Africa Confidential, May 2010NIGERIAWhat's next for Nigeria's banks?
Exclusive interview with Mallam Lamido Aminu Sanusi, the Governor of the Central Bank of NigeriaPrint this special report
Nigeria's banks are emerging from a frenetic and nearly fatal systemic crisis following a a programme of sweeping reforms. The man behind the rescue plan, Central Bank Governor Mallam Lamido Aminu Sanusi, has spoken openly to Africa Confidential about the risks and prospects for Nigeria's financial institutions as the after shocks from the 2008 financial seizure spread around the global economy. 'The Nigerian banking sector lost 66% of its capital, it's a miracle that it's still standing and lending at all', he said.
Last year, Sanusi ordered industry wide audits and then in August sacked the chief executives in six banks deemed to have been chronically mismanaged. Sanusi pledged that the Central Bank would shore up all the ailing financial institutions and files on several senior officials in commercial banks were then passed on to the state prosecutors. Two of the chief executives are still refusing to respond to charges against them, almost nine months after the orders were made.
Sanusi's list of bad debtors to the leading banks included some of the country's most prominent businessmen and politicians. His move shocked Nigeria's establishment but it convinced many outsiders that he was a serious reformer. The result sheet so far is positive: Sanusi has purged the banks with minimal collateral damage. No banks have gone under and no deposits have been lost, he told Africa Confidential. But what has this operation cost the government?
The bill may run into billions of dollars but it is still far less than many Western governments have spent propping up their own badly weakened financial sectors. The next part of the rescue plan – the establishment of the Asset Management Company – is currently going through the National Assembly. That will allow for a state-backed restructuring of the distressed banks. The end result should be that Nigeria has a stronger and more accountable banking system, one that is likely to attract substantial investment from Asian, European and American banks seeking a foothold in one of Africa's biggest markets.
'I think the economy needs a mix of foreign and local banks,' Sanusi told Africa Confidential. 'I don't think we should hand over all the banks to foreigners, it's not a practical proposition. But 25-30% of the industry being in the hands of foreigners would be a very good target.'
Below is the full transcript of Governor Sanusi's interview with Africa Confidential's Special Correspondent Oladipo Salimonu and Editor Patrick Smith.
AFRICA CONFIDENTIAL: The Asset Management Company is going to manage the distressed banks. Is that legislation going through the Senate at the moment?
Mallam Lamido Aminu Sanusi: It has been accepted for debate in the Senate. Once it goes through that process it means that it has Senate approval. There are two more tests: one is to harmonise the Senate version with the House version, I'm aware that there is a difference of four clauses. After the harmonised version has been made it will go to the President for a signature, which is really just a formality.
AC: When do you think the bill will become law and the money disbursed?
LAS: I believe that it will be law before the end of May.
AC: It's nine months since the tumultuous announcement last August, when you took over the the management of six banks. How do you assess the health of the sector at the moment? Are you implementing the reforms as fast as you would like?
LAS: I think it has moved faster than one would expect. At the end of the audit we came out with a report that showed that 10 out of 20 of the indigenously controlled banks had negative capital, the other four are foreign banks. We disclosed this information fully, we haven't had a run on an institution, no creditor has lost any money, shares are still being traded. The fact that we told the truth has increased the confidence of the international community in the system, because the major concern people had before we intervened was that everyone was saying that the Nigerian banks had not been affected by the crisis, and everybody knew this was a lie. What we have done is fully disclose the banks that were affected, ring fenced them and avoided a risk of contagion, as it had knocked confidence in the entire banking system. Now people know which banks are strong and which are weak.
We have improved and increased the level of disclosure in the accounts. Today, Diamond Bank is publishing its accounts. A year ago the bank would probably not have admitted that their profit was lower than the previous year. Now everybody understands that you can tell the market the truth that you had a bad year; we had an economic crisis and you have cleaned up your books. The market will understand that you have done the right thing and that going forward the fundamentals remain strong.
That is real progress, because the financial markets are built on confidence and trust. There are moral hazards, management always knows better than the investors, always know more than the regulator, so the more people are aware that there is a regulator forcing people to disclose losses honestly, the more confident investors are in the risk they are taking on the industry.
The AMC bill has made progress towards recapitalisation and we'll go through mergers and acquisition process and once that is done we can put this behind us and go back into growth mode. We've made it clear that there will be personal responsibility for actions which again were a major problem in the sector, and we are improving the general regulatory environment.
AC: Although the reform progress may have been impressive in the past nine months, the banks have become extremely risk averse, so lending to he private sector has gone down while lending to the public sector has gone up. Is that going to create a problem in the real economy?
LAS: Yes there are a number of issues, but it is a question of the chicken and the egg. The bank can only lend if they have capital, and if the banks have had bad loans and the capital has been eroded, they are not going to increase their lending. Looking at South Africa, credit growth was negative year on year and they haven't even had a banking crisis. In the United States and Europe you find negative growth in credit. The US, for example, has had a reversal of the credit crunch but if you look at the numbers there is still a decline in lending for businesses, the increase is still coming on lending to mortgages, so when you compose the numbers you still don't have money going into the real economy and production. It is still going into the area that caused problems.
The first thing is to have some perspective on that. The banking system lost 66% of its capital in Nigeria. It's a miracle that it is still standing and lending. Most of the lending is coming from the banks that have not been so badly affected. You must also look at the overall macro picture. Prior to our intervention, the banks were not lending to the real sector anyway. Agriculture is 40% of GDP: in 2008, lending to agriculture was 1% and lending to SMEs was less than 5% of total loans.
All the growth in credit has been in the capital market and in the importation of petroleum products. So some of the criticisms are misplaced as it is assumed that the banks were lending to the real sector before and they were not. You then need to look at why the banks were not lending to those sectors. There are the technical issues of the bank not being able to assess the risk in SMEs, but looking at the wider economy, there is no power.
Most of the manufacturers are not viable – they don't have power, there is no infrastructure. So it is always easier to lend to the capital market. The federal government continues to borrow domestically and issue bonds. Until recently, the government was paying crazy rates of interest. If you have bonds out there in the market and the federal government is borrowing at 12% or 13%, that is sovereign debt in the sovereign currency: risk-free and tax-free, you create a system-perverting incentive.
If I were sitting down and looking at a bank's portfolio, and I could invest in government bonds at 13% with no capital required, why would I make money from manufacturers? So the incentive has been created to put portfolios in favour of government instruments.
If you look at the structure of federal government debt, there is nothing to worry about in terms of the absolute amount of debt. National debt is only about 15% of GDP, but foreign debt is only US$4 billion dollars and we have foreign reserves of over $40 billion. There is no source of concern there. But the domestic debt is 11% or 12% of GDP. As long as the government keeps issuing bonds to finance the deficit locally rather than diversify its sources, you have a crowding out.
The federal government borrowing in naira is the best credit risk in the economy. So to get banks to lend, we've got to look beyond monetary policy and look at fiscal policy, the performance of government and the general macroeconomic environment. There is too much expectation of the banking system: banks don't give power or infrastructure, they can't provide peace and stability in the Niger Delta. All these things fit into the general business environment and the demand for credit, which derives demand. The banks need to have viable counter parties on the other side before they lend. We can fix capital and liquidity, provide macroeconomic stability and provide financial sustainability but central banking does not provide economic growth. The government also has to work by providing power, infrastructure and security. So when government officials complain about banks not lending, they shouldn't complain to the central bank, they should complain to their fellow ministers who have not provided power or made the reforms that would create the environment for businesses to thrive and then borrow.
AC: Last year you very critical of the management of some of the banks. Some financial analysts in Lagos are still raising serious questions about the declared results and lending activities of some of the biggest institutions. How much does this concern you?
LAS: There were increases in the loan books. They used to have an active use of commercial paper and CPs were always an avenue for off balance sheet transactions. Part of what we have done was initially to stop the use of CPs and then have tight restrictions on which kind of companies you could issue CPs for and what types of transactions. So you had a lot of exposure on things that were previously taken off balance sheets now appearing. This leads to a massive increase in the loan books. One of the ways of testing is to check the interest revenues of the bank and you will find that there hasn't been a significant increase in net interest revenues. Once you bring them back on the books, the interest revenue goes up – but interest expenses don't.
You will find that net interest revenue is not too different from the commission that the bank was getting on intermediation by selling them down. I'm not too worried. It's not the type of practice we saw in 2007 where new loans were being booked into the capital market. We now have new loans that were previously off the books but are now being brought on to the books. What we have now said is that if you take any exposure off the balance sheet then it is truly a low risk exposure, like lending to multinationals, MTN, Shell or Mobil for example.
We then know that we don't have any loans out there that are not showing that they are potentially non-performing. As for the banks that we have intervened in, most of them have turned to profitability, to the extent they've had to retrench workers, they've had to retrench costs in general. We are making the rates on interbank lending a lot cheaper, so a reduction in costs of funds and in the cost of business have helped the banks recoup capital through more profits.
AC: Guaranty Trust Bank is, for example, going to float a local bond. Do you think that is wise under these circumstances?
LAS: One of the reasons we pushed for the tax waiver on the capital markets is because if you look at the balance sheets of Nigerian banks, the major source of long term funding is equity, the rest is current and savings accounts, and volatile government deposits. Because the deposit base is so volatile, it means that the duration of the assets tends to be very short and the banks do not then create long term assets that are required for the mortgage market, for manufacturing and for agriculture.
Instead, they go to the short end and a lot of the risk assets go into the capital market and short term trading. The ability to raise long term money in the capital market increases the ability of the bank to in turn extend longer term credit to the real economy, and that is a good thing. Also the tax wavers improve the ability of highly rated private companies to raise money from the capital market and move away from their dependence on bank borrowing. That would then compel the banks to look for risk averse investment in the middle market in manufacturing, in small, medium and growing businesses, which is where we want bank lending to go.
So we have been trying to create alternative means of financing for businesses and move the banks away from doing everything. Right now the banks provide overdrafts, loans, project finance and underwrite equity. You want to make sure you've got venture capital companies, private equity companies and capital market there for long term lending. The banks can then focus on the short and medium term exposures to small and growing businesses.
AC: How do you respond to the criticism that your reforms have just made Nigerian banks prey to takeovers from big foreign banks, especially from Europe and South Africa? Do you think it would be good for foreign banks to come into the Nigerian market?
LAS: When I became Governor of the Central Bank, there was a rule that I did not agree with that said that foreign banks should not own more than 10% of a Nigerian bank. Coming from a risk management background I know that when foreign banks come in, they contribute to improving risk management and general practice in the industry and most countries that have opened their banking system to foreigners have found a general improvement in the quality of banking.
So I removed that restriction. Its removal was then interpreted by some journalists as an appeal to foreigners to come in or that they were going to buy out the banks. The criticisms were twofold: you had people who used it as just one more excuse to criticise the Central Cank and divert attention from the fact that the Nigerians who had managed those banks had mismanaged them, and so there was this false sense of patriotism that you don't have the bank sold to foreigners.
My view is that a banking institution belongs to the country. It's far more important to have an institution that protects deposits and contributes to the growth of the economy than to look at who owns it. Personally, I would like Nigerians to own and be partners but you have banks like Standard Bank of South Africa for example, where 49% of the bank is owned by Nigerians. It is lending to the Nigerian economy, it has Nigerian staff as well as foreign staff and is one of the best examples of what a big retail bank ought to be in that environment, so the principle is the right one.
At the time these critics were making their complaints about foreigners coming in, I knew that the foreigners were not falling over themselves to buy into these banks, because the banks that we are looking at have been so badly managed and run down (which is why we had to remove the management). The amount of work that they would need to do to bring the banks back on track is too much and they would rather merge or acquire some of the banks that have not been so badly run.
So here I was trying to entice foreigners and give them incentive to come and help fix the problem and people were saying that I was going to sell these banks to foreigners – but these banks were already run down. I personally feel we should encourage foreigners to come in. I think the economy needs a mix of foreign and local banks. I don't think we should hand over all the banks to foreigners, it is not a practical proposition, but 25-30% of the industry being in the hands of foreigners would be a very good target.
AC: Which of Nigeria's banks would be the most attractive for foreign investors – the medium-sized ones that have been restructuring in the past year or the so-called mega banks?
LAS: Standard Bank (of South Africa) came into IBTC... they are growing and if they had wanted to leapfrog and move to merge with a bigger bank, they could have. It makes more sense for foreign banks to go for medium-sized banks as it reduces that amount of initial capital that is at risk. In any case, if you have a bank like FirstBank or GTB, UBA or Zenith, unless the key shareholders make a conscious decision, it is difficult for foreigners to move in. If you have a franchise that is working, making you money and giving no problems, the incentive for you to sell may not be there. But for medium sized banks that want to grow and need the capital and the support of a foreign bank, that may be easier.
AC: What about the distressed banks? Are you happy with the progress of the legal cases against the chief executives of some of those banks?
LAS: At the Central Bank we do our own bit. We have removed the management, handed over all the evidence of criminal activity to the authorities and urged them to prosecute. All we can do is keep making the point that we have given enough evidence to convict a number of those persons but, ultimately, it is for every other arm of the government to do its own bit. We can't do the job of the prosecutors or judges.
AC: Some of the key people – I'm thinking of the two bank directors Erastus Akingbola and Cecilia Ibru – does anyone know where they are at the moment?
LAS: Ibru is in Nigeria, and Akingbola is in the UK. We've got charges filed against them and at some point they will have to defend themselves against those charges.
AC: Police in Australia are investigating Securency, which is 50% owned by the Australian Reserve Bank, and have uncovered evidence that $50 million dollars in bribes were distributed by the company in Malaysia, South Africa and Nigeria. Australian police say they have hard information about bribes paid to officials in Nigeria who claimed to be able to influence the decision to sign a contract with Securency for the introduction of polymer notes. Are you satisfied with the progress of this investigation in Nigeria?
LAS: I have spoken to the Australian journalists and given my view, which is that to the extent we have been talking about Nigerian officials, there have been no names, so anything we say would be speculative and quite inappropriate. We would be happy to have the names of the Nigerians who were the beneficiaries of this. I have no doubt in my mind that if there is a claim that Nigerian officials were paid, then Nigerian officials were paid. But were these people politicians in government or central bankers? I don’t know, there has been no discussion of the names. If I as Governor had any information that someone in the Central Bank either currently or in the past was a recipient, I would go and take it to the authorities and say that this is information that has come to me and I think it needs to be investigated. But in the absence of that, I have to be very careful with what I say.
AC: I understand you are in a difficult position, but does this mean that there is an ongoing investigation in Nigeria as well or is your investigation premised on what the Australian Reserve or Australian police say to you?
LAS: The decision to go with polymer notes was taken before I became Governor. By the time I became Governor, the notes had been printed and my duty was to launch them. The question is would I have gone for polymer? I think we would have to wait and see the detailed cost-benefit analysis. My personal view is that I’m not sure that there is a compelling case that has been made for going to polymer.
I have already asked to see the indices by which we measure the relative cost efficiency of polymer and paper and I want to see over time that we monitor those indices. If it’s established that polymer has saved the country money, then it becomes a justified decision but if we are just going to spend two or three times on polymer rather than paper, and continue printing the same amount every year then frankly I don’t see that we’d be better going to polymer.
AC: So there's an internal analysis on the costs and benefits of polymer. Will you make that report public when you make a final decision?
LAS: At the end of the day we will have to monitor over a period. In three years when it’s time to look at currency restructuring, we are going to have to look at whether we go back to paper or remain on polymer. A lot of countries have gone to polymer and then gone back to paper. My gut feeling is why aren’t the Americans or Europeans going to polymer? What do they know that we don’t?
AC: What is the sequence of developments after the National Assembly passes the Assets Management Company bill this month?
LAS: There are a number of things that are already happening, the banks that are interested in merging with these banks have been in talks and are conducting due diligence. The structure of the transaction will involve the AMC purchasing toxic assets and putting some capital into the banks, and an agreement on the share exchange ratio that will combine the two entities. For about three, four or maybe even five of the banks, we think we have clear and committed parties that are interested in merging. By June, July or August we should have a firm outline of transactions and once that is done it is just about getting through the relevant regulatory and shareholder approvals and so on.
AC: Are all the interested parties Nigerian banks at this point?
LAS: Most of them are.
AC: You mentioned that related to only three, four or five of the banks. What about the remainder?
LAS: By the time you announce deals for all five – and they are the big ones, the rest fall into place. That's how these things work. We want to establish a track record of successful transactions.
AC: A report is coming out that bad loans to the oil and gas sector might be over N1 trillion instead of the almost N500 billion that surfaced at the time. Is this true?
LAS: I don't know where people get their numbers. Banks are publishing the numbers and have rightly decided that they are going to take advantage of the opportunity in a period of crisis to clean up their books. It is quite possible that a number of weak loans that were still technically performing during our audit in September may have deteriorated and the banks have decided that they will increase their provision. A lot of the speculation about loans in a particular industry- some of this is not fact.
AC: At this point do you see any further action needed outside of the Assets Management Company and in addition to the injection of capital that has already been made?
LAS: Reform is a continuous project. We've taken prudential rules to allow for a longer period for providing for Small and Medium scale enterprises and infrastructure loans. We have a few guidelines to regulate margin lending by the banks and stockbrokers. We are looking at setting corporate governance, risk management, accounting disclosures, standards and capital standards for different categories of banks, so that banks that want to be international players do not just have to have higher capital but have also got to comply with IFRS. They've got to go for Sarbanes-Oxley (USA's financial criteria) and so on.
It's an ongoing process. Action has to continue and we have to balance the macro prudential requirements to make sure that banks are able to continue lending to grow the economy with the micro prudential requirements. We have to do the right thing but making sure we don't impose too much on entities too fast and then risk hurting the overall economy.
AC: Nigeria currently has about US$41.5 billion in reserves. That is 18 months of imports when the international benchmark is three months. Do you think that is the most prudent use of this money?
LAS: It is a country that depends largely on oil exports for its reserves and that's a big risk. I think we need to focus less on the amount of reserves and more on our ability to have a diversified reserve base. For example, how do we build a competitive industrial sector? How to generate foreign exchange from exports from manufactures or agricultural processing? The Nigerian economy is one that has the greatest potential by stimulating domestic demand. You have a market of 150 million people. It is the market for Chinese, Indian and European goods, so why can't it be a market for Nigerian produced goods.
AC: What are the most serious blockages to diversifying Nigeria's economy?
LAS: We have structural bottlenecks and a lack of linkages. Take power that we always talk about: power from the discovery of electricity has always been the foundation of industrial growth and it is so basic, elementary and pedestrian that if you don't fix power, you are not going to have a viable manufacturing sector.
You have to look at some of the treaties signed with the World Trade Organisation and ask whether the tariff regime that we have which exposes our industries to being wiped out by imports from China and other countries is in the interest of the country, or if we need to protect the industries for a while before we expose them to this level of competition.
We export crude oil and import petroleum products which we need to refine our own crude. We have gas reserves and are exporting it to Europe and not using it for power. We export glue and don't have a leather product industry. We produce cotton and our textiles industry is down.
So by simply looking at the linkages where you can take your own raw materials and move to the next stage and process them and sell in the domestic market to penetrate the export market, you would go a long way. It's what the Chinese, Koreans and Malaysians did and it was successful. We need to focus on critical infrastructure, on human capital development and creating the right price incentives for investors and producers, and that involves looking at our tariff regime, at the so-called subsidies and the actual regulatory environment.
AC:The World Trade Organisation deals have already been signed. Surely reneging on those deals would be almost impossible now?
LAS: First of all, we are a sovereign nation. A lot of what has happened in Africa is that African countries have often gone alone while if you take Asia for instance, Asian countries work together. West Africa wants to have a common market, is debating a monetary bill, and I keep saying, how can you have a monetary bill when you don't even have a free flow of goods and services?
There is more trade between Ghana and China than there is between Ghana and Nigeria for example. So we are going back to the drawing board and looking at the kind of economic policy that has been adopted by African leaders and I can't see why we can't renegotiate The reality is that we don't have a voice, we just sign up. The Chinese and Indians have a voice and make sure that their interests are there before they sign.
AC: What is the problem then – a lack of political will?
LAS: I think we've always had a problem with political will. We've also had a problem with political capacity. Sometimes, I don't even know if its about a will or just being smart enough to understand what is good for you. Certainly, there are serious questions about leadership. If the leadership has the competence and the will to do it, just imagine the rate the economy would grow.
AC: General Aliyu Mohammed Gusau, the newly appointed National Security Advisor, has strongly criticised your banking reforms. Are you concerned that there may be a political backlash against the changes you have made?
LAS: I’m not. I think people can make criticisms. Sometimes it may seem that you have to be very intelligent and sophisticated. If you say that Central Bank policies have hurt the economy, you have to say exactly which policies you are criticising: is it the policy that says people who take money from the bank should be removed or the policy that the banks which make bad loans should provide for them? Is it to allow the system to continue the way it is operating and allow the banks to collapse and be handed over as failed banks? What is his option? What is his alternative? It is very easy to criticise, but what is your alternative?
None of the people that have been criticising the Central Bank have come up with what they would do if they were governor. That’s the way I see it. I have to make sure that I don’t get myself into confrontation with critics. Criticism is very good and I’m willing to engage anyone who has a criticism on an intellectual basis and I think it is a good thing that people should criticise, and I think it is a good thing for us because when people aren’t doing anything, there’s nothing to criticise.
So I’m not troubled at all, I am worried that some of the insinuations, the suggestion that there is selective justice, basically cast aspersions on many bankers who have run their banks very well and have been honest. So for him to say that all banks did that and a few are being selected is a very unfair comment. I have said in an earlier interview with the Nigerian press that I have read the story in the newspapers, I have not spoken to the National Security Advisor. I do not know exactly what he said. But the point is that as far as the economy is concerned, our reforms have been very good for the country and its image, and our management of the economy has been very good.
When I became Governor of the Central Bank, the rate of inflation was 15%; as of March it was 11.8%. The differential between the official rate and the parallel market rate was about 25%; the naira was trading at 189/190 in the black market. It’s been down to about 150/152 for a year now; the gap between official and parallel market rate is less than 2%. Interbank rates were at 22% and have now been down to about 2% for a long time. The stock market has gone up 30% since January (2010), so all the indicators of market confidence have gone up.
If you look at the lending of foreign banks to Nigerian banks that had been disappearing before we intervened, this has now come back up. We’ve got US EXIM giving credit lines, the European Investment Bank has come to give credit lines to Nigerian banks, the AFC which used to restrict itself to trade finance is now giving long term loans to Nigerian banks, the IFC, USEXIM, EIB, everybody is coming into Nigeria…How this hurts the economy I don’t understand, but everyone is free, obviously, to criticise and we will respond.
AC: Has President Goodluck Jonathan expressed any views on the reforms or on your performance so far?
LAS: I have not had a discussion with him, I have not heard a public comment from him. My understanding is that he has always been supportive and I’m assuming that what is said to have been said by the National Security Advisor was his personal view and not the view of the government. In any case, you must remember that the Central Bank is an autonomous agency in the Federal Republic of Nigeria. We have a responsibility to do what we think needs to be done to ensure that we take care of our national financial sustainability.
When I make policy, I don’t go around thinking about what is the President thinking about this. When it goes beyond central banking – such as issues of prosecuting people – that’s political decisions for political authorities. But issues of who should run institutions, how banks should be run and what we do with money supply are totally immune from political consideration.
AC: You have mentioned the US regulations such as Sarbanes-Oxley and the concerns about the idea that some US banks were “too big to fail”. How should these rules apply to Nigeria: are you concerned about the health of those banks with retail and commercial lending activities, investment banking, asset management, mortgages and even insurance companies?
LAS: There has been a lot of debate over our position in banking. We have issued notice to the market of guidelines that restrict banks’ use of off balance sheets to do banking activities. Now they can go into holding companies and shareholders can still do insurance and asset management. But we going forward: we are not going to allow some banks to use deposited funds or bank capital to go into some lines of business. The problem is not so much the size of the institution but what they do with their balance sheets.
I think if you restrict them from deploying deposits to certain types of business, then you restrict the moral hazards of having to bail out institutions. But we are now bailing out banks that were using deposited funds for trading on the capital market and that wasn’t what they were supposed to use those for. So we want to make sure that deposited funds are not going to private equity or venture capital or proprietary trading. If people want to do that, then they should use their own capital or get leverage from people willing to take that kind of risk. When a person wants to trade on the capital markets, he should put his funds in an asset management company and not in a bank. When people open current accounts, they are there for safety. If people want to do venture capital, they can go and invest in a venture capital company and then we will not be obliged to save those intuitions if they go bottom up.
AC: Can we take an example of Bank A which has an asset management company and is also in partnership with an Australian insurance company in Nigeria and also has corporate banking divisions. As funds and information move very quickly across these corporate worlds, trouble in one area of operation could rapidly threaten other areas and possibly damage Nigeria's national economy. How seriously do you take such threats?
LAS: I think you are talking about two things. A banking institution is most likely to be affected by what happens to its capital and balance sheets. So the first thing is to make sure that the capital of the bank and the deposit liabilities of the bank are not in those businesses, so that protects the bank.
However, the banking institution is part of a general financial system. The Central Bank is primarily responsible for ensuring financial stability but we don't have the tools to regulate stockbrokers, insurance firms or asset management companies. Part of what we have to look at in terms of enabling legislation is what exactly is the financial systems' stability, what is our role in the maintenance and the promotion of that stability, and what kind of powers do we have to intervene even in institutions that we are not directly regulating in the event that they constitute a risk to financial stability.
That was the debate you have in the United States when they talk about the Dodd Bill regulating certain institutions or in the case of the House version where they are looking at restricting the types of businesses that banks can go into. Or the new Central Bank Act of Malaysia, for example, which allows the bank to direct a company or institution that it is not regulating or supervising to take certain action if it feels [those] institutions are compromising stability.
The crisis has raised serious questions about whether the Central Bank as a lender of last resort should not then also have a certain over-arching responsibility in supervision and regulation.
AC: In the instances you mention of the American and Malaysian cases, those are example of the linkages between the Central Bank and the legislative institutions of those countries. Are you confident that you have that relationship with the legislative branch in Nigeria to enact regulation and expand Central Bank powers as situations dictate?
LAS: We do have a relationship with the legislative branch but the decision is not just about central banking. You firstly have to win the intellectual battles to convince everybody that this is necessary and required, and that is more on the political level. You need to get the political authorities to understand that the Central Bank will need those tools.
I suppose Malaysia was able to get its Bank Negara Act amended because Malaysian banks were not affected by the crisis. The Central Bank of Nigeria and the Federal Reserve in the US and European Central Banks and the FSA need to do a lot to regain the confidence and credibility of the market because the banks that had these issues were directly under the control of the central banks and the central banks did not stop it.
It is a valid scepticism. What would convince the legislature and the Nigerian people that if you give the Central Bank the authority to do this, that the law would be sufficient to make sure that you protect yourself from the next crisis? The priority for me is not so much to go and change the law, rather to undertake all the reforms within the Central Bank itself, strengthening the capacity and showing the ability to do this very well before you start asking for these powers.
See below for charts showing current economic trends in Africa using data sourced from the IMF and World Bank.
Africa's Economic Rebound Africa's Investment Profile