W/Africa May Face Financial Crisis
..Banks to brace up for challenges Governor of Bank of Ghana, Dr. Paul Acquah, at the weekend expressed fear of an impending financial crisis in the Economic Community of West African States (ECOWAS) arising from the planned single monetary system for the sub-region. He predicted the sub-region's vulnerability to crisis based on the proposed free movement of capital through trading without barriers, which would inadvertently increase financial risks.
Acquah who delivered the keynote at the maiden annual lecture of the Association of Corporate Affairs Managers of Banks (ACAMB) however said the challenge was to ensure that the banking system stabilizes and strives to avert the imminent crisis.
According to him, “as we prepare to allow capital to move freely across our borders in the sub-region, in a single monetary space, we should be mindful that all our countries will be open to financial crisis whether originating locally or abroad.
The challenging task is how to seek to avert crisis particularly in a regime of capital account liberalization, which is one key objective of the West African Monetary Zone (WAMZ) project.”
He said there was a “sound basis” for the prudential regulation and supervision of local and the global financial system noting that “it is in the interest of every economy to have a well-regulated financial system that ensures its stability and protects the integrity and safety of the financial markets.” He therefore called for the adoption international best practice in the regulation of sub-region's financial system in addition to the necessary best practice and standards of transparency in other areas of financial management. Ahead of the launch of Eco, the ECOWAS common currency in December 2009, Acquah charged banks to adhere strictly to the various fiscal and monetary policies of the Obasanjo administration.
He said the reforms in the banking sector especially the recapitalisation and consolidation of banks into mega-banks will go a long way in repositioning the banks to contribute more meaningfully to the economic growth and integration in the sub-region.
Acquah who spoke on “How Banks Contribute to Economic Growth and Integration in the West African Sub-Region” noted that banks have a critical role to play in the unfolding process of economic and monetary integration in the sub-region as well as in the entire monetary cooperation arrangements that envisage a single currency and a single African Central Bank.
He said that Eco, which would have been launched last month, was put on hold to allow member states of the economic union prepare adequately for the numerous challenges inherent in the project.
He dismissed speculations that the repeated postponement of the introduction of the common currency was due to non-commitment of the member countries. He said countries like Nigeria, Ghana, Sierra Leone, Gambia and Guinea were currently engrossed in various reforms that would place their economies on the path of low and stable inflation as a way of securing macroeconomic convergence, a fundamental pillar of the West African Monetary Zone (WAMZ) single currency project.
According to him, “the union that we envision will be an economic entity that would provide for three freedoms– the free circulation of goods, free movement of capital, and the free movement of labour with a unique central bank and with complete fiscal autonomy for each of its member countries.” This, he said, would mean a complete change in the fiscal and monetary regimes that countries in the sub-region now operate.
He noted that the convergence criteria for monetary union within the WAMZ have been designed to encourage countries to pursue disciplined monetary and fiscal policies pointing out that, “they are essential to set the stage, not only for a single currency but more importantly to build the foundation for successful monetary integration.”
Appraising the current regime of reforms in the Nigerian banking sector, Acquah who was a former Deputy Director at the International Monetary Fund (IMF), said that sound prudential regulation was essential and good for the banking industry to guard against the phenomenon of distress, ensure stability and sustain public interest in the financial system.
“The health of an economy,” he said, “is inter-twined with the health and soundness of its financial system and therefore no stone must be left unturned in the efforts to keep the sector healthy.”
He commended the Central Bank of Nigeria (CBN) for the initiative of the current recapitalisation of banks, but warned the banks not to see the N25billion benchmark as an end to building a strong asset base as empirical evidence had shown that a minimum capital requirement that may appear sufficient today might be woefully inadequate tomorrow.
He therefore, implored the regulators of the banking sector in Nigeria to be consistently proactive, fair and firm in performing their roles.
Acquah said that strong financial institutions operating in a stable macro-economic environment were the bedrock of financial stability in any country. He noted that banks ought to have strong capital base well aligned to their risk profile with quality portfolios of assets, high accounting standards and robust balance sheets.
“This is why banking regulators have to be firm. But they also have to be forward looking in setting the regulatory framework. The dynamics of the market today is such that banks and other financial institutions develop a wide variety of financial products with increasing frequency; and so the regulatory framework has to be adaptable to meet the changing demands on the banks and the financial system.
"The history of banking crisis all over the world indicates that without the assurance of the general public that banks are well capitalized, liquid and sound, the integrity of the financial system would be at risk. The system would be unstable, prone to a run on banks, resulting in their closure, financial distress for depositor; and the economy vulnerable to flight of capital, possible exchange rate depreciation and decline in output. In an independent economic environment in which we live today, the impact of financial crisis in one country is no longer localized but can spread rather quickly to other parts of the world.
"As we prepare to allow capital to move freely across our borders in the sub-region, in a single monetary space, we should be mindful that all our countries will be open to financial crisis whether originating locally or abroad. The challenging task is how do we ensure that the banking and financial system is stable and seek to avert crisis particularly in a regime of capital account liberalization, which is one of the key objectives of the West African Monetary Zone (WAMZ) project,” he said.
President, Association of Corporate Affairs Managers of Banks (ACAMB), Mr. Lanre Alabi, commended the governments of West African states for their current efforts to revamp the economies of their respective countries.