A well-targeted policy reform does involve a process of adaptation and learning the outcomes with regard to the reform targets. Nevertheless, it is axiomatic and development experts agree that the less disruptive the change policy, the higher the possibility of its buy-in and success.
Also, change policies within an industry or sector stand better chances of success when they have consistent elements and have linear focus over time. The Nigerian experience always tends to negate these
truisms through rapid yet inconsistent change policies within an industry or sector. This is how the terminology “policy somersault” sticks in the highly volatile Nigerian policy terrain.
After the assault on bank debtors and little more than harassment of a few bank executive directors, the banking regulator is now sacking the existing banking policies with the familiar drama. In about 18 to 24 months, the Nigerian banking sector will assume a completely new character, negating all the defining selling attributes of the industry in the three years before the local experience of the global banking crisis.
Some of the new policies being introduced will depart completely from the existing order. Instead of a ‘manageable’ two dozen banks, the CBN says it is ready to licence several new banks. Replacing the policies that intended to encourage banks to spread across national, regional and global markets, the CBN would like to re-direct the banks into a specific geographic and operational pigeon holes, under an impending classification of banks.
Not done, the CBN wants to re-license the banks as specialized banks after withdrawing their universal banking licenses.
Here are some questions on the immediate point of stepping down the banks’ scope of operation as planned by the CBN. Will the banks have to pay for their new licenses? Since the licenses will be narrow in scope, will the CBN pay compensation to the banks for obvious inferior licenses? In fact, will the CBN compensate bank shareholders for decline in profit arising from loss of previous other areas of business? We ask ominously: what will happen to the banks? subsidiaries if their owners are unable to find buyers for the severed assets in two years from now?
Immediate Past Banking Reform Targets
Just six years ago, the Central Bank of Nigeria (CBN) rolled out the banking industry reform policies. Through its communication and implementation, it was clear the reform targets included:
Three years before the mid-2004 banking reform took off, Nigeria had adopted the universal banking model to address issues around levelling the playing field for all market participants and encouraging innovation and competition.
Dispelling claims against the banking consolidation and universal banking
The core principles of both the last banking reform and introduction of universal banking regime in Nigeria did not necessarily lead to the ills and near-disaster they have been associated with in the last nine months. The local experience of the financial market crisis mirrored the causes and effects of the global problem.
Financial market growth rides on asset bubble which bursts in a matter of time. This is usually cyclical.
During the period of growth, market players tend to be ahead of the regulators and or supervisors. Therefore, the direction of regulatory reforms across the Atlantic is how to manage future financial market growth through counter-cyclical measures and keep regulators and supervisors ahead of the game.
The reason why there seems to be little progress with the reform process in the matured market is because the process is driven by debate and not impulse. More important, the process aims at improved safety and soundness, but never to impair growth. So the most unlikely of places – Nigeria – is where we are seeing the most drastic regulatory reforms after the crisis.
With a modicum of fastidiousness, several myths could be unveiled with regard to why Nigeria must make 180 degrees turn from the past banking policies. Some of the myths are enumerated hereunder.
One, introduction of N25 billion regulatory capital did not preclude a bank from becoming a regional bank, serving only one state out of the 36 states of the federation and Abuja, or serving one of the six geo-political zones or completely limiting its footprint to any of the geo-ethnic cleavages in the country.
Two, universal banking does not compel all the 25 and later 24 consolidated banks to have investment banking, stock brokerage, insurance, mortgage, (pension) asset management and microfinance arms, since all the banks operate commercial banking first and foremost. Neither does universal banking mean an Arewa Bank, Oduduwa Bank or Igbo Bank could not operationally be an agric, infrastructure or trade finance bank.
Three, so far, it is even more plausible that universal banking and banking industry consolidation have increased skill aggregates in the system. The banks are leveraging on bigger capital bases, global outlook and attraction of professionals from outside the country including Nigeria in Diaspora who otherwise would have had nothing to do with erstwhile Nigerian micro banks.
Four, failure of regulation and supervision of 25 “mega” banks will not translate into more efficiency of the regulators when additional x number of smaller banks are added to the system after slicing up the existing big banks.
Five, in the last nine months, we have seen that a wildcard invitation of foreign equity holding in the Nigerian banking sector will not be received and responded to with unstudied enthusiasm.
Yet other myths
The CBN is taking the system through the new tracks in implementation of its reform targets of “enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution and ensuring that the financial sector contributes to the real economy in many areas”.
Take the classifying of banks into operational and geographic pigeon hole for instance. One obvious lesson of the global banking crisis is that banks cannot grow too big to fail. But we now know as well that small banks are by far less able to survive major banking crisis. In 2008, 25 banks were closed in the United States. Last year, the number of bank failures jumped to 140. But a February 23 statement by FDIC Chairman, Sheila Bair, said 30 banks had already failed in the US this year. The bad news actually is that she estimated bank failure in 2010 to surpass the 2009 figure.
Of the 195 bank failures in the US since 2008, Lehman Brother and Bear Stearns collapses are the best known. The overwhelming majority of the failed banks were small(er), regional or specialised banks the CBN wants to re-create in Nigeria. Nigerian mushroom “specialised” banks had always disappeared in no time.
Collaboration amongst regulators
After the plunge the current regime at the CBN took ostensibly to sanitise the market mid 2009, it is encouraging to see that attempts are now being made to fashion more robust and collaborative regulation and supervision across the Nigerian financial markets. This is a welcome development. What one wishes is that the revamped meetings of the Financial Services Regulation Coordinating Committee (FSRCC), comprising the CBN, FMF, NDIC, SEC, CAC, NAICOM, PENCOM, NSE and ASCE, will promote necessary debates on measure to strengthen regulation and supervision, and coordination of the independent bodies that dot the country’s financial landscape.
By: Jide Akintunde and Chris Ogbodo
Jide Akintunde (email@example.com)