Move to Hive off Banking Supervision from CBN Raises Dust

20 Jan 2013

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National Assembly

The intensity of the opposition to the plan of the House of Representatives to strip the Central Bank of Nigeria (CBN) of its supervisory role in the banking industry is yet to abate, reports Festus Akanbi

When the National Assembly set in motion a chain of events aimed at stripping the Central Bank of Nigeria Governor, his deputies and directors of powers to sit on the board and approve annual budgets of the banks sometimes last year, many informed analysts took a swipe at the lawmakers for the seeming gang-up against the apex bank. However, as critics of the bill were busy marshalling their arguments against what is considered a legislative interference in the affairs of the nation’s financial sector, the leadership of the lower chamber-House of Representatives- has also expressed its determination to hive off banking supervision role from CBN.

Chairman, House of Representatives Committee on Banking and Currency, Hon. Jones Onyereri, had disclosed that the House was working on a legislation that could strip the CBN of its oversight powers over the banking system and transfer it to an independent body that will be responsible for banking supervision. The proposed law, according to the lawmaker, would result in the withdrawal of the banking supervisory function of the central bank, leaving it to oversee only monetary policies and currency management.

The Alternatives
Two options are being proposed to fill the vacuum to be created should the legislators have their way in their quest to clip CBN’s wings. On the one hand, a financial regulatory body could be floated to supervise the nation’s banking industry. On the other, the Chartered Institute of Bankers of Nigeria (CIBN) could be saddled with the responsibility of maintaining an orderly banking industry in Nigeria.
Informed analysts said in view of the cost implication and the attendant complications, which the first option could throw up, the latter could be the option to be settled for.

CBN Mandate
The CBN’s mandate is derived from the 1958 Act of Parliament as amended in 1991, 1993, 1997, 1998, 1999 and 2007. It is instructive to note that that CBN Act of 2007 charges the bank with the overall control and administration of the monetary and financial sector policies of the Federal Government. The apex bank was set up to ensure monetary and price stability; issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; promote a sound financial system in Nigeria; and act as banker and provide economic and financial advice to the Federal Government.

Consequently, the bank is charged with the responsibility of administering the Banks and Other Financial Institutions (BOFI) Act (1991) as amended, with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payment system. And in addition to its core functions, CBN has over the years performed some major developmental functions, focused on all the key sectors of the Nigerian economy (financial, agricultural and industrial sectors). Overall, all the mandate is carried out by the bank through its various departments.

But Onyereri insisted the current organisation framework for CBN is defective, blaming the various challenges rocking the industry on the lack of capacity of the bank to handle issues considered too wide in scope for the present regulators.

An Independent Body
He said: “We are trying to take that banking supervisory function away from the CBN because if you look at it closely, especially in Nigeria, most of the problems we have in the industry has to do with supervision. For some reasons, we believe that the hands of the central bank are full.

“Creating an independent body will enable the CBN to focus on its mandate of price stability and monetary policy.”

Beyond Bankers Institute
Most of the respondents to THISDAY’s enquiries about the likely choice of CIBN for the all-important assignment said the institute cannot effectively handle some of the issues that border on supervision of banks.

When our correspondent sought the view of the institute to know how adequately positioned it is for the task ahead, its registrar and chief executive, Uju Ogubunka, said the CIBN is yet to be officially notified, saying appropriate response would be given when such is done.
Meanwhile, a former chairman of the Lagos branch of CIBN said the National Assembly would be playing to the gallery if it decides to go ahead with its desperation to strip the CBN of its responsibilities.

He admitted that the CIBN cannot in any way undertake the responsibility of the apex bank because it is not caught out to do so. He said the CIBN could only make input into any new arrangement that could be fashioned out by the regulators.
“They should not saddle the CIBN, which is a professional body, with the responsibility of banking supervision although the institute can make input.”

The former CIBN boss was, however, not completely against the move to divest CBN of some of its powers.
A bank chief executive, who spoke under the condition of anonymity, wondered how the new entity being proposed would efficiently handle supervision-related issues like the implementation of the Money Laundering (Prohibition) Act (MLPA), 2011 And Terrorism (Prevention) Act (TPA); code of Corporate Governance for Banks in Nigeria; the Guidelines for Whistle-Blowing in the Nigerian Banking Industry; Prohibition of New Credit Facilities to Debtors of the Asset Management Corporation of Nigeria (AMCON); Guide to Bank Charges and Know Your Customers (KYC)Requirement.

It was this array of specialised interventions that prompted, Group Head, Ecobank Capital Nigeria, Mr. Rotimi Oyekanmi, to draw a line between the CBN and the CIBN. According to him, the National Assembly’s proposition “appears to be a political driven agenda, which requires more careful thought. The role of the CBN is defined by law, which also defined that of the CIBN.
“The CBN is an independent body while the CIBN is an association.

The CBN is an institution, which has provided this service for a long time. “We need to determine what the best way to supervise the banks is.

“Is the plan to hive off the banking supervision department and move it to CIBN the way Petroleum Inspectorate was moved from NNPC to DPR? The devil is in the details,” he concluded.

Among other analysts that demanded a thorough examination of the various issues that triggered the National Assembly’s intervention is Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane. He said the move by the lawmakers was precipitated, saying, “We cannot come out with a therapy without diagnosis.

“The United Kingdom had done it and has gone full cycle. The European central bank is back to regulating the banks in Europe. However, in the United States, the office of the Controller of Currency is the one that regulates the banks. But I am saying that today in terms of financial services regulation, I do not see that as a major problem. I think that we should focus more in making sure that monetary policy is aligned with the broad macroeconomic objectives of the country, rather than trying to canibalise the powers of the CBN in any form,” Rewane said.

Avoidable Disruptions
Other commentators called for caution in order to avoid a situation that will cause confusion and the eventual disruptions in the economy.

According to Head of Regional Research, Africa Standard Chartered Bank, Razia Khan, “The moves by NASS to try to reduce the autonomy of the CBN are a serious concern, and if realised could trigger the potential outflow of several billions of dollars from Nigeria.”

She noted that aggregate foreign portfolio investment inflows in Q4 2012 alone were estimated at c. $ 4.6 billion, the stock of portfolio inflows is estimated at $8 billion, warning that much of this money could exit if investors fear that the CBN’s autonomy will be removed and monetary policymaking in Nigeria becomes more greatly influenced by the political cycle.

She said: “Nigerians must recognise that it is only the credibility of CBN policy-making with investors, the tightening of monetary policy when it was thought necessary, the tightening of policy even in the face of political opposition, as well as the action taken by the CBN in cleaning up the domestic banking sector that has led to the new trust that investors are showing in Nigerian institutions and the formal inclusion of Nigeria in globally-tracked bond indices. 

“Should this trust be eroded through the removal of the CBN’s autonomy, Nigeria would find it much more difficult to finance itself by borrowing externally  (include in this measure foreign investment in local currency FGN bonds).  Bond yields would spike, the naira would weaken, and financing any Nigerian entity would become much more difficult.”

Speaking further, Khan said, “Equally, I believe it would be a grave mistake to strip the CBN of its power to regulate the banks.  As a central bank performing a lender of last resort function, it is best placed to monitor any signs of distress in the domestic banking system, and significantly, to act on those signs of distress.  Should this important function be hived off from the monetary authorities  (for what reason, I wonder?), it is doubtful whether any new entity would be able to carry out this function in an adequate way.

“A key part of banking supervision is overcoming the information asymmetry that necessarily exists between insiders in a commercial bank, and those on the outside.  Without the depth of knowledge that a central bank would have on any financial institution  (including its typical pattern of borrowing), the proposed banking regulator would be trying to do what is already a very difficult job at an even greater disadvantage.

Would it be worth it?  No.  If anything, confidence in the Nigerian banking sector would probably fly out of the window.”
Another commentator said, “The experience of the Nigerian banking sector in recent years has not been very pleasing due to the avoidable disruptions that had been following the appointment of a new CBN Governor. The consolidation exercise of 2005 and the banking reform that started in 2009 created unnecessary disruptions in the economy, which perhaps led to the plans by lawmakers to take away the banking supervisory role from the CBN.

“By creating an independent body to oversee banking supervision, Nigeria would have decided to adopt the British system where banking supervision is being handled by the Financial Services Authority (FSA). However, due to the perceived failure of this model to prevent the banking crisis in the UK, the British government has decided to remove banking supervision from the FSA and added to the mandate of the Bank of England (BoE), the same model we currently operate in Nigeria, which also appears to be inadequate here.”

Continuing, the financial market analyst pointed out that: “What this means is that even the proposed plans of the lawmakers may not work. However, we wouldn’t know until we have tried it. Different economies choose different models as appropriate.

“While I am not a fan of political inference in the financial system, in response to the global financial crisis, most countries are trying out alternative models to determine which is most appropriate. The lawmakers must carry the public along, be receptive to contrary views and conduct adequate investigations before deciding on what model to adopt.”

Last year, the House of Representatives began deliberations on a bill, which focuses on amending the CBN act 2007. They intend to transfer the powers delegated to the CBN for the approval of their budget back to the House.

The bill also seeks to reduce the number of the board from 12 to 7 and plans to remove the CBN Governor as the chairperson of that board. CBN Governor Sanusi Lamido Sanusi has on several occasions argued that by virtue of Section 14 and other sections of the CBN Act, the bank does not need approval of its spending by the legislature, the parliament has continued to insist that the CBN statute is subservient to the 1999 Constitution that prescribes otherwise in Section 80.

Tags: Business, Nigeria, Featured, Banking Supervision

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