The Central Bank (CBN) Governor Sanusi Lamido Sanusi thought up a “brilliant” idea recently to reduce the cost of borrowing in the country. The CBN, Sanusi revealed, has started a shared services project in collaboration with banks aimed at centralising back office services and the industrialisation of common
processes. Through this so-called shared services project, the banking regulator will invest in a dedicated power plant for all deposit money banks in the next three years that will operate in Lagos as a pilot cluster. The IPP, he believes, will reduce overhead costs in the banking industry by 30 percent.
In thinking up this project, Sanusi has conjured up a pipedream, one from which he needs to be awoken very urgently before he ventures into areas that have nothing to do with the CBN. First and foremost, no Central Bank in the world has any business getting involved in direct investment in infrastructure projects in any shape or form. Central Banks can create money for onward lending at concessionary interest rates to commercial and specialized banks that in turn lend to investors and construction firms involved in infrastructure development. But certainly not invest in the constructions of roads, security, water projects, hospitals, schools, air and seaport, or power projects for that matter.
The primary aim of Central Banks is to formulate monetary policies that guarantee price stability, determine interest rates, manage a country’s foreign exchange regime and its foreign reserves, and control money supply. Central Banks are also lenders of last resort responsible for providing governments with banking services and are the bankers’ bank. In comparison, the Central Bank’s role of supervising and regulating the operations of banks in the financial system is secondary to its primary role of monetary policy implementation.
In all, monetary policy implementation and banking supervision are time consuming and demanding responsibilities capable of daunting the most insightful central banker worth his/her salt, not to talk of adding the burden of infrastructure development. Personally, this columnist is still trying to fathom where Sanusi came up with the idea of getting the CBN to invest in a power plant. It is a major lapse in judgement that should be scrapped before it goes too far.
If Sanusi is that concerned about the mounting overhead costs in banking (which he should be), he should focus his energy on ensuring that funds are set aside for infrastructure lending at low interest rates to investors in the power sector. The CBN has done the same for SMEs, the manufacturing and agriculture sectors, and for aviation. If memory serves me right, last March, Sanusi also disclosed that N500 billion was to be set aside for lending to the power sector.
To be more specific, at the end of its 213th Monetary Policy Committee meeting, the CBN announced that as a measure to continue with the quantitative easing policy, it will provide a N500 billion facility for investment in debentures issued by the Bank of Industry, in accordance with Section 31 of the CBN Act 2007, for investment in emergency power projects dedicated to industrial clusters. The funds will be channeled through BOI for on-lending to deposit money banks at a maximum interest rate of 1.0 per cent for disbursement of loans with a tenor of 10 – 15 years at a concessionary interest rate of not more than 7.0 per cent. What became of this?
Besides, have Sanusi and the Central Bank given serious consideration as to how they intend to transmit the power generated by this dedicated power plant to the head offices of banks and possibly thousands of branches in and around Lagos. Will the CBN also be responsible for power distribution, revenue collection, power and bulk purchase agreements, gas supply and other attendant aspects of providing electricity to commercial banks in the state?
The amazing thing is that the CBN can barely run its subsidiary the Nigerian Security Printing and Minting Company Plc with the efficiency that is required to meet the nation’s currency demands. In the last ten years and more, CBN has had to import more than 60 percent of the currency notes and coins circulated in the Nigerian economy. Yet, it wants to invest in a power plant? The very idea is not only unreasonable, it is a distraction that the Central Bank can do without. Has it also occurred to Sanusi that the added cost of establishing and running a power plant and distribution infrastructure will inevitably by pushed back by the CBN to the banks as the lender of last resort?
But let us ignore Sanusi for a moment and concentrate, instead, on other support infrastructure services that raise the cost of banking overheads: In addition to generators banks need to power their head offices and branches, they expend considerable resources on ICT infrastructure to provide online, real time banking services to their customers nationwide. The same ICT infrastructure supports their ATMs and card services products they push at customers on a daily basis.
To reduce the cost of what banks expend on telecommunications, all banks require considerable bandwidth and efficient enterprise solutions to transmit large packets of data between branches and their customers 24 hours a day. Sadly, very few telecom operators can provide the broadband services the banks need, as most of it is taken up by the networks for their backhaul requirements. As such until there is sufficient bandwidth, banks will have to make do with satellite backbone transmission that is less efficient, costlier and susceptible to atmospheric interference.
Other forms of support services banks invest in include sinking of water bore holes in their head offices and branches; in several instances, construction and/or rehabilitation of access roads to their branches; security services; cash movement operations; and real estate. All these, in addition to self-power generation, account for more than 60 percent of banks’ overhead costs, which inadvertently is transferred to borrowers through the interest rates charged by the banks.
Given the plethora of costs borne by the banks to stay open, is the Central Bank prepared to invest in telecommunications, water infrastructure, a dedicated police force and security firms, roads and transportation, and the construction industries, in order to bring down costs? If it is, then the regulator might as well jettison the purpose for which it was established and take on the new role of Infrastructure Bank of Nigeria.
Sanusi, nonetheless, has ample opportunity as the CBN governor to play a critical role in plugging the infrastructure deficit in the country. As a key member of the National Economic Team, which meets regularly in Abuja, he can push for the formulation of policies that speed up investment in segments of the economy that have an impact on banking services.
For instance, just like CBN set aside N500 billion for lending to power infrastructure projects, he can advise on policies to encourage private participation in such sectors. By meeting with agencies such as the Bureau of Public Enterprises and Infrastructure Concession Regulatory Commission, he can get some insight into the investment requirements for infrastructure projects, and intervene through the banks where the need arises. It is only targeted lending at subsidized rates of interest to infrastructure developers that can help to depress overhead costs in banks and lending rates.
Lest he forgets, the CBN as a government agency has not exactly been efficient in the management of its operations and that of the Mint. Ultimately, even the new National Integrated Power Plants and state-owned power projects will be transferred to private hands through concessions and outright sales. So the last thing Nigeria needs is yet another government department investing in sectors better managed by the private sector.