Tunde Lemo, Deputy Governor, CBN
As investors and the banking public await the 2012 full year results of commercial banks, Deputy Governor, Operations, Central Bank of Nigeria (CBN), Mr. Tunde Lemo, has stressed that banks’ financial performance are now real due to enhanced risk capability as well as lessons learnt from the banking crisis few years ago. Lemo, who spoke exclusively to Obinna Chima, said the banking sector regulator will continue to ensure that banks do not speculate on energy transactions or equities. Excerpts:
What is the three-tiered Know Your Customer (KYC) that was recently introduced by the Central Bank all about, because a lot of bank customers do not understand the policy?
It is all about financial inclusion; it is about ensuring that the KYC requirements are made in such a way to reduce the incidence of identity fraud. It should be robust enough to ensure that where financial transactions have certain value, then you have to ensure that the identity of that person is unique and it cannot be faulted, as to prevent an unauthorised person from impersonating the account of a customer. At the same time, the requirements are such that if you don’t cascade it down and simplify it as the financial requirements becomes less, you will automatically rule out a large segment of Nigerians from the system.
I want to give you an example. If as a customer of bank X, I transact business in hundreds of thousands and millions of naira, of course you will want to make sure that you have my international passport, you want to make sure that the identification that I have are robust enough to ensure that somebody doesn’t show up tomorrow and grab a cheque issued in the name of Tunde Lemo, goes and open an account and present himself as Tunde Lemo. But the requirements need not be as rigorous for transactions that are just N500, N1,000 and N2,000. So as you go down the prosperity ladder, you simplify it such that at every point in time, you will have sufficient information required by every segment of customers, depending on where they are on the transaction ladder.
So the three tiered KYC requirements were fashioned out to ensure that those who otherwise would not be qualified for an account relationship on account of the rigor associated with the detailed KYC requirements of the past are also given opportunity to open account and transact business to the extent of the amount of business that they do. We made it as low as N20,000, so as to ensure that virtually everybody, whether in the city or wherever and no matter your level, would have the opportunity to be integrated into the financial system.
But what is the relationship between the various transaction limits under the three-tiered KYC and normal limits for account opening. Does it imply that the CBN fixed new account opening limits as reported by some newspapers (not THISDAY)?
Not at all! Today, an account relationship is not restricted to when you open a current or savings account. Technology has enabled banks to roll out their products in such a cost-effective manner. Today, through mobile banking, you can bank people who otherwise would not have been qualified for an account relationship. So, most of these other segments are people who would have relationship via other banking products that are away from the familiar products that they had before. With the mobile banking opportunity, you can actually bank anyone, no matter how small the amount is.
Even as you do that, you still want to ensure that the account holder remains unique in your database. We leave the minimum balances for banks to determine, depending on their target market, depending on the business segment in which they are interested. Of course some banks pitch their clientele very high if they don’t want to be everything to everybody, they have very few branches and a segment of the market that they service. Such banks may not have their branch network in hundreds. Many of them are foreign banks that have come to actually target certain segment of the market; maybe upstream or telecoms.
But you also have other banks that have the mass appeal. You see them on every street and those ones, of course, their target market would be different. So, the minimum account that they would specify would be different from what other banks specify. Today, we believe that banks have different products that cater for different categories of people. We are not very much concerned about minimum balance. We leave banks to determine that, depending on what their target market is.
January 2013 made it one year since the cashless Lagos policy commenced, what is your assessment of the policy?
The cashless Lagos policy in my opinion has been very successful. You recall that in January last year when we started, we actually announced that we would roll out Point of Sale (PoS) machines aggressively. That was the time that we had PoS machines of less than 10,000. I am not sure we had more than 5,000 in Lagos. But today, we have over 150,000 PoS machines all over Lagos. Today we have transaction volume of over 15,000 per day, totaling between N250 million and N300 million every day.
For me, yes, it is still below what we targeted at the beginning, but there have been tremendous progress since January last year. We still have a few challenges, but if I look back, I really would say that we have done a lot to transform the payment system in Lagos through PoS machines. Of course when we talk about cashless Lagos, a lot of us only look at the retail side which is driven by PoS machines. We have forgotten that the cashless also include high volume payment transactions such as the NIBSS Instant Payment (NIP). The NIP now moves between N20 and N40 billion worth of transactions daily.
Of course, the cashless Lagos also includes the Nigerian Electronic Fund Transfer (NEFT). Through NEFT, we also have tens of thousands of transactions valued over N50 billion daily. So between NEFT and NIP, we have transactions now that have more than doubled the cheque transaction volume. So we now have more of Nigeria’s transactions on the electronic platform and to me that is really a signal that we have made tremendous progress. Does that mean we cannot improve? Of course there is still a lot of room for improvement, which was why we deferred the nationwide roll-out to July, so that we can deal with environmental and technical issues that must be fixed before we do a nationwide roll-out on July 1.
When you say nationwide roll-out by July, are you talking about all the states in the country?
When we talk about nationwide roll-out, we are also being careful to ensure that we make use of resources in a smart way. Cash doesn’t flow by the same volume in every State of the federation. What we would do in July is to look at those other market clusters where large amount of volume are transacted and add them to Lagos. It is cheaper that way because the resources you need to cover the entire 923,000 square kilometres in Nigeria are huge. But you can achieve almost the same thing by looking at the pattern of cash distribution and you can cover about 90 per cent of that by adding about five more locations to Lagos. That is Abuja, Kano, Aba, Port Harcourt and Onitsha.
That is basically what we want to do. We would get those five clusters and add them to Lagos. When we add those five locations to Lagos, then we have covered about 90 per cent of the cash volume. We would see how far that goes and once we perfect that, we then begin to look at contiguous market centres around these locations and we would gradually cover the entire country. We don’t need to cover the entire country in the next two to three years to become cashless. There are some remote locations where the total amount of commercial transactions may not justify putting expensive investments around cashless.
Again, mobile telephony is already gaining ground. We expect a lot of cashless activities to be done when mobile telephony gains traction. We started mobile telephony last year. When we started we were recording transactions in hundreds and thousands, but the volume of transactions last December alone was N8 billion. So we are very hopeful that before we cover the other six states, virtually every nook and cranny would be well served through mobile banking. By the time we now add mobile banking transactions to these other locations we are adding to Lagos, it would look as if we have covered the entire country. That is our strategy, which is very cost effective and I believe that it is going to work.
But in Lagos, there are lots of complaints that most of the PoS machines are always faulty and this is one of the reasons why people still prefer to move with cash... what is the central bank doing about that?
Nigerians like to generalise when they say most of the POS in Lagos are not working! I have told you now that I receive alerts on PoS transactions in the country daily and there is hardly any day that we don’t do about 15,000 transactions valued over N300 billion. If most of the PoS machines in Lagos are not working, we would not record that number of transactions. Yes, like I told you before, we still have issues around GPRS and there are certain spots in Lagos that are not well connected. But that is outside of central banking, it is outside of commercial banking, it is all about technology infrastructure.
We are engaging Lagos State government as well as the Nigerian Communications Commission (NCC) and Service Providers to ensure that we have alternative means by which transactions are done. We are working with MTN, Glo and other service providers in ensuring that in those areas PoS machines work. To that extent, the connectivity issues are still there. We still have issues with bandwidth, but these issues are being dealt with. So I am not sure it is correct to say that most of the PoS machines are not working. It is important to say that we can make the utilisation rate better, by fixing connectivity in those clusters and that is basically what we are doing.
As part of its financial inclusion strategy and to support small businesses, the central bank last year announced a special fund for businesses owned by women. How much of this fund has been disbursed?
We have the Development Finance Department that is driving that initiative. I don’t have the details, but I can speak in general terms. In general terms, we have commenced the programme and we have even adopted Bornu State where we expect to flag-off the financial inclusion strategy on February 15. Another thing is also to look at financial inclusion from microfinance aspect. The CBN Governor last month went to Kano to flag-off the establishment of microfinance institutions through state government initiative.
We have changed a bit our policy on microfinance to be able to accommodate state governments that would like to establish microfinance institutions for the purpose of integrating large portions of their citizens into the financial system. You can have financial inclusion through mobile telephony, agency bank or through microfinance institutions. All these multiple approach would ensure that before the end of the year, we move fast on financial inclusion. We have already concluded the policy framework on agent banking and we intend to expose that to the public before the end of the month.
As a member of the Monetary Policy Committee (MPC) are you not concerned about the complaints of industrialists, manufacturers and other business owners that the interest rate regime and monetary policy stance of the central bank are not favourable to them? They also complain about inability to access credit. How soon do we expect the CBN to start easing monetary policy?
First is to find out why the central bank has ‘hiked’ interest rate. I am using that word not because I believe that is the right word to use, but I am thinking about it through the eyes of the public. The Monetary Policy Rate (MPR) is 12 per cent largely because of inflation. The primary responsibility of the central bank is to ensure that we deliver stable prices by making sure that inflation is as low as possible. That is the most important duty of the central bank. Every other thing is adjoint to that. To the extent that inflation rate is still where it is, it does not pay anybody to bring the MPR, which is the benchmark rate, below inflation.
When you do that, you are distorting the flow of resources. Then what you are doing is that you are penalising savers. This is because negative real interest rate does not help savings mobilisation on a long-term basis. What we are trying to do at the central bank is to work with other stakeholders to bring inflation down. You bring inflation down by attacking it through monetary policy by ensuring that you tighten. When you tighten, inflation comes down and as inflation comes down, you then in tandem bring down interest rate.
However, inflation is not every time a monetary phenomenon. Price level may be high because of other factors. In Nigeria, structural factors are very important. To the extent that you don’t have good roads to bring food from the hinterland, food prices may be high. To the extent that you don’t have electricity to ensure that productivity and capacity are enhanced, prices may also be high due to structural factors. The central bank has been working with other economic agents in ensuring that we remove those structural bottlenecks that impede productivity.
As we remove those bottlenecks and have enhanced productivity, prices naturally would go down. That is our wish. Every central bank anywhere in the world would be happy when prices are going down because that is our primary responsibility. Inflation hurts the common man more than interest rate, which is what people don’t know. The common man in the village is not connected to interest rate at all, but inflation can wipe him off. At the end of the day, even the Manufacturers Association of Nigeria and all the people that are criticising the CBN, should know that when you look at the component of cost of production, I am not sure interest rate is the most important component.
Nobody is talking about the fact that we have been able to deliver stable exchange rate in the last 18 to 24 months. In Nigeria where propensity to import is very high, if we had left that, it would have fed into inflation numbers and inflation figures would have been worse. Nobody is talking about the fact that we have lost our competitiveness because in Nigeria today, to produce anything, you have to produce your own electricity, you have to do roads, the cost of contract enforcement, cost of securing yourself, double taxation and when you add everything up, that is a lot more on the additional thing you pay on interest.
All those things are things that add up to the cost of doing business. Just imagine, someone who brings in raw materials into Lagos and has a factory in Kano, today, it takes the truck one week to get to Kano, whereas in the past it was one day. So, transportation cost is about five times what it should be. In other climes, it shouldn’t even go by road because rail is cheaper. The fact that he is even doing it by road and not rail has also made him to lose his competitiveness, not to talk of the fact that he would have to cross about 40 local governments and maybe five states, each of those local governments would collect levy.
So when you add up everything, these are the things that hurt manufacturers more than interest rate. But does that mean we want interest rate to remain high? No! But we cannot put the cart before the horse. All of us should work to ensure that we deliver low inflation and of course interest rate would go down. I don’t think that is true that they are not able to access credit. In the last three years, if you check the numbers, banking sector credit has been growing. If you plot the graph, aggregate credit has been growing in the last four to five years. So I am not sure access to fund is a major problem.
They can talk about cost of funds, which I have been able to explain. But do you know that before the central bank policy, credit to agriculture was one per cent, but as December, it has gone to about 3.5 per cent and we have a plan to grow that to 10 per cent in the next four years. That has never happened before. Besides that, the CBN, through Bank of Industry (BoI) had set aside funds to intervene in the real sector because we are tackling inflation from those ends. If we influence the real sector and it receives funding and of course if those environmental issues and issues around power are dealt with, we then would be able to bring inflation down.
The central bank, apart from our primary responsibility to influence the economy through monetary policy, has also stepped out of the bound, we are not of the bound to the extent that any central bank in a developing economy would also add up developmental initiatives, and we have achieved a lot. In agriculture through the Nigerian Incentive Risk-based Sharing Agricultural Lending (NIRSAL), we have been able to de-risk so many agric products where banks would ordinarily not want to lend. We also have insurance and guarantee products to ensure that banks’ resources are flowing into agric and that gives us hope that we are beginning to see a revolution in the area of agric financing in Nigeria.
The US government has sued Standards and Poor’s over the agencies ratings of mortgage bonds market before the banking crisis. As a regulator who most times relies on some of these ratings –both corporate and sovereign, to do your job, how credible are these ratings and are you not concerned with this development?
The rating that you see of countries are helpful, but the lesson about what has happened in the last three to four years is that you should not just close your eyes and look at any rating or opinion and then take a plunge on account of that. Remember that Lehman Brothers had a rating enhancement just one or two days before it crashed.
That clearly shows the limitation of ratings. For us at the CBN, we look beyond ratings; we look at the country’s fundamentals, trade flows and every other thing. After all, the information available to rating agencies are also available to us and we have skills and expertise within the central bank to do a study and have an opinion on the financial health of institutions and sovereigns, particularly those that we do business with.
The market is currently awaiting the full year results of commercial banks. What is your assessment of the banking industry today?
I think today, looking back, even though nobody has been commending the Sanusi-led central bank, I think we deserve a lot of commendation in spite of the fact that we were severely hit by the second round effect of the economic meltdown between 2008 and 2009. First we intervened and repaired those banks. Everybody thought it was Armageddon. But we assured the public that it is to make those banks better. The good news now is that looking at where they are today; they (banks) are even doing much more business than they were doing before our intervention. So, we have been proved right.
If you look at the total staff employed by the 20 Deposit Money Banks (DMBs) today, they are more than the number of staff members employed before the intervention, which means that the intervention has been positive. Also, they are back on profit track, but the beauty of it is that because they have enhanced their risk assessment capability and because they have learnt a lot of lessons and because we are now looking at areas of assets bubble, we would no longer allow rascality in the area of speculation either around energy transactions or around equities. The profits are now more genuine than before.
Again let us not lose sight of the efficiency gain that those banks have achieved. Few years ago we came up with shared services initiatives that banks can reduce their operating expenses by having a shared service philosophy around the way they acquire processing facilities and that has worked a lot. If you compare the cost to service ratio of the banks today with what they were three to four years ago, you then understand why a lot of them are making profit.
Before, you used to see a bank that had a big four-storey building and maybe only the ground floor is being used. Today, no bank will do that. Today they now know how to ensure that they share infrastructure such as information technology, they have reduced fleet of bullion vans because we have registered some companies that now does that for all of them.
So through the shared services initiatives, they have been able to reduce their cost of providing banking services and the customers are beginning to get the benefits. But the efficiency gain that the customers are getting can be improved upon. That is why recently we agreed with the bankers that they should not charge any more ATM fees.