Few would disagree with the notion that the Central Bank of Nigeria (CBN) has dropped the ball on its banking sector oversight function in the past few years. Rather than pre-empt bank operational failures, it has opted for remedial solutions tucked under a big word it calls ‘forbearance’. In other words, it had let the horses run from the stables and enjoyed playing catch by trying to round as many up as possible; this is not a particularly smart way of keeping the financial system safe.
A pre-emptive framework that keeps banks on the straight and narrow is a better strategy than a forbearance framework that allows banks’ bad habits to fester.
For example, it has been brought to Proshare’s attention that at least one Tier 1 Bank has a huge unsettled clearing position with at least three Tier 3 banks. The ‘big brother’ bank has enjoyed CBN ‘forbearance’ because the regulator has deemed it prudent to allow the Tier 3 banks to continue operations. However, beyond Tier 3 banks, one or two Tier 2 banks also have a few operating challenges caused by poor balance sheet gap management (a situation where the tenor of liabilities used to fund loans do not match, thereby leading to liquidity challenges) and occurred in the United States of Africa (USA) where banks like Republic Bank and Silicon Valley Bank (two mid-sized banks) went belly up. In sorting out the challenges of these banks, the USA regulatory authorities neither arrested the chief executive officers of the banks, nor instigated a public mob trial on the pages of newspapers or social media. Such action would have been tacky and dangerous.
The Crux – Matters Arising from Recent Actions
The recent dissolution of the boards and the removal of the management of three Nigerian deposit money banks (Union Bank, Polaris Bank, and Keystone Bank) raises more questions than answers.
For example:
- Are the three banks now ‘nationalized’, will the erstwhile owners of the banks be given their equity capital, since none of the banks had negative shareholders’ funds,
- Are the three banks now properties of the Asset Management Company of Nigeria (AMCON)?
- Do they serve as ‘bridge’ banks? Proshare believes that the Central Bank of Nigeria (CBN) must, like Caeser’s wife, come forward with clean hands.
Banks are too economically sensitive to be regulated by unclear guidelines or actions. Besides, only a handful of Nigerian banks can claim to be all round fiscally rugged. Vulnerability is to a bank what a high pulse rate is to an Olympic athlete, it comes with the turf.
Indeed, a forensic dive into the finances of most of the local deposit money banks (DMBs) would reveal some areas that require fiscal support by way of additional equity or regulatory forbearance (relaxing of prudential requirements).
While the CBN’s decision to remove bank boards and managements may be understood within the context of ensuring financial system safety, professionalism requires that rather than make a media circus of the series of events leading to the removals, a better approach would be to ensure that government agencies collaborate within a framework Proshare calls the ‘whole-of-government’ approach. This approach is based on the notion that the government can achieve best policy results when government agencies collaborate. This will require a controlled management of perception and comms such that the unintended consequence is moderated to a manageable scale and the signalling from such actions uncompromised.
Rethinking Bank Investigations
As noted above collaboration should be the heart of public policy administration under the President Bola Tinubu’s government. This requires that regulatory and investigative authorities speak to each other or one another before acting on institutions or individuals. For example, the Economic and Financial Crimes Commission’s (EFCC’s) recent January 2024 decision to summon bank chief executive officers to their offices in Abuja, the federal capital, to investigate areas of concern relating to the deposit of public sector funds by a Minister is untidy.
A less alarmist approach would be for the investigative body (say the EFCC) to conduct its investigations and pass its findings to the CBN who in turn would probe the banks further and take the required action as prescribed by the Act establishing the regulator and as contained in the Banks and Other Financial Institutions Act (BOFIA), 2020.
In this light, the recent developments concerning the alleged inappropriate fiscal governance decisions and financial actions of Ministers of the Federation should not be tied around the necks of bank CEOs like an albatross.
Banks are not the moral conscience of the country, they are facilitators of financial transactions, whether public and private. They cannot and should not be held to account for the decisions of Ministers who answer to the President. It is sufficient that banks ensure that all transactions involving public sector ministries, departments, and agencies (MDAs) are guided by standard operating procedures (SOPs) as approved by the Central Bank of Nigeria (CBN) and the Banking Act.
To arrest a bank managing director for following a customer’s instruction (whether public or private sector) is, to say the least, odd. If the MDAs’ account opening mandate are not violated, a bank cannot be said to have connived or conspired to commit fraud. The issue becomes of concern when there are better ways of handling such matters. Proshare is of the view that when agencies with the responsibility of ensuring fiscal probity are required to investigate suspected bad conduct of public officers, such institutions should pass through the CBN (which has the prudential responsibility for banking sector oversight).
Nevertheless, Proshare, has been at the vanguard of those calling for a revision of the banking system oversight architecture. Proshare analysts have called for a British-style bank regulatory environment with the CBN focusing on standard monetary policy objectives (low inflation rate, fast GDP growth rate, stable Exchange rate, and low unemployment rate) while a financial supervision authority (FSA) (carries out prudential supervisory monitoring) and a financial conduct authority (FCA) (takes responsibility for staff conduct, discipline, and fiduciary infractions).
The Weakness of Shaming
Some once observed that you cannot shame the shameless. Something of an oxymoron, but instructive. Naming and shaming people with poor corporate governance credentials has not worked in Nigeria. In countries where misconduct has been ‘normalized’ a superior approach to handling poor professional conduct would be quiet but thorough investigation by an investigative agency of government which would report to an industry regulator which in turn takes up the responsibility of initiating sanctions. The process is without fanfare, detailed, clinical and equally punitive. The advantage is that an industry like banking which is critical to economic growth and development is not dragged into a crisis of customer confidence.
Dramatizing the arrest or the summoning of bank chief executives to the EFCC offices sends the wrong signal to a domestic and foreign banking sector audience already agitated by media conversations. Observers have noted that stealth, precision, and decisiveness is the universally recognized strength of investigative financial authorities, orchestrating a media blizzard is not part of their job description. Mature economies do not hang dirty linen in public spaces. Likewise, well-run global markets run their fiscal challenges with sensitivity, caution, and restraint to avoid sending the wrong smoke signals.
We believe that the CBN should always be the first port of contact for agencies investigating banking sector administration. The banking sector regulator has the savvy, experience, and tools to address corruption and abuse of professional privilege in a way that does not scare the daylights out of regular banking customers.
In a period of fear and uncertainty creating panic cannot be a solution. Nigeria’s financial system could do better. If the truth be told all banks have some issue or the other that needs careful resolution. As an observer once noted, the ocean’s waves graciously hide the status of all swimmers, but when the tide runs out, we all begin to see whose shorts was dangling around his ankles.
