Banking Regulation: Commonsense And Nonsense (2)

People who only a few months ago were praising the CBN governor to high heavens for his concerted programme aimed at liqudifying the financial sector at the onset of the global financial meltdown now indulge in the favorite

pastime of vilifying him for the “excess liquidity” supposedly caused by the same policy, which they now claim has caused a crash in the value of the Naira – a case of damned if you act and damned if you don’t!

I’m not surprised because this is an open season of Soludo-bashing as charlatans and pseudo-intellectuals are angling, positioning and showcasing themselves as more-than-worthy successors. I’m amused at the high tempo of intrigues swirling around Prof. Soludo and would only say at this point in time that, just as in the case of political leadership, this nation deserves whatever replacement steps into Soludo’s shoes.

It isn’t as if the incumbent CBN governor doesn’t have his faults. He does. One is the too-chummy relationship he has cultivated with those he is supposed to be supervising and regulating. It is unsavory and unethical for top officials of government parastatals like the CBN and the Nigerian Stock Exchange as well as ranking members of the Senate and House committees on banking to gallivant abroad for the official opening of a foreign branch of a Nigerian-based bank. Their individual gain is the nation’s collective loss because as our elders say: “After a while, the soap and its wrapping become indistinguishable” – signaling a loss of bite in oversight functions. Interestingly, you’ll never find such officials gracing the opening of domestic branches since this is an “unprofitable” task reserved for state governors and their deputies! It is fine to say that banks will be jointly examined this year (and henceforth?) by the CBN, Securities and Exchange Commission, Nigeria Deposit Insurance Corporation and the National Insurance Commission but consolidated supervision would still be meaningless if banks continue to render falsified returns.

Secondly, it is my well-considered opinion that Soludo lacks guts. After his well-articulated redenomination plan for the Naira was shot down by government officials and politicians too dense in their thinking to see beyond their noses, I advised him to go to court to test the limits of the CBN’s statutory powers or resign honorably from office. He chose not to resign and instead buckled under the well-orchestrated pressure that seeking judicial adjudication would amount to insubordination to President Yar’Adua even though he had a precedent in Alhaji Hamman Tukur, chairman of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC), who sued the Obasanjo government for operating illegal accounts and making illegal withdrawals from the Federation Account.

To compound matters further, Soludo seems to have succumbed to political arm-twisting from ‘above’ else he won’t engage in the Don Quixotic alchemy of combining populist economics with practical finance. I’m talking of the recent news that the CBN – in conjunction with the Bankers’ Committee – has decreed that henceforth the deposit rate will be a maximum of 15 per cent while the lending rate has a ceiling of 22 per cent. The icing on the cake was the stipulation that “all other charges shall not exceed two per cent per annum,” constituting an All-In-Rate not exceeding 24 per cent. We might as well go the entire hog: peg the exchange rate, decree an inflation rate and resuscitate Price Control Boards to monitor compliance! We’ve been down this road before several times in the past. It didn’t work then and this old-wine-in-new-wine-skin won’t work either this time around. There’s a condition of equilibrium between inflation, foreign exchange rate, interest rate and productivity. An interventionist tinkering of one variable – by executive fiat! – would only produce a new equilibrium that would leave one or more variables worse off. It is analogous to patching a leaking old water hose (pipe). Just as you cover a leak with cellophane and rope thinking that your problem has been solved, water pressure will cause a tear in another vulnerable part of the hose and the quick-fix process would continue ad infinitum until the problematic water hose becomes an eyesore.

In the early to mid-90s when we faced the same scenario, banks created non-bank subsidiaries that engaged in importation and wholesale marketing of commodities and/or embarked on joint partnership ventures based on asset financing. This was the only way they could make the kinds of profits they wanted to make given a very restrictive financial intermediation environment. The same thing is bound to happen because banks are going to seek very creative ways of generating wealth for their shareholders (including most of the top executive management). The maximum spread of two percent is unrealistic for on-lending to the real sector in the light of the yawning infrastructural gap in the country (which exacerbates lending risk to a long gestation project). What maximum tenor of deposits would attract 15 per cent? Do depositors and potential savers have more profitable alternatives? Isn’t this a recipe – like it happened in the past – for a skewed lending to trading and short term transactions at the expense of the manufacturing sector? Let us not provide banks with another reason for doctoring their books and making it appear as if they are fully complying with the CBN’s directives while the economy keeps degenerating from bad to worse.

If the CBN really wants this policy to work it must furnish banks with the necessary medium and long term deposits with a clear directive that the funds should be lent to the real sector at the official rates. Anything else is simply playing to the gallery. This is why I found the homily to the banks to “moderate competition and insist on greater safety and soundness of the financial system, in view of the financial meltdown” very funny. Of course, the banks must engage in cutthroat competition, especially with the insistence of the CBN on a uniform year-end reporting (something I support anyway).

Let me just add that experience all over the world has shown that a seemingly profitable bank can easily become insolvent and bankrupt hence the measurement of liquidity should be accorded special significance. Like in the case of capital adequacy, the CBN must review its traditional evaluation methods to reflect changes that have occurred in the industry in recent times (such as universal banking). I personally would love to see a situation where the CBN requires each bank to prepare a short term (90days) rolling contingency plan for managing a liquidity crisis.

Emmanuel Tiko Okoye