crisis which we can all testify to that he has stick to that so far. But not so in the area of CBN overseeing of microfinance banks, many analysts still believe that CBN has done poorly in that respect. Microfinance sector that suppose to assist the poor and lower middle-class with their financial needs is being slowed by lack of quality and absence of deepness, and so far CBN is not doing anything concrete to help the situation. 



      The plan reversal away from universal banking model back to the less complex commercial banking model was viewed differently by the Nigerian public. Though this is a process that can be observed happening worldwide. Nigeria is not the only country that is reversing back to commercial banking model, others in both developed and emerging markets have also embarked on the same process. From what we have seen around the world during the global financial crisis where banks engaged in all sort of businesses with no time to concentrate on their core banking job, this reversal is a good policy. Under the universal banking arrangement, banks engaged in activities such as insurance, pension business, investment banking, foreign exchange dealings, mortgage business, hedge fund, and other capital market dealings. Money that is mean for safe keeping in the retail baking department of a bank will find it ways into the highly risky investment banking department where they are used to fund risky businesses. This is a risky activity that the new separation of commercial from investment banking has done away with. Despite numerous promises to bring down the cost of interest Nigerian interest rate is one of the highest in the world. Likewise other transaction costs such as charges for using ATM machine, withdrawal or transfer of cash. Sanusi also could not made much impact on his other interventions such as the Billions he allocated for lending to manufacturing and agriculture. Despite such huge allocations farmers and manufacturers still complain of lack of credit to support their businesses. The introduction of specialize banks like the non interest Islamic banking should be commended, because it has the potential to increase overall financial deepening in the economy by reducing the percentage of unbanked people. Despite the recent set backs, Sanusi has shown to the world that he is  an inflation fighter. But, the continuous weakening in the value of Naira will remain a big obstacle in the foreseeable future.