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February 11, 2013/ CIBN/NASS - For the Records



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We are very delighted for the invitation extended to The Chartered Institute of Bankers of Nigeria (CIBN) by the Senate Joint Committee on Banking, Insurance and other Financial Institutions and Judicial, Human Rights and Legal Matters to make presentations and input into the proposed Amendment of the Central Bank of Nigeria Act. Cap C4 LFN. 2007.


The CIBN is a self – regulatory banking professional body in Nigeria promoting banking and finance education, ethics and professionalism consistent with global best practices. It was incorporated as a Company Limited by guarantee in 1976. It attained its Chartered status through Act No 12 of 1990, which was re-enacted as Act No. 5 of 2007.

One of its core statutory responsibilities is to ensure the furtherance, maintenance and observance of ethical standards and professionalism among practitioner of banking profession in Nigeria, who are individuals and corporate bodies, including all deposit money bank, Nigeria Deposit Insurance Corporation and Central Bank of Nigeria.


This presentation represents the views and opinion of a wide spectrum of various categories members after extensive consultations.


Our understanding of the main thrust of the proposed amendment is that is seek to enhance the powers of the Bank to prohibit transactions with Foreign Currencies in Nigeria; compel the Bank to submit its Annual Budget before the National Assembly; alter the governance structure of the Bank and for Related Matters.


The presentation to this distinguished Joint Committee is categorized into five major parts.


First, is the Introduction which expouses the concept of Central Banking and its roles and objectives in any economy. The second part examines in context the autonomy or independence and governance structure of Central Banks with highlights on International best practice and country experiences. In the third part of this presentation attempts are made to review the CBN Act 2007 while the fourth part highlights the implications of the proposed amendments. Finally, the fifth part provides recommendations and conclusions from the Institute representing the position of its members .i.e. the banking industry.



Central Banks all over the world have the core mandate of ensuring monetary and price stability as well as a non-inflationary growth. They also have the responsibility of ensuring a sound and stable financial system, in addition to other developmental functions. These mandates and functions are peculiar to central banks, and no other institution performs such functions. These special responsibilities are enormous and have continued to pose increasing challenges to central banks, largely because developments in the domestic and international economies create significant intricacies and complexities in the financial systems. Indeed, the current trend of globalization exemplified by economic and monetary unions has increased the challenges to central banking. The effective discharge of these responsibilities requires that Central Banks be truly independent, shielded from political interferences, have administrative and budgetary independence and instrument autonomy.


The role of the Central Bank as a regulator has been the focus of much public attention and debate, particularly in light of the increased pressure that the transformation of the financial services industry poses to the supervisory authority in achieving its goals of safety and soundness whilst facilitating market efficiency and effectiveness.


The Central Bank primarily is and usually has important financial stability functions. The structure of those roles, the responsibilities given and the range of other functions allocated vary from countries. The monetary policy function clearly dominates the public perception of central banking activities, notwithstanding the continuation of numerous other functions of great significance to the effectiveness of financial systems and monetary exchange. The roles of the central bank can aptly be described in two broad ways i.e. monetary policy and others.


Monetary policy decision-making and implementation are the defining characteristics of the central bank. However, there are differences between countries as to how extensive the central bank’s independent responsibilities are for these aspects of monetary policymaking.


As well as setting monetary policy, a Central Bank concerns itself with other important functions. Encouraging and maintaining financial stability is high on a Central Bank’s objectives list, and there has been an especially keen focus and expansion on this remit in recent years, with the global financial crisis throwing many of the world’s largest economies into a period of unprecedented turbulence. A central bank also includes managing a country’s reserves as one of its responsibilities, essentially holding different currencies in its coffers to act as a buffer in-case of currency fluctuation.


The Central Bank also acts as a lender of last resort to the government; this means the central bank has the capacity to provide financial assistance to the government in times of difficulty. This is a role that almost all central banks fulfil, with notable exception being the European Central Bank.


Given the above, it is important for the Central Bank to have the authority and the ability to take effective actions to achieve its objectives.   



Ojo (2000) posited that the role of an autonomous central bank in promoting macroeconomic stability has in recent years become a topical international economic policy issue although the empirical evidence on the relationship between central bank autonomy and macroeconomic stability proxied by price stability is not conclusive. The prevailing wisdom supports the need to accord a central bank a reasonable degree of autonomy that will give it substantial discretion to conduct its monetary policy in a manner that will help achieve its assumed central mandate of maintaining domestic price stability, defined as a regime of relatively low inflation rate and an environment free of inflation expectations.


In the recent past, there have been conscious efforts by governments all over the world to ensure that their Central Banks are independent, not just by legal provisions but also by actions (Smaghi, 2007). This is to ensure that they are able to achieve their main object of price stability. More and more countries in the Organisation for Economic Co-operation and Development (OECD) and beyond have made their central banks independent. In the European Union, central bank independence is a precondition for European countries to be admitted into the Eurpean Union as enshrined in Article 108 of the Treaty establishing the European Community which states that:

neither the ECB, nor a national central bank … shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body”.


The ECB noted that the obligation of member states to ensure the independence of their central banks puts them in an exceptional position, since it obliges the member states to keep the assessment of the level of financial resources and the management of the capital of the national central banks at arm’s length. The national central bank should not be dependent for its finances on the government, the parliament or any other third party.


Empirical evidences suggests that central banks’ independence is associated with better economic performance, not only in terms of lower inflation rates (which leads to price stability in the long run), but also in terms of less output variability. There exists a negative correlation between central bank independence and inflation. Countries with less independent central banks are more likely to develop high rates of inflation when hit by adverse economic shocks.


According to Martínez-Resano (2004), central bank independence has been typically judged as characterizations of the following degrees of independence:

-Legal independence
-Goal independence
-Operational independence
-Financial independence

Legal independence ensures that the establishment of the central bank is etched in law and is undisputed. In some countries, informal arrangements have worked well but most countries have found that stronger, more formal mechanisms work better. The European Central Bank and the Bank of England are two noteworthy examples of central banks that have anchored their monetary policy-making law in a manner that ensures continuity in policy-making. In Nigeria, the Central Bank of Nigeria Act 2007 established the Central Bank of Nigeria as an independent body.


Goal independence refers to the central bank’s ability to determine the goals of policy without the direct influence of the fiscal authority. Section 2(a) of the CBN Act of 2007 dictates that the principal objects of the bank shall be to ensure monetary and price stability.

Operational independence refers to the central bank’s ability to freely adjust its policy tools in pursuit of the goals of monetary policy, thereby leading to operational effectiveness.  


According to Knight (2005), there are three aspects of operational independence: the decision-making process; the appointment of senior officials; and access to sufficient financial resources for the central bank to carry out its work.


Best practices suggest that the decision-making process should be collegial so as to take advantage of a wider range of experience and expertise. Collegial decision-making also gives the decisions greater legitimacy. It is for all these reasons that the use of monetary policy committees has become the norm.


To achieve operational independence, the board must be constituted in a manner that ensures its impartiality, continuity and competence. The procedures for appointing and dismissing policymakers are as important as the terms of office.


Financial independence is vital to the effectiveness of a central bank. The central bank must have the full responsibility to conduct its financial affairs without interference from the government. This must include the formulation and execution of its own expenditure budget. Without this, it is much harder for a central bank to sustain the high level of performance that is desirable (Knight, 2005). Without proper financial means, a central bank cannot credibly operate independently; it would be under a “sword of Damocles” if it must source for the funding of its operating expenses from the government (Smaghi, 2007).


Smaghi (2007)further identified four aspects of a central bank’s financial independence:

-The right to determine its own budget
-The application of central bank-specific accounting rules
-Clear provisions on the distribution of profits
-Clearly defined financial liability for supervisory authorities


Where the above four aspects are absent, central banks are vulnerable to outside influence from the government. The credibility of the central bank will be at stake, which will erode the confidence of the public in its ability to maintain price stability.


In the United States, the Federal Reserve System is self-financing, its earnings stemming principally from interest income on the portfolio of government securities it holds to conduct open market operations. Financing itself internally means that the Federal Reserve is not dependent on Congress for annual appropriations and is therefore insulated from pressures that might otherwise flow from the "power of the purse." McDonough (2002)


After examining the role of central banks and the importance of independence; it is pertinent that a survey of selected central bank governance structures from around the world is made. The choice of countries is influenced by economic status and jurisdiction.


A total of eight central banks has been deemed appropriate for this purpose with a split between advanced economies (USA, UK, Canada and Australia) and emerging /developing economies (Ghana, South Africa, Kenya and Nigeria). The Central Bank of Nigeria will be examined in more detail.


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In conclusion, it is generally agreed that the current CBN Act is a product of several rigorous efforts to review past policies and laws in other to align with international best practices. Nigeria as an emerging economy cannot afford to be economically retrogressive in its policies especially with the independence and autonomy of the Central Bank of Nigeria in order to guarantee financial stability.


Furthermore, in this era of globalization, Nigeria cannot afford not to follow the global trend. A truly independent and autonomous Central Bank of Nigeria has become more imperative for the integration of the Nigerian financial system with the world economy in general. It should be emphasized that instrument autonomy without financial and budgetary autonomy, as obtained in other countries, is meaningless.


What is required now is not to erode the financial autonomy of the Central Bank but rather to build and strengthen relationships that would enhance complementarities between the monetary and the fiscal authorities, and indeed, all arms of government.


In the light of the foregoing, it is necessary to caution against subjecting the CBN annual budgets to the approval process of the National Assembly, so as not to encumber its operations and effectiveness.


Thank you


28TH MAY 2012

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