The Putrid Mess Also in CBN ! (4)


This week, we will conclude the series of articles on “The Putrid Mess Also in CBN!” with an examination of the misguided application of the Central Bank's instruments of control, and wonder why these wrongheaded policy measures were not subjected to the simple test of whether or not they were in conformity with commonsense!

It is alright for the CBN to engage in self righteous posturing in its current condemnation of the odious practices in the banking sector; it is also appropriate that those found culpable of misconduct should be booted out and prosecuted and if found criminally guilty, should be punished accordingly to serve as deterrent to other holders of public office.

In this light, Sanusi's sacking of Bank CEOs and EFCC's investigations of their infractions seem to be steps in the right direction. However, the theme of the current series of articles is to shift attention and invite closer scrutiny of CBN's negligence and/or complicity in the current mess. Indeed, if CBN officials had kept faith with their responsibilities, especially with the copious information and alert signals at their disposal, it is probable that utter recklessness in the banking sector and the attendant fraud would have been averted.

But surprise, surprise, in spite of the apparent negligence of the supervisory and regulatory officers in the CBN, no heads have rolled; indeed, there is no indication whatsoever that responsible officers in these 'underperforming or failed' CBN departments have been reassigned to less sensitive jobs or even removed as in the case of the bank CEOs.

If the same officers who 'conveniently' went to sleep in the last five years are also the same officers we still rely on to transform and establish best practices in the banking sector, then, the new CBN Governor must be living in a fools' paradise, especially when there is no hint of individual spiritual rebirths, or rectitude induced by stiff punishment for their failures.

It is anomalous that banking consolidation was trumpeted to usher in stronger, more transparent and more responsible banking sector, but the reality of the current distress in possibly 10 out of 25 banks within the short space of just five years is a clear indication that rather than progressive empowerment and development according to CBN hype, the banking sector has in fact been stagnant and may, indeed, have retrogressed. It is necessary that all those who brought the sector to these depths by not doing what they were handsomely paid to do should also be brought to book! However, if these CBN officials are not only negligent, but also found to have consciously promoted policies which facilitated the collapse of not only banking sector but the economy as a whole, then Nigerians would demand that the punishment should indeed be more severe than the deprivations which await bank CEOs, if and when found guilty of crimes against Nigerians.

We have earlier noted what appears to be CBN's unusual and inexplicable acquiescence to the shenanigans in the banking sector, especially with regard to their overt indulgence in incestuous margin loans, prevarications on common year endings, insider trading, fraudulent financial reporting, share price manipulations and the rampant abuse of huge uncollateralized loans.

However, a closer scrutiny of how the CBN deployed its constitutional instruments for price stability and a progressive and vibrant economy may suggest that the erstwhile CBN team was not only culpable for turning blind eyes to the ugly realities in the sector, but actually tailored its policies to encourage financial recklessness in the sector. For example, even after it became clear from their persistent presence at the CBN expanded discount window that some banks were distressed, the CBN failed to take any action! Instead, it bent over backwards to accommodate the excesses of these banks! It surprisingly reduced the cash reserve ratio required of banks from 10% to 2%!

In other words, bank could now keep only 2% of their assets as cash! Serious analysts would consider such accommodation as patently reckless and skating on thin ice, especially in a country with a heavily cash dependent economy; liquidity ratio of banks was similarly inappropriately reduced from 40%... to 25% and government treasury bills holdings were also admitted as a component of liquidity ratio. It has been repeated consistently in this column that the CBN's monetary policies unfairly pitched the CBN in competition against the real sector for the funds in the market consequently instigating higher lending rates than would otherwise prevail if the banks had no other borrower apart from the real sector. In the event also that the CBN was willing to pay mouthwatering interest rates of over 10% (was between 14 – 17% about 3 – 4 years ago). It was inevitable that the real sector was crowded out of the loan market by the same CBN that was expected by its enabling act to create macroeconomic stability and an enabling environment for the real sector to thrive!

Thus, with CBN's unyielding and substantial patronage, there is no motivation for the banks to lend to the real sector; consequently, industries are starved of funds and made to borrow with over 25% interest burden, a rate that can never stimulate industrialization in a landscape devoid of any form of infrastructural support and dwindling disposable income.

In focused economies worldwide, liquidity mop ups are generally intermittent incursions into the money market to reduce the amount of cash in the system especially if these huge cash or bank credit capacity is adjudged to drive an inflationary spiral that would make it impossible to fulfill CBN's core mandate of price stability! In any event, such mop up in serious economies would attract interest rates of between 0 – 3% as riskless sovereign securities!

In addition, the Central Bank of such economies may more appropriately choose to increase the cash reserve and liquidity ratios of banks in order to reduce excess cash at no cost to government! Our own CBN should be ashamed that like those banks who became eternally locked into the expanded discount window, the CBN had also become eternally locked into a spurious eternal liquidity mop up, such that a series of immediate reflex mop ups follow every time monthly allocations are made to the three tiers of government!! In spite of the fact that upward revision of liquidity and cash ratios could be used for reducing excess cash that may be perceived to exist, our own CBN chooses the path with the higher cost burden to our country, such that the 2009 budget, projects that almost N300bn would be required to service such loans incurred by the government in its liquidity mop ups to the banks! (N570bn will be required to service such government borrowings as per 2010 budget). Need we wonder how the banks continue to be immensely profitable even when the real sector that should ordinarily instigate their profitability is largely moribund?

It is extremely difficult to justify CBN's recklessness, more so, when these favoured banks are also existing beneficiaries of CBN's largesse of soft loans totaling $7000m. Why is CBN borrowing at over 10% from the same banks that it has given 'open-ended' and “uncollateralized”soft loans of over $7bn? It seems the CBN is also guilty of the crimes that the banks are accused of. Till date, the CBN refuses to release the details and conditions of these loans, especially with the systemic banking distress. Nonetheless, indications are that the banks also found wisdom in emulating the commercial direction of the African Finance Corporation, AFC, set up unilaterally and ultra vires by the former CBN Governor which was also a beneficiary of CBN largesse of about $460m.

The AFC, according to testimony of its erstwhile CEO, Austin Ometoruwa, recognized that returns on government instruments in Nigeria were higher than profit they could ever make from other international markets and consequently, repatriated the monies diverted by the erstwhile CBN Governor back to Nigeria, as possibly foreign direct investment; the sum was converted to naira and used to purchase government's treasury bills (issued by its benefactor, CBN) with a salutary profit of at least 10%! The same AFC which was touted as a facilitator of foreign investment to Nigeria currently owes one of the distressed banks over N20bn. Some critics would indict the former CBN Governor's participation in this scam as insider trading, similar to one of the offences of the so far declared distressed banks!! The pot and the kettle certainly belong to the same class!

“The above was the fourth in a series of articles titled “The Putrid Mess Also in CBN” first published in this column in September 2009. It now seems that the attention of Lamido Sanusi has been totally arrested by the glitz of the office, and the related preponderous media coverage attendant on his controversial ongoing bank reforms.

“Indeed, CBN's concentration on bank reforms has led to woeful failure in the pursuit of its core mandate of price stability and an enabling macroeconomic environment!

“Nigerians were led to believe that banking consolidation would make stronger and better managed banks which would be responsive to the needs of the economy. We have since known better that 'big' does not necessarily mean better and stronger banks, especially in an environment where the regulators have gone into deep slumber to the detriment of the rest of the economy. In spite of unceasing assurances of former Governor Soludo that the CBN was on top of its responsibilities, the current incumbent Lamido Sanusi is reported to have noted at a 'This Day' organised conference on Thursday, 11/2/10 that “The sector entered a crisis situation partly because the CBN, as the regulator, lacked both the capacity and the will to supervise the banks!”.

“If honour and dignity mean anything, it would be appropriate for Soludo to come out and tell Nigerians what constrained his will to serve effectively, especially in view of what appeared to be his unfettered powers under the 2007 CBN Act and a very supportive and gullible President Obasanjo! Sanusi also noted at the same conference that “…for instance, the Financial Sector Regulatory Committee did not meet for three years, and no one talked…!! When you have someone responsible for financial system stability or surveillance, who has never worked in a bank, it is difficult to expect him to know what makes the bank run.” (Punch 12/2/2010). Although Sanusi has taken a swipe at the caliber of the CBN's staff, there is still no overt attempt to rid the system of these square pegs, yet, he appears determined to take the banking sector and the economy to the Promised Land with the same CBN regulatory and supervision cast that colluded with the banks to ruin the economy! Heaven help us!!”