While some experts believe the banking sector needs strong regulation to avoid another financial crisis, others think they are being over-regulated and coerced, Ademola Alawiye writes.

The banking sector in any economy serves as a catalyst for growth and development and is, therefore, critical to the economy in terms of stability and growth.

Central banks in different countries strive to evolve an efficient banking system, not only for the promotion of efficient intermediation, but also for the protection of depositors, encouragement of competition, maintenance of public confidence in the system, stability of the system and protection against systemic risk and collapse.

However, it is said that stiff regulation of banking activities and direct hands-on influence over banks are unlikely to promote sound system and will hurt development in the banks.

Following the crisis that rocked the sector and the collapse of top banks in the country in 2009, the Central Bank of Nigeria introduced various reforms and policies in order to avoid recurrence. Nonetheless, this is seen by some analysts and industry watchers as coercion rather than collaboration between the CBN and the banks.

To the Managing Director, Sotice Investment Company Limited, Mr. Adedayo Toluwase, regulation no doubt is needed to bring sanity into the banking sector as well as placing it in an internationally competitive status.

He, however, urged the CBN to always consult with the banks, which it regulates.

“The banking sector feeds on confidence, hence should not be left without adequate regulation. Nevertheless, the regulation should not drive the banks out of business,” he added.

The Chief Research Analyst, Stakes Capital Limited, International Corporate Research, Mr. Sanyaolu Kehinde, said the CBN was meddling in the affairs of the banks rather than regulating them.

He said, “The CBN should be focusing on supervising the operations of the banks and ensuring that they are complying with guidelines that if flouted can lead to a banking crisis. The CBN, it appears, is focusing on ‘innovating for the industry’, a job that should be left to the banks and market forces.

“The role of banks in the economy is anchored largely on credit to the right segments and sectors of the economy. The CBN should be working to help channel loans rightly to help the government’s vision. Furthermore, the fastest way to kill a bank is large bad debt portfolio; so, the CBN should be looking more closely at how the banks disburse loans, especially to insiders. All the major bank failures in Nigeria are linked to either insider lending and/or speculative investment.”

Speaking differently, the Head of Research, West Africa, Standard Chartered, Ms. Razia Khan, said, “I would guess the equation is pretty simple. With Nigeria having emerged from a banking sector crisis that might have been much more severe had it not been for regulatory action, it is difficult — at this point — to argue that regulation has been overdone.

“Given the downside risks associated with light touch regulation, the measures taken play a tremendous role in restoring confidence in the sector – from depositors, investors and counter parties. They are not overdone. The test should be – in the absence of such regulation, would people still have faith in the sector, and would they know that the mistakes of the past would not be repeated?”

A former Director-General, Securities and Exchange Commission, Mr. Wole Adetunji, advocated an urgent review of the Nigeria’s financial system to enable it compete with its peers across the world.

Adetunji, who spoke at the PEARL Award in Lagos, noted that the review had become imperative for healthy development of the financial system considering that the last of such exercise was done in 1978 under the military administration of Gen. Olusegun Obasanjo.

‘’I believe the Nigerian banking industry is over-regulated and that is not how it is done elsewhere. We need an independent body to regulate the banks, while the CBN will concentrate on monetary policy, inflation targeting and exchange rate stability,’’ he said.

According to him, government can do this by setting up a high-powered committee of experts to take a critical look at the financial system in order to come up with a code that will enhance the efficiency of the system as they have in Britain where there is a financial services regulatory authority.

Adetunji added, “The Nigerian financial system needs an overhaul. It needs to be looked into because the CBN does not have the capacity and resources to handle effectively the responsibility it has assigned itself under the current dispensation.”

He wondered how Nigeria would still be operating the Companies and Allied Matters Act of 1990, when Britain, from whom she copied the law, had reviewed and updated hers over the years.

The whole reform started when it became clear that poor corporate governance practices, overt and undue exposure to the capital market, oil and gas sector, poor risk management practices and inadequate disclosure and transparency about the banks’ financial position characterised the Nigerian banking sector.

The CBN, in June 2009, took a three-pronged approach to assess the financial conditions of the 24 banks, given their precarious and fragile state. One of the approaches was the special audit jointly carried out by the CBN and the Nigerian Deposit Insurance Corporation.

The exercise highlighted inadequacies in capital asset ratios and liquidity ratios as well as weaknesses in corporate governance and risk management issues in nine banks.

These banks were found to be in distress situation. They failed to meet the minimum 10 per cent capital adequacy ratio and 25 per cent minimum liquidity ratio. Apart from accumulating high non-performing loans, these banks seriously exposed the oil and gas sector as well as the capital markets.

Poor risk management practices in the form of absence of necessary controls measures were prevalent as the board and management of the banks failed to observe established controls. Although the remaining 14 banks had holes in their books, they were found to be in a relatively sound financial condition and did not require immediate intervention by the CBN.

Source: Punch