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Soludo and the banks

Published: 26-JUL-04

After only two months in office, Central Bank (CBN) governor, Charles Soludo, has hit the ground running with new capital and reporting requirements, and the banks are riled. Whether he sees the reforms through depends on the political will backing him, but if he succeeds, customers and investors should find the banking system, which constitutes some 90 percent of the financial sector, easier to chart.

In early July, Soludo stunned bank chiefs attending the weekly CBN-banks parley by announcing N25 billion ($180 million) as the minimum capital base - shareholders' funds plus most reserves - to be achieved within 18 months. From January 2006, only banks so endowed will access the crown jewels: public sector deposits and the government's foreign exchange (FX) auction. Those that cannot achieve the new capital should merge, he said.

In this, Soludo broke an unwritten rule: he had not consulted the bankers first. To hammer the point in, he said managing directors must sign their banks' regulatory returns. This may seem an adaptation of the USA's Sarbanes-Oxley Act on quoted companies, but it is a situation-specific response to the CBN's consistent findings that banks routinely render phoney returns.

The banks' response has been reminiscent of how they checkmated FX reforms in the 1986-1991 structural adjustment programme, when they used a combination of scaremongering about job losses, political lobbying, and media campaigns. Simultaneously, they ask that the new capital requirement apply only to 'national' banks, while others become 'regional' banks.

They quickly scored in the legislature. Both the House of Representatives and Senate banking committees promptly summoned Soludo to a closed-door scolding. Publicly, the senate committee suddenly recalled that the CBN had not been briefing the legislature biannually, which is statutory.

Its chairman wondered why the CBN with 'only N300 million' paid-up capital should be tormenting banks for N25 billion, blissfully forgetting that the apex bank is not a market-facing institution and lends only to governments and select banks in zero-default statutory arrangements.

The CBN actually has N3 billion paid-up capital and about N40 billion supporting reserves. Senate president, Adolphous Wabara, said the new requirement would encourage money laundering, as only scammers could afford to invest in banks. Wabara's family is associated with Hallmark Bank, with a capital base of less than $10 million, and managed by younger brother Marc.

Soludo has thus far stood firm, arguing the regulators' case, which is that the Nigerian banking system remains marginal. Most banks have less than $10 million capitalisation and the largest has about $240 million, compared with $526 million for the smallest bank in Malaysia - while one bank in South Africa has larger assets than all the 89 banks in Nigeria put together. Only two can handle foreign collections for the government's oil and other parastatals, while external reserves have to be domiciled with foreign banks. The banks are 'rent centres' that are focused on public sector deposits, treasury bills and FX trading, rather than on deposit intermediation. The result is an unclear and inefficient system, difficult to police and easy to manipulate.

The capital requirement has received strong public backing. A Guardian poll in mid-July found 75 percent support. Similarly, the stock exchange says 'any serious bank' can recapitalise. Its director-general, Ndi Okereke-Onyiuke, claims that at least 25 of the 31 quoted banks would do so. Although the exchange has not published portfolio foreign investment inflow for some years, prompting speculations that it has slumped, she said some may be assisted to make cross-border issues.

Most critically, Soludo appears to be effecting a specific presidential mandate to consolidate the sector. Apparently to strengthen his hand, the National Economic Intelligence Committee (NEIC) presented to President Olusegun Obasanjo a report last month, which stridently denounced banks for stifling the economy. It accused banks of charging upwards of 30 percent interest on loans, and paying 3 percent for savings. Moral persuasion, it said, had failed, and banks needed a hard lesson. Both NEIC and the CBN report to Obasanjo, who has for years been accusing banks of repressing small-medium scale manufacturing and agriculture, in particular.

The sooner bank owners stop their obstructionism, the more chance that they can realign in time. Soludo needs to tighten his plan, though. One loose end is the fate of foreign banks - Standard Chartered, Citibank and Stanbic - which have helped to upgrade operational standards for the last 20 years. Where their parents' willingness to recapitalise is impaired, they should express viable options. Regionalisation, however, should not be considered for any bank, as it would create another complex layer for those unwilling to adjust.

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