CBN reverses Soludo policies

The Central Bank of Nigeria intends to reverse some of the core aspects of Professor Charles Soludo's banking reforms.

The banner achievement of Soludo's tenure as CBN supremo were the reforms colloquially known as the "bank consolidation" exercise. The Central Bank raised capital requirements for banks from =N=5 billion to =N=25 billion, compelling banks to recapitalize and/or consolidate. In and of itself, it was a good thing; the federal republic had fewer, bigger, stronger banks that were better able to serve the country and to accelerate the positive trend of expansion into the West African, Central African and East African markets.

On the other hand, Soludo was too deeply connected to Nigerian politics to be an effective regulator. The management of the Nigerian Stock Exchange, personalified by Mrs. Ndi Okereke Onyiuke, was just as soaked in the federal republic's dirty politics.

In most countries of the world, it is impossible to separate business and politics, but in Nigeria during the recently ended Obasanjo administration, the connections between Nigerian apex-politics, Nigerian mega-business, and the "technocrats" (like Soludo and Nuhu Ribadu) who were supposedly in charge of enforcing the law and regulating both groups (politicians and businessmen) was downright familial. None of them was ever going to hurt a "family" member for any reason, even if that "brother" or "sister" was criminally wrong; indeed, the security of position of each of them (be it political position, economic position, administrative position, etc) was dependent on the rest of the family's support. Had Obasanjo's Third Term bid succeeded, Transnational Corporation of Nigeria (Transcorp) might have been even bigger than it is today (and would own more previously government-owned assets).

Add to that Soludo's personal interest in seeing his pet project succeed. The managers and directors of Nigeria's banks have been accused of presenting false data designed to make their banks look financially stronger than they actually were; the banks have also been accused of lending money to "investors" (more like lazy speculators) for the purpose of buying the shares of the bank that loaned the money, in order to artificially drive share prices up. It is easy to explain why rational self-interest (or greed) would motivate bank leaders to engage in these and other unethical or illegal activities. What is often not talked about is the fact that Soludo also has a rational self-interest in seeing his project succeed. The banks were not the only entities made to look good by artificially and falsely inflated numbers -- Soludo looked good too, his bank consolidation exercise looking like a stroke of genius. It is not a "Soludo" problem so much as it is a human problem; when people hear what they want to hear, and are told what they want to be told, I do not think they feel motivated to look deeper to see if they are being told the truth or not.

With all that said, the consolidation of the Nigerian banking sector into 25 so-called "mega-banks" was a positive. Indeed, I have changed my mind on one aspect of the reform I had previously considered negative.

I used to be concerned that Soludo's reforms left no room for specialist banks. In a new, geographically-restructured, six-state federal republic, there could be utility in having banks that are narrowly focused on the region-specific needs of one (or two) of the states. And while planning for mega-banks in a mega-economy, I though it necessary Soludo not forget we live in the real, actual economy of today, with a sea of Naira outside the formal banking system, and a significant proportion of Nigerian individuals and micro-businesses with micro-banking needs. There is utility in having community-based (per the Grameen model) micro-saving/micro-lending agencies that need not be "mega" sized.

As a citizen, I face one main problem with a lot of policy, policy announcements and policy implementation in the federal republic, which is the quality and quantity of information avaialable. The government, a private commercial bank, a regulatory agency, or a political/business/cultural leaders announces "XYZ" will happen and either nothing will happen, or something will happen but not XYZ, or XYZ will happen but with the usual add-on criminal/unethical money-draining activities, or it will happen and not achieve what they said it was going to (though they lie and insist it achieved everything), or it starts, looks good for a while and then is abandoned ....

Long story short, you never really know what will happen until it has already happened. With somewhat more information emerging about our banking industry in the Sanusi era, I am in a position to say I am less worried about specialist banks post-Soludo-reform. The =N=25 billion base is not a huge amount in dollar terms. If a few of the 25 current banks rebranded themselves as regional banks or as host bank to a network of independent micro-saving/micro-lending agencies, we could have our cake and eat it too.

As such, I support the Sanusi reform of the Soludo reform ... to an extent.

The new, Sanusi Lamido Sanusi-led CBN is reversing Soludo's reforms ... also to an extent. I cannot say for sure yet what exactly the Sanusi-CBN plans to do (we are back in the era of waiting to see what actually happens before we know what they have really done), but it seems their central idea is to create different tiers of capital requirement for different kinds of banks and financial service institutions.

What this means in effect is the one-size-fits all =N= 25 billion capital requirement set by Soludo for ALL BANKS will be weakened, and will presumably apply only to SOME banks.

Once more, the question of whether this is a good or bad thing depends heavily on what they actually do, and what it actually means for the industry when implemented.

It should be noted that BOTH Sanusi Lamido Sanusi AND Charles Soludo are in favour of further consolidation in the industry; I don't have the links, but I've read both men mention banks with capital bases of =N=70 billion to =N=75 billion. The difference being Soludo intended to compel more consolidation "by force" so to speak (his intention was to have Nigerian banks that could rival South Africa's Big Four banks in size), while Sanusi (who said Nigeria might end up with 15 banks rather than 24) appears to prefer the banks naturally merging of their own volition without CBN compulsion (presumably because eight or nine of them are weak in the aftermath of the 2008/2009 crisis).

So I don't think Sanusi is trying to reverse "consolidation" per se. It might even be the case (after our banks adjust for toxic assets and begin to report ACCURATE numbers) that some of the existing 24 will be revealed to have fallen below the =N= 25 billion threshold anyway, and perhaps the Sanusi move is to keep them legal and avoid panic among depositors, while stronger banks move to take them over.

I don't know. I am guessing.

In any case the Sanusi CBN does seem rather keen on opening up space for smaller, regional and specialist financial institutions. This is a good thing in and of itself (much as consolidation was).

I will say that I am not too fond of the Central Bank of Nigeria radically reversing itself every few years.

In one of my earlier blog posts, I cricitized Soludo for abruptly changing the rules for foreign corporations seeking to invest in Nigerian banks based on nothing more than his personal reaction (and the reaction of certain special interests) to a South African bank's takeover bid for a Nigerian bank.

I am likewise concerned that Sanusi's abrogation of the =N=25 billion capital base requirement is just as random and out-of-the-blue (though nowhere near as random as the Supreme Court's and Appeal Court's rulings on the Rotimi Amaechi issue).

Time will tell.

I hope Sanusi keeps up the emphasis on improving transparency, governance and decision-making in the sector, while spearheading reforms in the broader economy to unleash our full potential. Rather than aiming for "paper" growth in bank assets, we should have aimed for real growth in the Nigerian economy, growth that could consistently and sustainably continue until we could one day talk about 25 banks (or maybe 8 or 10) that are each the size of the South African Big Four, banks that would have attained that size by being deeply involved in tripling or quadrupling the size of Nigeria's GDP.

EDIT 26/03/10: CBN Governor Sanusi Lamido Sanusi is looking to set up a special regulatory agency for micro-credit banks. Sometimes I like the way he thinks; sometimes I have doubts. Come to think about it, this is exactly how I felt about Charles Soludo ....