Central Bank of Nigeria on crisis and reform

Q: Following the global financial crisis and a domestic banking crisis, the Central Bank of Nigeria (CBN) has implemented major banking reforms over the past year or more. What is your guiding strategy behind the reforms and how do you see their impact on the economy?

A: Fundamentally, what we have tried to do with the reforms is to address the root causes of the crises rather than addressing sectors. At the heart of the crisis is a banking system that grew very rapidly, driven largely by liquidity from oil and the public sector but without any structured focus, without any strategic centrality as an intermediary for providing resources to the real [non-financial] economy. Money got onto the banks' balance sheets but was used on betting on asset classes [margin lending] and other non-productive loans, which in turn led to the crisis.

To address that, there had to be a change in the mindset of the bankers. While they are there to make money, their primary responsibility is the safeness and soundness of customer deposits and, in the evolution of their strategy, they need to focus on putting their resources into the real economy. It is inherently less risky than putting their resources into unstable financial markets.

A lot of what we have done in working with the government to get projects off the ground - pushing through reforms in the power sector and working with specialists in agriculture - has been aimed at de-risking at different points of the value chain in the real economy so that resources can flow from the banks into these sectors and into the economy. The focus has been to deal with policies that will curb the bottlenecks and allow the flow of bank funds into the economy.

First, from the banking perspective we have made a number of adjustments; we issued prudential guidelines giving banks a longer period to provide for non-performing loans and to give loans to infrastructure and small and medium-sized enterprises [SMEs]. This is an incentive for directing credit to the preferred sectors and the real economy. We have put up guarantees for lending to SMEs and, while this cannot go on forever, if it unlocks the market and begins to give banks the confidence to lend to these sectors, it will stop the need for these guarantees and get banks to take the credit risk themselves.

On SMEs and other areas, there are clear policy issues; there are concerns over the regulation of mortgages, the issue of repossessions, the long court processes and concerns over credit history. We are working on establishing credit bureaus and a bill creating a commercial court fast-track process, again aimed at unlocking credit. So it is not only about making money available but also about changing perceptions and establishing new conditions in a very poor policy environment.

What has changed is that the CBN has taken its role as advisor on policy extremely seriously, dealing with the Ministry of Finance, the Ministry of Justice, the presidency and the national assembly and addressing these concerns once and for all. Rather than just complaining, we have resolved to find solutions where we can make the banks feel comfortable on issues such as lending to SMEs.

Q: Recently, the CBN abolished the universal banking model and adopted a narrow banking model. Can you explain the reasons behind this change and its impact?

A: Our banking model was based on the 1930s US Glass-Steagall Act, which set clear boundaries and did not allow banks to do insurance or stockbroking. Strictly speaking, the emergence of universal banking was illegal. We thought we had to establish what banks could and could not do and so we had to abolish the universal banking model. While banks' shareholders are free to invest in various areas, the capital and liabilities of the bank have to be ringfenced from certain types of businesses for the protection of depositors and to improve transparency.

People put their savings in banks for safety, not to be put into high-risk businesses. We have now defined what commercial banking is: normal deposits, current accounts, savings accounts and lending and advisory services. Merchant bank activities are defined and include capital markets and underwriting. But stockbroking is not banking, insurance is not banking, registrars are not banking. Custody in regard to pension funds remains in banking because custodian services have to be carried out by a bank.

Q: Bankers suggest that there are only 10 million Nigerian bank customers in a country with a population of 150 million. How do you increase the number of banking customers and the role of banks in the economy?

A: The CBN has joined an alliance for financial inclusion with the Central Bank of Kenya and we are looking at models for financial inclusion in Malaysia, Bangladesh and Kenya. What we have seen in Kenya is that a lot of financial inclusion does not come from people opening bank accounts but by making banking services available through the internet, mobiles and telephone banking. That is the model we would like to look at; I don't think of this issue as opening bank accounts but in terms of financial inclusion generally.

We have an institution in Nigeria that we do not own but work closely with - Enhancing Financial Innovation and Access - which has done a tremendous amount of work in finding out what financial services are available to various categories of people.

How do we get people to save, to borrow, to have access to services? This could involve microfinance and alternative channels such as mobile banking and telephone banking.

At the end of the day, the really significant boost will come from the development of a rural economy that will allow people to become involved in formal employment. Moving agricultural production from primary [farming] into processing will create an industrial base in rural areas and therefore bring more people into the formal economy and into the banking system.

[In the past,] we have had the desire to bring people into the formal banking system without a corresponding effort to bring them into the formal economy. Agriculture accounts for 40% of the GDP [gross domestic product] but only 1% of bank lending. If agriculture can be moved from primary to semi-processing, then this industrialisation would bring more into the formal economy, create more wage labour and bring more people into the banking sector.

Q: Nigeria has been one of the few countries in the world to prosecute bankers. Do you feel it was necessary to take this action to deal with the abuses in the sector?

A: Yes, we needed to deal with the problems. The abuses in banking were symptomatic of the abuses across the country and we had to improve our image. And now we have moved our attention from banking to the capital markets and other areas. The most significant problem in the banking sector concerned the behaviour of some of our bankers, stockbrokers and businessmen that borrowed from banks and assumed that they did not have to repay their debts. Dealing with that behaviour is crucial. So I say you can never avoid a banking crisis, but you can avoid a crisis that is compounded by bad behaviour.

Arunma Oteh, director-general of the [Nigerian] Securities and Exchange Commission, is examining the almost 300 registered brokerages and, if laws have been broken, those brokers will be expelled and face criminal charges.

Q: How much do you think the recent financial crisis will cost the Nigerian government?

A: It is always difficult to work out the full cost of a crisis. Just as, in the US, you have to look at jobs lost, tax revenues lost, credit flow that has been cut off and many other factors; the costs of crises are limitless.

The cost to the government of cleaning up bank balance sheets can be quantified. We think we can limit that cost to the N500bn [$3.2bn] that we have contributed to the sinking fund.

Also, we have identified about N2200bn in non-performing loans [NPLs]. We think that, between the underlying collateral and the investments the Asset Management Company of Nigeria [AMCON] will make, we should be able to get back about N1400bn and the gap has been filled by the CBN and the banking system through a voluntary levy on bank balance sheets that should give us about N1500bn.

The cost to the government will be the bit the central bank funds and that, we think, should be a maximum of N500bn.

AMCON is unique as a 'bad bank' [a bank that takes on non-performing loans] in that it is a combination of a number of different institutions. It is a combination of three different processes we saw operating in Malaysia. It can recapitalise institutions, it can restructure and lend.

In Malaysia, this is done under three different institutions and we did not want three different pieces of legislation, we just wanted to put all three parts into one box. The N1400bn will come to AMCON from the sale of collateral and the investments it makes. What is left [in cost to the government] is the N800bn to N1000bn that will come from the central bank and the banks.

Q: In terms of the structure of the banking sector, which now has 24 banks, does the CBN have a view on consolidation, on how many banks there should be in Nigeria, or should it all be left to the market?

A: I think we should leave it to the market but we should also create an environment where you can have different types of institutions, so that we do not lose focus on certain things.

Under the new [narrow banking] law, we have different types of guidelines, for example, on different levels of authorisation where we have local, regional and international authorisation and we also have specialised banks [including the mortgage banks and the non-interest banks or Islamic banks].

Under the overall guidelines, we have different guidelines on accounting, capital and corporate governance. We have to have IFRS [International Financial Reporting Standards] in accounting, [we have to] comply with Basel III [the latest proposed international banking regulations] and [we have to] look at the [UK] Cadbury code for corporate governance. We are giving an 18-month period for banks to comply and also for the CBN itself to build within it the capacity to monitor and enforce these guidelines; we still have our own limitations within the central bank.

Q: In the special CBN audit of the banks last year, 10 banks failed the test. What is expected to happen to these banks? Will they be liquidated or will they be recapitalised?

A: No bank is expected to be liquidated. If the banks were to be liquidated, it would have been done in September 2009, so we have sent a clear signal that this is not going to happen. But whether they end up as independent institutions depends on the market. If there are mergers or deals that make sense, then they can go ahead, but if that does not happen through AMCON, they can be recapitalised and new management can be brought in. There are a number of options.

Q: What role do you see for foreign and international banks in Nigeria? Could they come in and buy these 'failed' or distressed banks? Are mergers possible soon?

A: It is always clear that foreign banks can come if they are interested. Obviously, the European and US banks have their own issues but the South African banks could come, just as they did with the merger that formed Stanbic IBTC Bank a few years ago. In terms of possible mergers, among the proposals I have seen it is possible that some mergers could be completed by the end of this year.

Q: Islamic banking seems a natural area for Nigerian banks to develop into, but The Banker's research shows that there are no Islamic financial institutions in Nigeria at present. With about 75 million Muslims in the country, what are the prospects for Islamic banking?

A: A bill from 1991 allows for non-interest banking and the central bank has issued a number of approvals in principle for Islamic banking. Part of the requirements for non-interest banks is a capital of N10bn.

Power play: a new gas turbine power station under construction in Port Harcourt. The Nigerian government and central bank are working to increase investment in power generation

There is a framework for Islamic banking. A lot of work was done last year and a final document is ready. That framework provides for Islamic banks and also provides for Islamic windows where banks could establish Islamic banking branches. So the guidelines are there and Stanbic IBTC wants to have Islamic banking products and branches. We have appointed a special advisor on Islamic banking and we work very closely with Bank Negara Malaysia [the Malaysian central bank] in this area. We are a member of the Islamic Financial Services Board. A lot of work has been done and we expect that the new Jaiz Bank will be able to open its doors this year as the first Islamic bank in the country.

Q: There is a clear need for funding in terms of power generation and infrastructure in Nigeria. What role do you see for the banks in channelling funds into these areas?

A: We have gone very far with the pensions commission and the bankers' committee trying to structure an arrangement that would satisfy the pensions commission's desire to have pensions funds deployed to greenfield sites but also to address the risks to pensions. With the lack of depth in the [Nigerian] capital markets, it is a chicken-and-egg situation.

What the CBN wants to do is place itself in a position to midwife those [pension]assets, so that they are made available to clearly thought-out power and infrastructure projects. This is on the understanding that the CBN provides the credit enhancement and takes the risk. We need to work out the guidelines so that the CBN balance sheet is not unduly exposed. We cannot eliminate that risk but it is a case of weighing that risk against the potential benefits of economic development.

[Developing power investment] is an important developmental role for us and, in a sense, the Chinese have always done this. The Chinese government owns the banks and the banks have been used to provide single-digit [interest-rate] long-term lending for infrastructure projects; when the loans go bad, the government pays them out.

Building up bad loans to provide power and infrastructure that help grow the economy has been a successful Chinese model, but this Chinese model may become a problem if it creates excess capacity in infrastructure, in terms of creating buildings that are not used.

What we have been doing in Nigeria at the central bank is expanding our balance sheet through examples such as the SME guarantees [that we have put in place]. But we have not been doing it blindly, we have expanded our balance sheet into the 'real' economy. As long as we do that, we can see the benefits and assess the risks we take.