Safe Hands

How would you assess the success of the measures taken to stop the financial crisis?

I would assess the success of the measures that we took as the Central Bank of Nigeria (CBN) to intervene in the banking sector as quite high. This is evidenced by the fact that the banks are stable and largely profitable, although our primary focus is on the stability of the banking system, not bank profitability. The profits are a business priority that is left to the banks to pursue within a framework set by the regulatory system. The reason why I bring up this distinction is because it’s subtle, but important. There are certain measures that we take, and have to take as regulators, that we are aware will affect the profitability of the banks, but we take those measures because it is in the longer-term, broader interest of the economy and financial system, especially when it leads to stability. For example, the increase in the cash reserve ratio of public sector deposits. If you have a number of banks being highly exposed to public sector deposits, that poses financial stability risks because we are an economy that depends largely on crude oil for its revenues. If anything happens to the price of oil, then the government will have serious liquidity problems and the banks become unduly exposed to a decline in government deposits. We do not want this to happen. We increased the cash reserve ratio for public sector deposits from 12% to 50% when monetary conditions required such a policy, then from 50% to 75% at the last policy meeting. This matter of banks’ exposure to public sector depositors is one of the things that contributed to the near collapse of some of our banks in 2008 when the oil price crashed, along with the excessive exposure to the oil and gas and public sectors, which created problems for those banks. It is a macro-prudential approach in a sense, and we have an eye on stability. We know that in the short term it will affect the profits of banks, but it is necessary for those banks to reposition their business models toward the real sector, which means banking for retail, SMEs, manufacturing, and so on. Building on CBN reforms under past governors, there were four components of the CBN banking sector reform since 2009, and each of those components has been making very significant progress. The first component of the reform was to enhance the quality of banks. That was to ensure that the corporate governance of banks is sound, the risk management by banks is sound, and the asset quality is sound. The second leg was to establish financial stability, which was severely threatened by a combination of the global financial crisis and some corporate governance and risk management failures in the banking system. We had to restore financial stability and we did that in a number of ways, especially with the establishment of the Asset Management Corporation of Nigeria (AMCON) to buy non-performing loans (NPLs) from the banks and give them a clean balance sheet to get them lending again. The average NPL ratio at that time was about 35%, and we brought it down to under 5%. The third leg of the banking reform was to facilitate the evolution of a healthy financial system, and that is something that we did in two ways. First was to create a new banking model in which the CBN restructured the banking system to have three broad types of banks: commercial banks, merchant or investment banks, and specialized banks, such as those that cater more to SMEs, mortgage banking, and so on. Before the reforms, we had universal banking and one bank could be a conglomerate of financial services. When you have this type of structure, you have a bank that owns all the subsidiaries and the CBN regulates the bank, but not the insurance or pension funds, for example. That led to gaps in terms of the movement of funds between the subsidiaries, and regulatory arbitrage. We stopped this with the new model and separated core banking from other financial activities. The fourth leg of the reforms was to ensure that banks lend to the real economy, and that is very important for the long term. These are the four main pillars of the reforms, and I think in each one of these pillars the CBN has achieved very significant success. A reform is not a destination; it is a process, so we cannot say we have arrived, but the banking system is very markedly different from what it was in 2009.

What was the net impact of AMCON, and will it continue to operate now that NPLs are at an acceptable level?

The purchase of NPLs by AMCON sent the NPL ratio crashing down. AMCON has been very successful in terms of completing its objectives. AMCON is no longer buying new loans and it is no longer capitalizing the banks, but it has done that. Immediately after the establishment of AMCON, there was a merger and acquisition process of various weak banks. They were opened up to new investment so some were merged, and some took over others. AMCON helped these processes. For the three out of the eight that we were not able to recapitalize by the deadline, AMCON took them over and recapitalized them; now they are in the process of being sold by mid-2015. The Nigerian banking system intervention to restore financial stability has taken place without any depositor losing a single cent. Nigeria is perhaps the only country in the world in the wake of the financial crisis where you can say this. It is also the only country where you can say the Treasury was not directly involved in the bailout of the banks, in the sense of providing direct funding for bailouts. The way we were able to do this is because AMCON issued bonds. Those bonds are guaranteed by the federal government and we have set in place a mechanism to ensure that that contingent liability of the federal government is not called upon, ever. We have done this in two ways that were unique. Nigeria became the only country in the world in which the banks themselves were able to contribute to the banking crisis resolution. The banks contribute 0.05% of their total assets every year to a sinking fund to pay off AMCON’s funds. That is one. The CBN also contributes to that sinking fund, paying NGN50 billion a year. Between these contributions to the sink-in fund, AMCON’s recovery to the debts it holds, we expect that the sums will balance themselves out. Thus, financial stability has largely been achieved because of this. We now have banks being encouraged to lend.

How is the CBN contributing to the national goal of increasing financial inclusion?

Financial inclusion is a very important part of our strategy. It is important for creating financial stability because the more people you have, the more diversified your deposit base, and the stronger the system is. It is also the key channel of economic development because it allows entrepreneurs to access financial services. So yes, we have taken financial inclusion very seriously and we have a strategy that we can share. We are hoping to bring down financial exclusion by 50% by the year 2020. We belong to the Alliance for Financial Inclusion, a global alliance of central banks and financial regulators that seeks to create ways to bring the excluded into the financial system. We are going about financial inclusion in a number of ways. First is enhancing financial literacy, which is the most important aspect for financial inclusion. People need to be educated about the benefits of going into banking services, micro insurance, and micro savings. It is not just banking but insurance, pensions, and other aspects of the financial system. We are rolling out the financial education program at this time, covering the whole country and offering programs to educate Nigerians on where they should put their money in the financial system. Another barrier to inclusion is trust. We tackle this problem in two ways, first through the educational process and second by talking to the banks about a reduction in what they call commission on turnover (COT). We negotiated with the banks to reduce their fees on this COT by 2015. This is a huge confidence boost for the financial system. If Nigerians see themselves putting money into the bank and then being charged hidden fees, why would they put money in the bank? We have also removed obstacles for opening an account for those at the bottom end of the pyramid. We reduced the requirements for the lowest levels of customers to open bank accounts. We have moderated some of the requirements, but staggered those requirements based on the level of customers so that banks manage their risk at the same time.

© The Business Year – April 2014