CBN Unveils Four Pillars of Banking Reforms



The Central Bank of Nigeria (CBN) has unveiled its blueprint for the reform of the banking sector, which is built on four pillars.



The CBN Governor, Mallam Sanusi Lamido Sanusi, announced the blueprint during his pre-convocation lecture at the 28th Convocation of the Bayero University, Kano, at the weekend. The four pillars of the reforms are: enhancing the quality of banks; establishing financial stability; enabling healthy financial sector evolution and ensuring that the financial sector contributes to the real economy.



Sanusi also clarified a newspaper report which quoted him as saying the rescued banks would have to pay back the bailout loans by May this year.The CBN, he said, has not given any bank a deadline to repay the intervention funds and "it would be unreasonable to do so".



The exposure was taken in the first place to address a solvency problem caused by huge levels of provisioning that eroded the capital of banks caused by non-performing loans and bubble capital. "What we said is that the Asset Management Company will buy off a substantial part of these assets and also recapitalise the banks and they will then be in a position to repay the loans from this capital recovery. We also believe this may happen as early as May. That is why the AMC is a resolution vehicle," he said.



In Kano, Sanusi, who spoke on the “Nigerian Banking Industry: What Went Wrong and Way Forward”, said the reform period would afford the apex financial institution enough time to implement the four pillars of the reforms.The governor also seized the opportunity of the lecture to unfold the details of the four pillars of the reform programme.He said in the first pillar, the monetary authorities would initiate a five-part programme to enhance the operations and quality of banks.



“It would consist of industry remedial programmes to fix the key causes of the banking crisis, implement risk-based supervision, reform regulations and regulatory framework and also enhanced provision for consumer protection and internal transformation of the CBN,” Sanusi said.



The CBN, in establishing financial stability, seeks to strengthen the financial stability committee within the CBN and establish a hybrid monetary policy cum macro-prudential rules.Sanusi said the banking watchdog would also include the development of directional economic policy and counter-cyclical fiscal policies by the government and further develop capital markets as alternative to bank funding.



“Some of the potential levers for the new macro-prudential rules may include limiting capital market lending to a set proportion of bank’s balance sheet, prohibiting banks from using depositors’ funds for proprietary trading, private equity or venture capital investment as well as adjusting capital adequacy and forward looking capital requirement of banks, driven by stress tests by the CBN," he said.



The governor pointed out that the CBN would in enabling healthy financial sector evolution, review the basic one-size-fits-all model of banking.Besides, he said the apex bank would also review the universal banking model mandates, which would make it possible to have international, national, regional, monoline and specialised banks such as Islamic banks, with different capital requirements, commensurate with the depth of their activities.



Sanusi said ensuring that the financial sector contributes to the real economy entails leveraging on the CBN governor’s role as adviser to the President on economic matters.He said the apex financial institution would take the lead in measuring more accurately the relationship between the real economy and financial sector as well as cooperating with state governments to run pilot programmes in directing the financial sector’s contribution to social and economic development within the states.



The apex bank’s chief challenged the academics over their noticeable absence in the discourse on the banking crisis, which he considered tragic because the discourse “has been left to journalists of varying degrees of sophistication, and to faceless agents and charlatans”.



He urged the academics to take advantage of the opening salvo fired by the CBN to lead what he said “could potentially be a revolutionary battle against the nexus of money and influence that has held the country at ransom for decades”. He added: “Eight main interdependent factors led to the creation of an extremely fragile financial system that was tipped into crisis by the global financial crisis and recession.”



He named the factors to include macro-economic instability caused by large and sudden capital inflows; major failures in corporate governance at banks; lack of investor and consumer protection; inadequate disclosure and transparency about the financial position of banks; critical gaps in regulatory framework and regulations; uneven supervision and enforcement; unstructured governance and management process at the CBN and weaknesses in the business environment in the country.



On the reform programme, Sanusi, in obvious reference to opponents who claim that the CBN has no strategy or there is no roadmap to the reforms, said while the US had just set up a committee to undertake a study of what went wrong over there, after achieving some stability “in our own case, we commissioned a detailed study with the involvement of the CBN and external resources to diagnose the problems and come out with solutions”.The banking reforms that started August 14 last year has necessitated the sack of eight bank CEOs and the injection of N620 billion tier 11 capital to stabilise the affected institutions



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