The third policy choice that confronted the CBN in late 2009 and in 2010 was the tension between the anxieties of shareholders in distressed banks as the recapitalization with new equity and mergers and acquisitions by new investors approached, and the worries of depositors. Some category was bound to lose their shirt in the banking sector bailout. Whose shirt would it be? Sanusi was clear that, in the view of the bank, the depositor was king, and shareholders who made a business bet that went awry would have to be prepared to take losses. This policy choice was informed by vivid recollections of the harrowing consequences for most depositors in the failed Nigerian banks in the 1990s, and the unique nature of banking business which relies far more on depositors’ funds and leverage than on shareholders’ funds.
Achievements and continuing challenges
The banking sector reforms in Nigeria recorded several achievements, including but not limited to the following: No bank failed; no depositor lost a kobo in the crisis; Nigerian banks today are stronger and more resilient as a result of the reforms; we have a new banking model that allows banking industry investors and operators to, as it were, “find their size”, whether large (global), medium (national) or small (regional), trading (merchant banks) or developmental (non-interest banks, microfinance, etc); the beginnings of macroprudential supervision and regulation that assesses the impact of wider macroeconomic trends on the safety and soundness of banks.
Nonetheless, significant challenges continue to confront Nigeria’s banking sector. The first challenge is the tension between the profitability of the banks and public policy. Many Nigerian bankers believe, wrongly in my view, that the industry is overregulated and that this has negative implications for their profitability. This tension is global, with many global banks actively resisting global banking reform initiatives in advanced industrial economies.
As we have seen from the lessons of the global financial crisis, the notion of the “efficient market hypothesis” that financial firms and markets can regulate themselves effectively through the interplay of market forces has been discredited. It is not the regulator’s role to adopt a regulatory (or perhaps non-regulatory) stance calculated to enable banks make profits. Banks should endeavour to develop business models that will enable them thrive within the broader regulatory framework. The CBN should, no doubt, be mindful to balance regulation with broader financial stability, which includes avoiding policies that directly induce banking distress, and stability is indeed the goal of financial policy and regulation. This is a difficult balance, especially in a difficult macroeconomic environment, which brings us to the second continuing challenge.
It is necessary, given the difficult economic situation in which Nigeria finds itself, to strengthen macroprudential policy and have a longer term approach to financial stability with clear, forward looking policies for the resolution of any future banking crisis.
Third, the role of banks in Nigeria’s economy and society still needs to be revisited and conceptually sharpened and understood by all stakeholders including operators, regulators, and the fiscal and monetary authorities. Beyond the CBN’s efforts to have banks lend more to the real economy, it is important to develop a banking charter, a kind of philosophical lodestar for the Nigerian banking industry that clearly defines its role in Nigeria’s development and how any obstacles to achieving such goals should be addressed.
Fourth, the reforms and their outcomes point to the benefits of maintaining the independence of the CBN. It has been tempting in different political dispensations and for different reasons, some of which may be perverse and self-serving, and others even in the perceived national interest, for political authorities to interfere in the operational independence of the CBN either in monetary policy or banking regulation, or both. This temptation should always be resisted. We should not forget too soon that, as former CBN Governor Paul Ogwuma affirmed at a National Assembly hearing on the independence of the CBN a few years ago, the lack of independence of the CBN in the 1990s was a major cause of the deterioration of the economy and the failure of several banks during that era. It is unthinkable that the extensive reforms I have discussed at length, which have indisputably been beneficial overall to the Nigerian economy, would have been accomplished without not just an independent central bank, but the strong political support for that independence by Presidents Obasanjo and Yar’Adua.
Conclusion
As we have seen, Nigeria’s banking reforms over the past decade have sought to address the three reasons why finance matters for developing countries as I stated at the beginning: that the history of other successfully developed and developing countries has demonstrated the importance of effective finance in the economy for that success; that finance matters for Africa because we have chosen the part of capitalism (regardless of its variations) and we cannot succeed at creating capitalist economies that create the wealth of nations and not just that of individuals, without sufficient and efficient capital; and that finance matters because financial stability matters for the wider economy and we must therefore keep finance not just relevant for economic development but also disciplined for stability.
The banking reforms have attempted to do all these things, with varying degrees of success. I would argue that they have been most successful in their structural and financial stability dimensions, but we still have a long way to go to an economy in which finance operates at its fullest potential for economic development. This is largely owing to factors such as structural deficiencies in the wider economy that are outside the control of the central bank, although many do not understand this and thus the tendency to focus on the central bank in assessing economic leadership and performance.
But we can have some satisfaction, at least, that in these reforms the CBN has certainly moved the needle in Nigeria’s development trajectory, demonstrated what African institutions can achieve when empowered and allowed the independence to do so while held accountable for their actions, and acted in ways and with concepts that were often well ahead of even more mature jurisdictions. Other African countries have good and valuable lessons to learn from these reforms as they navigate their own path to economic development and the role of finance in that context.
Being a keynote speech at the Commerzbank Investment Banking Conference for African Banks, Frankfurt, Germany, October 20, 2015.
Kingsley Chiedu Moghalu
