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One year ago, Mallam Sanusi Lamido Sanusi became Nigeria's banking industry chief regulator, having been appointed governor of Central Bank of Nigeria (CBN). He came to the job from First Bank Nigeria Plc, where he was at the apex of management, as chief executive officer. At his coming, those who knew him expected some controversies, especially going by what he once said about himself: 'I criticize for a living.'

A risk manager of repute, Sanusi proved that he was controversial as soon as his appointment was announced and his name transmitted to the Senate for ratification. The Upper House of the National Assembly had hardly voted on his nomination when he charged the then President Umar Musa Yar'Adua to re-think his seven-point agenda and possibly prune it to two. Perhaps, he acted on the understanding that he was and still is the president's key economic adviser, but he also indicated by that statement, which elicited immediate reaction from the Presidency, that he intended to call a spade by its real name.

Before Sanusi came on board the CBN train  and even with measured assurances by his predecessor in office, there was palpable public trepidation regarding the health of the industry. Rating agencies kept up the heat that all was not well with a good number of the nation's banks. As soon as he assumed office and taking advantage of his training as a risk manager, he had an over view of the entire industry and identified eight factors that, in his considered opinion, 'created an extremely fragile financial system that was tipped into crisis by the global financial crisis and recession.' These include, macro-economic instability caused by large and sudden capital inflows; major failures in corporate governance at banks; lack of investor and consumer sophistication; and inadequate disclosure and transparency about financial position of banks.

Others were, critical gaps in regulatory frame works and regulations; uneven supervision and enforcement; unstructured governance and management processes at the Central Bank as well as weaknesses within the apex bank itself as well as weaknesses in the business environment. This was followed up with a retreat in Enugu involving committee of governors and chief executive officers of all 24 banks 'to specifically map out strategies for growing credit to the real sector.' That retreat, the first of its kind in the history of the banking industry in Nigeria, came up with three areas, where urgent attention was needed. These were: Power, Transport Infrastructure and Agriculture.

Sanusi went ahead to design a reform programme based on four identifiable pillars, which he believed were sine qua non in the drive to restore the sector to good health and for it to play its assigned role as the engine room of economic growth and development. First of these pillars was: enhancing the quality of banks through industrial remedial programmes to fix key causes of the crisis. To achieve this, Sanusi said that there has to be 'risk based supervision, reforms to regulations and regulatory framework, enhanced provisions for consumer protection and internal transformation of the CBN in line with the 'good governance is good business' dictum.

The second is the establishment of financial stability, which centre around strengthening the financial stability committee within the CBN by establishing a hybrid monetary policy and macro prudential rules. Thirdly, he decided on a policy directed at 'enabling healthy financial sector evolution, with emphasis on banking industry structure, banking infrastructure, such as credit bureaux, registrars, cost structure of banks and the role of the informal economy.' Finally, the CBN chief said that his administration would move towards 'ensuring that the financial sector contributes to the real economy.'

In his opinion, 'rapid financialization did not benefit the real economy as much as had been anticipated.' To change this, he adopted six measures: (a) Leveraging the CBN governor's role as adviser to the president on economic matters; (b) Taking the lead in measuring more accurately the relationship between the real economy and financial sector and the transmission mechanism; (c) Evaluating continuously the effectiveness of existing development finance initiatives, such as agricultural credits as well as import and export guarantees; (d) Taking the public lead in encouraging examination of critical issues for economic development; (e) Leading further studies on the potential of venture capital and private public partnership initiatives for Nigeria; and (f) Cooperating with a state government to run a pilot programme in directing the financial sector's contribution to the states' social economic development.

These could be said to be the policy superstructure, which served as a pedestal for the CBN governor to launch his most far-reaching policy, which saw the initial take over of five banks and the prosecution of their chief executives and directors. For this, he received, in equal measure, kudos and knocks.

Without doubt, that policy thrust changed fundamentally corporate governance in banks. It revealed that the era of paper profits, which almost ruined the industry in the 1980's and 90's were still very much with us. It also turned, over night, award winning bank executives into fugitives from justice. Again, it brought to the fore the sad reality that our respected billionaires were like balloons floating luxuriantly in the air and  merely surviving on bank facilities.

Nigerians came to realize that what banks recorded as capital base were  actually depositors' funds. A section of Nigerians were appalled by this discoveries, even as others questioned Sanusi's methods, accusing him of heating up the system. His critics insisted that his reforms were not well thought out, as they were likely to exacerbate the already dire economic situation in the country with the resultant credit squeeze. These critics included well-heeled government officials. There were also fears that the policy might not help the worsening unemployment situation in the country.

However, he argued that he has been able to pull the nation's banking sector from the edge of a precipice, that the chestnut has been pulled out of  fire. The bank regulator blamed most of the problem in the industry on what he described as over exposure to oil and gas as well as the stock market.

'In the last three years, Sanusi further argued, 'we had rapid credit growth. Where was the credit going? Credit can go either into asset price speculation or economic growth. Banks were betting on asset prices.

Lending money to stock brokers to buy shares on the assumption that those shares will continue going up.'

Sill determined to put in place a policy framework that would save the industry from  relapsing into old ways, Sanusi went ahead to unbundle universal banking, insisting that banks must remain banks. If they must go into other areas, then they have to do that through an omnibus entity in the form of a holding company. What this means is that the stage is set for another round of bank consolidation. Under the new arrangement, the prevailing universal banking model is on its way out to pave way for a specialized banking regime.

Before now, banks were known to own subsidiaries in sectors considered to be outside their areas of core competence with the attendant risks such ventures bring to bear on depositors funds. This new banking model would be expected to correct the mistake of the past, where banks used their financial leverage to crowd out competition, including by those who have the expertise but lacked the financial resources.

Related to this is the amendment of the prudential guideline last amended in 1990 with a commitment to review it every five years. Another instrument by Sanusi, that has attracted a good level of attention is the Asset Management Company of Nigeria (AMCON) bill now before the National Assembly. The CBN governor perceives AMCON as a resolution vehicle expected to soak the toxic assets of the CBN-intervened banks and provide liquidity to them as well as assist in their recapitalization.

In the words of the CBN governor, 'the creation of AMCON will provide the first step towards resolution of the non-performing loan problem in banks and eventually facilitate further consolidation. This process is on-going and we expect all banks to be totally weaned off CBN support by end of the third quarter of 2010.

'That also explains why we have started a process of mergers and acquisition discussions to encourage the banks to look for partners who will bring in the capital to strengthen the bank balance sheet. Once that is done, the banks will have the capital and the liquidity to lend.

Analysing the AMCON bill at a public lecture recently, a lawyer, Osaro Eghobamien, Senior Advocate of Nigeria (SAN), said: 'The Asset Management Bill, now before the National Assembly revolutionizes the law relating to the sale and purchase of financial assets. So fundamental is the change that it impacts on many areas of law, including bankruptcy and insolvency, trust and the law relating to collateral securities.' The bill is almost ready, having been passed by both houses in the National Assembly with minor differences that would be resolved soon.

For the real sector, the provision of N500billion by the CBN was seen as evolutionary, in the sense that before now accessing long tenor loans was a mirage. The fund, according to the apex bank, would be channelled through the Bank of Industry for on-lending to deposit money banks (DMBs) at a maximum interest rate of 1.0 percent for disbursement as loans with a tenor of 10-15 years at a concessionary interest rate of not more than 7.0 percent. The facility also covers strategic areas. To complement this, the CBN also put aside a N200 billion facility to alleviate the financial challenges confronting small an medium enterprises (SMEs).

Shedding more light on this bold step, aimed at enhancing business activities at that level, Sanusi observed: 'When we say that we are providing N200 billion guarantee to the SMEs, we are saying to the banks, look, lend money to the SMEs. If you take losses we will pay you. It is a fiscal measure, but we are doing it as part of our developmental role. So in terms of unlocking credit, the Central Bank has done every thing it can in the circumstances within its mandate. We are delivering on our mandate and we will continue to deliver on our mandate.'

Still on credit situation in the system, the CBN governor pointed out: 'What is important in credit is that it is a function of demand. The supply of credit depends on the health and size of the balance sheets of banks, how much capital do they have? We have discovered that a lot of the capital Nigerian banks thought they had, they did not have. We have a situation,  in some banks, similar to the situation in banks of Iceland, where they had capital but a substantial part of that capital was financed by loans given by the banks themselves. As I speak to you, one of the banks we intervened in, 88 percent of its capital was depositors' funds. So in real terms, it had only 12 percent of the capital it claimed it had.

In addition to this, capital was further eroded by bad loans, large exposure to the capital market through merging and trading. Overall, if you look at the numbers,  banking system lost about 66 percent of its capital between what was reported at the end of 2008 and what we discovered to be true capital by the end of 2009. No banking system can lose 60 percent of its capital and maintain the supply of credit at that level. It is not about the actions of the Central Bank or the actions of regulators, it is the fact. They don't have the capital; they cannot do a lend.

So, the question is, what is the Central Bank doing to address the supply situation?'

To answer his own question, he came back to AMCON. He said: 'That's why we have the Asset Management Company of Nigeria (AMCON) to deal with the non-performing loans and bring back some capital to the books of banks. It will capitalise the institution by injecting capital and taking equity.'

However, Sanusi noted: 'We have seen in America, we have seen in England and other European countries that even if you have capital and liquidity, it is not sufficient. Now, for credit to go into income creation areas, the real economy has to grow and that is not a Central Bank question. It is a government matter. Somebody has to provide power. Somebody has to provide infrastructure. Somebody has to provide security. Somebody has to provide a stable political environment. Somebody has to fight corruption. Somebody has to provide

capacity. It is not the Central Bank. It is when these things are done that the bank will see on the other side a company that is profitable because it has power; it has security; it has low energy cost. It has human beings that can work and manage it efficiently. That is not Central Bank thing. We deal with the supply side and we are doing our bit and we will continue to do our bit on the supply side. We have even gone into the demand side when we provided for the SMEs.'

As part of enhancing corporate governance, the CBN is  to establish an institute that would train non-executive directors on risk  management. For Sanusi, the last one year has been tasking. His policies have made a mixture of  friends and enemies. This first of a five-year term can be taken as a ground-breaking period. In the years ahead, he is expected to consolidate not just the banks but also his policies.