The revelation by Umaru Ibrahim, managing director of the NDIC, that weak corporate governance and internal controls were tipping the financial sector towards crisis conflated with a similar alarm raised by the International Monetary Fund anchored on weak regulation and adverse operating conditions. With the economy falling short of growth projections, urgent, extraordinary measures should be adopted today to prevent a catastrophe.
Umaru could not mask his apprehension in an address presented on his behalf at the FITC discussion programme in Lagos: despite stringent and elaborate rules, weak corporate governance culture had rebounded in the banking system and, along with ineffectual controls, presented regulators with the possibility of bank failures. For regulators, he said the fear had prompted moves to conduct tests and moves to stave off adversity.
Earlier in March and April this year, the IMF had issued concerns over Nigeria’s continued vulnerability to shocks amid a slow exit from recession, rising debts and its ability to withstand the aftershocks of another global meltdown predicted by leading experts.
Ibrahim’s alert confirmed the long-running fears of systemic upheaval in the banking sector, which barely survived the shocks of 2007-2009 and only after a decisive intervention by the leadership of the Central Bank of Nigeria that prevented failure.
The IMF has identified weak regulation as a critical factor in the last few years. In what some see as self-indictment, Godwin Emefiele, the CBN Governor, recently took to warning the deposit money banks of sanctions for round tripping and other sharp practices in the foreign exchange market. The recourse to sermons and warnings demonstrates the crisis of regulation that has for long plagued the country’s financial system.
The CBN is armed with enough legal powers to monitor and sanction abuses and misdemeanours by bankers. Lamido Sanusi, as governor (2008 to 2014), proved this when, after stress tests, the central bank removed the boards and managements of eight banks, appointed interim replacements that nursed them until they recovered and were bought by new investors. Sanusi also identified gross insider abuse by directors and managers for the crisis.
Apparently, as the CBN itself has acknowledged, insider abuse is back; sharp practices in the forex market partly blamed for the collapse of 44 banks between 1994 and 2000; money laundering and violation for reporting regulations, as well as false accounting have taken hold in the DMBs.
Can Emefiele prevent systemic distress? Doing so requires, above all else, courage and astuteness. It was the frequent recourse to the CBN’s overnight lending window that alerted Sanusi to the stress in some banks in 2009. In 2017, the bank said, 60 per cent of the average daily N216.34 billion the DMBs borrowed from its Standing Lending Facility was for Intra-Day Lending Facility.
Reports, evidence and testimonies in corruption trials have detailed how regulations and anti-money laundering laws were brazenly violated by bankers to assist high profile public figures loot and hide public funds. These disclosures should have prompted audits, fines and, where necessary, severe sanctions on complicit banks, directors and managers, some of whom have testified to their involvement in court.
The CBN needs to act fast as most Nigerian banks, post-consolidation, are big and a failing one could pull down others. While inefficient banks may go bust in good times without threatening the entire system, an economy that grew only 1.9 per cent in the first quarter of this year, just two quarters separated from a recession, suffered nine million job losses in three years and, with youth unemployment of over 20 per cent, should avoid systemic bank failure.
This principle was applied during the 2007/8 meltdown when the United States Treasury gave an initial $700 billion to save some big banks, Italy €17 billion and Britain £500 billion.
The CBN and NDIC should immediately undertake full audits and examinations of the banks; there should be no hesitation to use their considerable powers to remove errant boards and executives. Fraud cases rose by 56.3 per cent in 2017, according to the NDIC, while the CBN stress tests in the same year found rising cases of insider abuse with directors accounting for 40 per cent of the N2.4 trillion non-performing loans in the industry. Emefiele’s CBN should explain why such directors are still in the system and why banks have persistently exceeded the specified five per cent NPLs ratio without serious sanctions. Elsewhere, Germany’s Deutshe Bank was slammed $14 billion by regulators in the US and Europe; by early this year, the world’s top 20 banks, according to a Guardian of London report, had been hit with £252 billion in fines and penalties combined over five years for various violations.
The top priority is to protect customers: the CBN should be proactive and reform itself for efficient monitoring in real time, applying the latest technology tools to weed out corrupt officials that collude with errant bankers. It should wield the big stick and avoid favouritism.
Our banks are not fulfilling the critical role of financial intermediation partly because the operating environment is dominated by government funds, which fuel corruption, rent-taking and rule-breaking while squeezing out the private sector.
The government should take the sensible approach of rolling out practical, sustainable policies of privatisation, liberalisation and export promotion to stimulate start-ups, SMEs and massive investment in agriculture, construction, transportation – rail, water and aviation – as well as mining and manufacturing. The financial system will become more efficient when DMBs rely more on private sector funds and less on public sector funds and forex, two toxic streams that have derailed banks from their traditional roles in Nigeria.