Nigeria: Central Bank Makes Sweeping Reforms

As African central bank governors go, Lamido Sanusi has a higher profile than most. This year, his shelves are piled high with awards, including Forbes’ ‘Africa Person of the Year’. At home in Nigeria, his audacious moves to fix Nigerian banks have toppled vested interests, while the controversial fuel subsidy reform, which he backs, brought thousands of Nigerians on to the streets.

Speaking to This is Africa during a visit to London, the softly spoken banker-turned regulator – whose gentle manner is at odds with his management style – says he is “on course” to reach the ambitious targets he set for himself when taking the post in 2009, as Nigeria’s banking sector teetered at the edge of collapse.

From the outset, Mr Sanusi has pursued a two-pronged reform strategy to deal with both Nigeria’s troubled banks, and the structural weakness of the economy. He first attempted to clean up and recapitalise the banking sector. The immediate problem was the second round transmission of the financial crisis to Nigeria, primarily through the oil price drop, from $147 a barrel in 2008 to less than $40 a barrel in 2009; during which period Nigeria’s stock exchange went from being one of the world’s most promising to its worst performing.

As a consequence of the crisis, Mr Sanusi sent in teams to examine the banking sector, at which point the full extent of the country’s internal banking problems became apparent, with systemic corruption, lethargy and incompetence, and ill-conceived forays into high risk lending with depositors’ savings.

Eight out of 24 banks, comprising 30 percent of total liabilities and 40 percent of total assets of the industry, were in particularly grave situations. Banks had been lending significant quantities of savings to asset management companies and stock brokers. Fraud was endemic with depositors’ money used to purchase overseas properties in Dubai and South Africa. Some banks were using depositors’ savings to set up private equity funds.

But the crisis had provided an opportunity to reveal the extent of the rot. Speaking to the London School of Economics, Mr Sanusi recently joked: “When the tide goes out, you see who has been swimming naked.”

CEOs were fired, with one jailed and others currently being charged. New rules limiting commercial banks’ abilities to enter new sectors were drawn up, and most universal banks opted to sell subsidiaries and get out of asset management, real estate and investing banking. All CEOs who had been in post for over 10 years were booted out, and non executive board members present for over 12 years suffered the same fate. This, Mr Sanusi explained, was because CEOs in power for lengthy periods were over-riding board decisions and erecting elaborate patronage networks. Regulators have also been constrained, and now cannot enter regulated industries for several years after leaving a post; an effort to crack down on their tendency to grant favours to banks so they could land comfortable jobs when leaving.

Then there were institutional innovations, such as the new Asset Management Corporation (AMCON), modelled on the Malaysian response to the Asian crisis in the 1990s, which bought non-performing loans that had been depressing bank balance sheets, restricting their ability to lend, and acted as a broker to bring in more private investors. Private sector credit growth is already improving, he says, and AMCON has gone “smoother than even our most optimistic predictions”. As Western governments plead feebly with their banks from the sidelines, Mr Sanusi’s reforms have ensured Nigeria’s shoulder around 70 percent of the costs of the bailout.

These changes have not gone unchallenged, with many deposed CEOs and shareholders taking their grievances to court. None have succeeded so far. “The reality is that, in this entire process, every step we have taken has been on the soundest legal advice and based on existing rules and laws,” he asserts. He expects more “frivolous cases”, as he calls them, but says there is “no chance for them to succeed”.

While the clean-up may indicate Mr Sanusi’s wish to scale back and discipline the banking sector, it is, in fact, a precursor to the building of a revitalised and open financial system, driven by a central bank that plays a developmental role, rather than being merely an inflation watchdog, as the IMF has long advocated. “I object to the ideological fixation of inflation-targeting as the sole objective for a central bank,” he says.

“My view has always been that the role of a central bank cannot be de-linked from the developmental stage of a country, which also cannot be de-linked from the structure of the central bank as an institution.

“All the initiatives that the government has put in place – power, infrastructure, agricultural transformation, small and medium enterprise development, housing and so on – will have to be done in coordination with the banking system,” he argues.

The CBN is already playing a role in power reforms, delivering long-term low interest money to independent power projects. He believes increased lending to agricultural projects would be a major achievement and hopes there will be concrete progress within two or three years.: The break up of the banks has occurred alongside the introduction of new differential capital requirements, which Mr Sanusi hopes will contribute to financial deepening and open space for the re-emergence of medium sized banks that would lend to SMEs. “An unintended consequence of sectoral consolidation was that huge institutions were created, most of whose assets were government securities and loans to large corporations. They have grown so big that they don’t have time for the small man,” he explains.

The growth of Islamic banking could also contribute to financial deepening, and the central bank recently issued a new license to a non-interest Islamic bank, Jaiz. Mr Sanusi hopes there will be more. “Non-interest banking brings into the financial system a large group of people who, for religious reasons, have not been patronised in the conventional banking system. This opens up the prospects for new products, such as Islamic-compliant bonds, which can bring in some investor classes which shied away from the fixed income market.”

Finally, and at the micro-level, cashless banking is a core part of the financial inclusion strategy, through close collaboration with the telecommunications sector. “We think in the next one or two years, we will have transformed the payment system in Nigeria, and moved more and more transactions to channels other than cash.”

Such sweeping reforms might indicate an over-active central bank, and some analysts believe Mr Sanusi may be trying to do too much. However, these criticisms miss the opposite point that Nigerian banks themselves have been hyperactive, involved in everything from mortgages and private equity, to venture capital and underwriting, but barely lending to the real economy.

Separating out financial institutions and protecting depositors savings, strengthening transparency and corporate governance, and providing the financial deepening to help Nigeria realise its potential are the foundations of Mr Sanusi’s strategy and he is not concerned at perceptions of central bank mission creep.

“There can never be soft touch regulation. But it has to be regulation that is not arbitrary. The direction needs to be clear. Banks need to understand why we are doing what we do.”