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CBN should strengthen the banking system – Punch

By The Citizen
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The recent sudden resignation of some directors and top executives of Skye Bank Plc is an indication that all may not be well with Nigeria's banking system despite reassurances of sound health system-wide by regulators.  By easing out Skye Bank's key executives and appointing new ones, the Central Bank of Nigeria was reaffirming its policy of pre-emptive intervention to save the financial sector from systemic stress. Strict supervision and more proactive actions, however, are required to strengthen the banks in these trying times.

For discerning observers, the CBN intervention at Skye Bank was inevitable. It explained that its replacement of the chairman, Tunde Ayeni, all non-executive directors, the managing director and his deputy and the two longest serving executive directors with its own appointees, were proactive measures to 'correct anomalies' in the bank. These include 'persistent failure to meet minimum thresholds in prudential and capital adequacy ratio thresholds, which culminated in the bank's permanent presence at the CBN Lending Window.' It also cited Skye Bank's low liquidity, alarming Non-Performing Loans profile, and its inability to remedy them despite a long grace period given by the regulator.

Insiders say two of the departing directors reportedly had NPLs of N30 billion and N98 billion respectively through companies linked to them. The CBN's action was in line with its policy put in place since the crisis of 2009/10 to avoid distress through intervention, and where necessary, even a takeover of an ailing bank. As a Domestic Systemically Important Bank âˆ' a big player whose fall could trigger system-wide distress - the CBN acted rightly to prevent a cataclysm. It has also repeatedly emphasised that neither Skye Bank nor any other Nigerian bank is distressed. This has calmed the markets.

But depositors' fears have not fully abated and pressure is on the regulators to safeguard the system. The stakes are high. Not only is there greater inter-connectedness among the banks today and according to a report, almost N22 trillion in credit as at December 2015; there are also 3,905 other financial institutions - development banks, mortgage banks, microfinance banks, finance houses and bureaux de change - with combined assets of N1.84 trillion and total deposits of N539.12 billion, according to the Nigeria Deposit Insurance Corporation. The adverse environment of low productivity, currency devaluation, low exports and late release of public sector capital funds has exerted pressure on the financial system.  The CBN's Monetary Policy Committee in May noted the continued contraction in production, rising borrowing costs and the weak fundamentals of Nigeria's and other Emerging and Developing Economies. The December 2015 Financial Stability Report noticed a slight decline in the quality of bank assets and weakened capital adequacy ratios. It had also reported recently that three banks had stress issues and had been told to address their capital inadequacy and high NPLs. Some analysts suggest there are more.

We hold the CBN responsible for seemingly going to sleep while some banks ratcheted up high NPLs, and are tending once more towards insider abuse. These are precisely some of the main factors that triggered the last banking sector crisis. Godwin Emefiele should explain how on his watch as governor, some banks and their directors reportedly circumvented the stringent risk management measures put in place by his predecessor.

Following the consolidation that created big banks in 2005, Nigeria cannot afford systemic distress, especially in the face of the ongoing economic recession. Unlike in 2009 when the CBN provided N620 billion to rescue eight stressed banks, cash is tight now. Our past experience is not palatable. In the 1950s, 21 of Nigeria's 25 indigenous banks collapsed, while between 1994 and 2006, another 45 banks were put into receivership by the NDIC, which said another seven had their licences revoked, while 103 finance companies were shut down.  With net domestic credit rising by 12.13 per cent to N21.61 trillion in the year to December 2015, according to the CBN, and low banking penetration, featuring over 60 million people without bank accounts in a population of 164 million as reckoned by Enhancing Financial Innovation and Access, the CBN and NDIC will need to strictly enforce the rules, tighten surveillance and devise even more robust proactive measures to prevent another systemic crisis.

Recent revelations of the money laundering shenanigans of politically exposed persons, to the point that thieving politicians are moving cash around in bullion vans, are clear pointers to weak regulation and complicity. Particular attention should be paid to the five biggest banks, which between them, held 15.65 per cent of all bank deposits and 14.27 per cent of all assets in 2015, suggesting that competition in the market, one of the goals of consolidation, though greatly improved, could still be better.

The CBN should immediately rejuvenate its Credit Risk Management System to smoke out and stop those it identified since the 1990s as 'predatory debtors,' who trawl banks taking jumbo loans on weak collaterals with no intention of repaying. They are still very much around, in collusion with some bankers who are glad that the stern a former CBN Governor, Lamido Sanusi, is out of the way.

The CBN should be more vigilant. Stricter annual stress tests were introduced by the United States Federal Reserve Bank in the wake of the 2008 global meltdown and 33 big banks have so far been examined this year. In 2013, India amended its Banking Regulation Act 1949 to meet new regulatory challenges; Singapore rolled out a new regulatory framework for SIBs, domestic and foreign-owned; while China has been tweaking its rules in response to the increasingly volatile financial sector.

Emefiele has to do better to inspire public confidence in his ability to manage the financial system. Where lapses have been allowed, culpable CBN officials should be penalised, and if crimes have been committed in the Skye Bank case or elsewhere, the executives should be referred to the anti-graft agencies for investigation and prosecution. Never again should bankers who abuse the trust of depositors and shareholders or violate regulations be allowed to go unpunished.

A former chairman of the US Federal Reserve, Alan Greenspan, has suggested that the prevailing 'too big to fail' policy that compels central banks to prop up ailing big banks should be reviewed to allow breaking them up into smaller business units. This is an option the CBN should explore going forward.

In the meantime, the regulator should go beyond assurances of health and beam an eagle eye on the remaining money deposit banks and nip any sign of stress in the bud.