Banks cautioned against derivatives trading

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Nigerian banks and other financial institutions have been cautioned against the risk of trading in derivatives and other sophisticated instruments to avoid a repeat of the cataclysm seen in the United States financial market late last year.

 

In a presentation at the ongoing 50th Anniversary conference of the Central Bank of Nigeria in Abuja on Tuesday, professor of economics at the Ahmadu Bello University, Zaria, Prof. A. G. Garba, said financial institutions and their regulator needed to have a re-think about the proposed introduction of derivatives instruments within the overall risk management framework of the banking system.

 

Garba, who spoke on, ”Building Financial Markets and Institutions: The Place of Values, Knowledge, Wisdom and Understanding,” questioned the rationale for such instruments in the system at this point in time, saying banks needed to learn from the experience of US and European financial institutions. He noted that derivatives trading was the key trigger of the global financial crisis.

 

He said while the CBN had the primary duty to regulate financial sector operators to avoid systemic risk, the banks themselves should self regulate by exercising restraint in embarking on high risk, high profit activity.

 

He said, “In the case of the subprime crisis, the big institutions and investment houses entered the market when they saw the returns of the marginal players. The lesson is that you cannot exploit a market that is not supported by fundamentals on the long term.”

 

Garba also expressed support for the CBN’s decision on the common year-end for banks, pointing out that it would give more credibility to the financial date of the institutions.

 

He said that ultimately, the success of any regulation would depend on the nature of the individual player, noting that if what the individuals were concerned with was just the money, they would search for loopholes to beat the rules.

 

He also stressed the need to strengthen the nation’s financial institutions through the process of transformation and rebuilding in order to ensure that the financial sector had an effective linkage with the rest of the economy, especially the real sector, which was critical in transforming Nigeria into a producing nation.

 

Another speaker, Prof Ademola Ariyo, of the University of Ibadan, said while there were concerns about the seeming disconnect between the real sector and the financial system, it would be erroneous to define the real sector in terms of manufacturing industries alone.

 

He said that while banks had effectively serviced real sector activities and other services, the problems of the real sector were more tied to issues such as the collapse of business ethics and values, inadequate synchronisation between fiscal and monetary policy and aspirations and excessive preoccupation with globalisation.  -Punchng 

 

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