Central Bank of Nigeria needs to reform the banking system

Things have fallen apart in Nigerian banking system and it is beginning to look like the center cannot hold anymore. Nigerian banking is in deep crisis and pragmatic steps must be taken to arrest the ugly situation.

Central Bank of Nigeria (CBN) has just announced the dismissal of managing directors of five banks in Nigeria - Intercontinental Bank PLC, Fin Bank, Union Bank, Oceanic Bank and Afribank. And on top of that many influential individuals and companies were fingered on not living up to agreements of the debts they own to those banks.

The reason given by Sanusi Lamido's CBN for letting them go is principally due to:

Excessively high level of non-performing loans in the five banks which was attributable to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to the bank's credit risk management practices. Thus the percentage of non-performing loans to total loans ranged from 19 per cent to 48 per cent. The five banks will therefore need to make additional provision of N539.09 billion. The huge provisioning requirements, have led to significant capital impairment. Consequently, all the banks are undercapitalized for their current levels of operations and are required to increase their provisions for loan losses, which impacted negatively on their capital. Indeed one is technically insolvent with a Capital Adequacy Ratio of (1.01 per cent). Thus, a minimum capital injection of N204.94 billion will be required in the five banks to meet the minimum capital adequacy ratio of 10per cent.

For sometime the paradigm shift and the leap forward by Nigerian banks were the talk of town and around the world. As an emerging market, Nigerian banks were receiving accolades and awards from international financial institutions. Investors were excited about Nigerian banking stocks and capital flow into the market was enormous. Credit was given to the capitalization of the banks at the tune of N25 billion naira that was initiated by the brainy Professor Soludo, the former governor of Central Bank of Nigeria.

In the third quarter of 2006, the Banker Magazine, an arm of the Financial Times Group released its world renowned Top 1000 World Banks ranking for 2006 and on the list were nine Nigerian Banks: First Bank, Union Bank, Zenith International Bank, IBTC Chartered Bank, Intercontinental Bank, Spring Bank, GT Bank, First Inland and Oceanic Bank. According to the magazine, the increase in the number of Nigerian banks in this global 1,000 listing is "due to the consolidation that has taken place in the banking sector in Nigeria since 1st January 2006 and the creation of larger banking institutions with a minimum capital requirement of N25 billion."

But presently we are beginning to realize that the banks are becoming vulnerable to laxity in the system. Therefore there must be a coherent and enduring reform coupled with the enhancement of the rules and regulations.

The brilliant and pragmatic CBN executive governor, Sanusi Lamido is rising to the occasion and is at guard to save the banking sector. The CBN chieftain deserves support from Nigerians so he can able to restore the integrity of the banking sector. This is not the time to be cynical and to read unnecessary meanings into the action he is taking to rectify the anomaly. Let us give him a chance and lend CBN our moral support. At same time we must also demand from CBN to be forthright, accurate and to avoid unnecessary mistakes that might cast shadow on their determined goal.

Emeka Chiakwelu, Principal Policy strategist at Afripol stressed that CBN must go further and come up with a doable comprehensive blueprint to reform the banking sector. To look into the rules and ordinances of the banking and readjust them where there are lax and weakness in the system. At this time of global economic melt down, the last thing Nigeria needs is to be weaken further by problems of the banking sector. The ramification will be capital flight and restriction of flow of capital for wealth creation in Nigeria. Already the Standard and Poor's lowered Nigeria credit rating from BB-minus to B- plus.

Nigerian Banks must not abandon the serious job of tackling inflation and building a stronger currency to the central banks. They can be a partner to monetary and fiscal policies of the government by adhering to rules and regulations of banking sector and not trying to exploit the loopholes for short time gain and by so doing weaken the banking sector.

Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.

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