Sanusi Lamido Aminu Sanusi: Assessment of current development in
the Nigerian economy and the CBN policy action
Speech by Mr Sanusi Lamido Aminu Sanusi, Governor of the Central Bank of Nigeria, at the
Maiden Press Conference, Central Bank of Nigeria (CBN), Abuja, 7 July 2009.
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It is with great pleasure that I welcome you all to my maiden briefing on the activities of the
CBN in addressing the challenges faced by the financial sector owing to the downturn in the
global economy. I, therefore, take this opportunity to appraise the CBN monetary actions in
the recent past and indicate the way forward in the immediate future.
As someone just coming from the other side of the aisle of the financial sector (the
regulated), you will appreciate that my remarks today as a regulator must be viewed as one
that is not bereft of the first-hand knowledge of what regulation means.
As you are well aware, the primary objective of the CBN is to promote sustainable output and
employment while maintaining price stability over time. These goals are not unique to this
country. Indeed, most central banks pursue the same objectives. The pursuit of these
objectives is central to eliminating uncertainties and distortions of high and variable inflation,
thereby, providing an economic environment that is conducive to growth.
The Central Bank of Nigeria has in recent times pursued these goals by influencing financial
conditions, that is, the cost and availability of credit as well as asset prices.
The growth performance of the Nigerian economy, has until recently, been sustained at a
relatively high level due largely to the sustenance of macroeconomic stability - a product of
effective conduct of monetary policy, financial sector reforms and relative improvement in
fiscal prudence. The current global financial melt-down has weakened growth considerably in
the first quarter of 2009 to 4.85 per cent from 5.75 per cent estimated for 2008 and
projections for the future are not encouraging.
To ameliorate the situation, CBN took measures to encourage the flow of credit for
productive investment. The MPR was reduced by 175 basic points in April 2009 while the
liquidity and cash ratios declined from 30 per cent and 2 per cent to 25 per cent and 1 per
cent respectively. As these actions did not seem to have yielded the desired economic
outcomes in time, the Bank resorted to direct control measures involving interest rate caps
and the re-introduction of exchange control measures.
The failure of the economy to respond favourably to the monetary easing measures reflected
mainly the under-developed character of the financial market and, concomitantly, the
weakness of the transmission mechanism of monetary policy.
The major challenge facing the CBN, therefore, is the critical need to strengthen the
implementation of the on-going financial sector reforms to achieve enhanced efficiency of the
financial markets on which the effective conduct of monetary policy depends.
In this regard, the CBN policies will continue to support government endeavours to promote
strong and sustainable growth without compromising its mandate to ensure the maintenance
of price stability. The conduct of monetary policy will be driven by market-based
mechanisms, thereby, building on the progress we have made since we abandoned the
direct control measures in 1993. Consequently, interest rate policy, which is an essential
component of monetary policy will be flexible and, as much as, practicable
marketdetermined in order to ensure allocative efficiency in the financial markets.
We will address some of the failures leading to high lending rates, including operational
efficiency in the financial system.
Finally, an efficient and effective transmission mechanism of monetary policy can only be
assured in an environment of safe, sound and competitive banking system.
In this regard, the CBN surveillance activities will receive new impetus to ensure efficient
management and good corporate governance that will complement the gains made under
the banking consolidation.
Please, permit me to elaborate on the four points just outlined.
Deepening the financial market
The financial market has not as yet attained the depths that are necessary to have efficient
transmittal of policy stance. As a result, the short term interest rates which should ordinarily
affect the lending rates to the real sector have not played this role. Bank lending rates
remained high and the spread between lending and deposit rates has been unacceptably
wide.
The role of the financial system in economic development cannot be overstated. Apart from
the critical role financial markets play in mobilizing savings and allocating them to productive
investment, an efficient financial market would provide a more stable source of financing for
both private and public sector. At present, there is a near total absence of debt instruments in
the capital market. As a result, banks are responsible for almost 100 per cent of the loan
taken by the private sector.
The Central Bank will work with the Tax Authorities to have a tax free yield curve and
encourage the development of a bond market. The Bank will also collaborate with Securities
and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) to reduce the cost of
bond issues so as to diversify funding sources away from banks.
Interest rates
A major impediment to the realization of development through the intermediation role of the
banking industry is the wide and persistent spread that exists between deposit and lending
rates. The interest rate spread, which is the difference between the bank's earnings from
loaned funds and its cost of funds is influenced by non-interest expense, prudential and
reserve requirements, market structure, inflation, credit risk and profit expectation of banks,
among others.
Available studies on interest rate margins and profitability determinants show that high
nonfinancial costs are largely responsible for the wide intermediation spread in Nigeria. These
costs often reflect inefficiencies in the operations of the banking system which very often are
passed on to consumers. The data also show a positive relationship between net interest
margin and overhead costs.
The Central Bank will work with banks to improve efficiency in the banking system. We will
encourage the banks to explore the idea of infrastructure sharing to improve efficiency and
reduce cost of operations. Other areas of cost cutting are through innovations that will reduce
the cost of delivery of banks products. It is expected that gains from banking efficiency and
other financial system reforms will reduce intermediation spreads.
In addition to these measures, it is expected that banks will realize that excessive interest
charges increase the risk of huge loan losses and financial instability in the medium term. It
is, therefore, necessary for banks to moderate short-term profit expectations and curtail
expenditure on compensation and bloated overheads. The CBN will work with the Bankers'
Committee and, through moral suasion, encourage a consensus on what constitutes a
reasonable margin. It is clear that in the present arrangement, all but the most powerful
companies are at the mercy of banks as fund providers, and the regulator must play the role
of consumer protection and ensure that banks charges are reasonable and consistent with
both the profit motive of the individual banks and in the interest of the system. Real interest
rates in double digits are much higher than the growth potential of GDP given structural
constraints.
Reform of the payments system
The payments system plays a crucial role in any economy as a channel of inter-sector,
interindustry and inter-company financial resource flows, thus, promoting economic growth.
Understandably, the Central Bank of Nigeria (CBN) accorded the payments system due
priority in its reform agenda of the financial system. Thus, the CBN in partnership with other
stakeholders embarked on extensive reforms of the payments system to enhance its safety,
efficiency and reliability. This effort culminated in the introduction of institutional
arrangements, operational mechanisms, interrelated IT infrastructure and instruments that
are gaining wide acceptability among service consumers in the banking industry.
The emerging payments landscape in Nigeria has generally been significantly influenced by
financial liberalization and integration across the globe and, in particular, developments in
payments framework including regulations, infrastructure and information and
communications technology. The first major step towards reforming the National Payment
Systems (NPS) by the CBN was the articulation of national payments system framework and
guidelines for all payments system initiatives with the objectives of generally, ensuring
availability without interruption, meeting as much of the users' needs as possible, and
operating at minimum risk and reasonable cost.
In retrospect, the CBN's payments system reform agenda has produced salutary outcomes.
The major developments so far have been in the areas of deployment of several requisite
infrastructures since 2002 and the establishment of the institutional framework to drive the
payments system reforms.
Therefore, the NPS would be a major driver of changes in the financial markets, and would
serve as a platform for supporting the integration of the Nigerian wholesale and retail
payments system with that of the West African Monetary Zone (WAMZ). The Bank will
continue to pursue the payments system reforms as outlined in the Financial System
Strategy FSS 2020. Specifically, the implementation of the seven key initiatives that will drive
the usage of electronic payments will be vigorously pursued. These initiatives include
Government supplier payments, person-to-person trade, salary and bill payments, business
and individual taxes and securities settlement.
Financial stability issues
The Bank has since March 2006 adopted a new code of corporate governance to engender
confidence in the industry and, hence, attract foreign investors in the sector. Risk-based
supervision and consolidated supervision have also been adopted in the industry to further
boost confidence and ensure stability of the system. In addition, common accounting year
end for all banks and international financial reporting standards aimed at improving integrity
and comparability of both financial reports and data is to be adopted in the industry by the
end of 2009 and 2010, respectively. Also, greater emphasis has been placed on e-FASS as
a tool for banks' returns analysis for speedy identification of early warning signals.
The Bank has also reviewed the Contingency Planning Framework for Systemic Distress in
banks. Others include the introduction of Credit Bureau, deployment of resident examiners to
banks since January 2009 as well as standby teams of target examiners being deployed to
any bank at any given time to ensure timely regulatory action when necessary.
Despite the measures taken by the CBN, there have been concerns in recent times about the
health of the Nigerian banking system occasioned largely by the system's exposure to the
capital market and the effect of the global financial crisis as well as exposure to oil marketers
and Ministries, Departments and Agencies (MDA). While there is no doubt that the banks
were challenged in the face of these developments, there is no evidence, thus far, that our
banking system is facing a crisis as has been reported in some newspapers recently. All
reports purporting to suggest that some named banks are not sound or shaken are
unfounded and we urge journalists to exercise caution and show more responsibilities in
reporting and quoting unofficial sources. Our view is that there are stress points in banks'
balance sheets (margin loans, proprietary positions, oil marketing names, unsecured large
exposures) and these are being dimensioned. An appropriate resolution framework will be
developed in consultation with reputable independent advisers, and the market will have
information on steps being taken at appropriate junctions in the process. We reiterate that,
based on the totality of information available to the regulator, there is no basis for suggesting
that the system is at risk. We also re-affirm our commitment to stand behind every financial
institution and work with its board and management to ensure a smooth resolution of any
issues that may arise as an outcome of the diagnostic process. No bank will be allowed to
fail.
Going forward, the CBN will strengthen the regulatory and supervisory framework and
enhance monitoring of the operations of the DMBs to ensure that they remain safe, sound
and healthy to support the macroeconomic objectives of the government, in general, and
monetary policy, in particular.
To this end, the CBN will continue to ensure the maintenance of public confidence through
appropriate disclosure and would reinvigorate the policy of zero tolerance on all
unprofessional and unethical conduct. Banks would also be required to further strengthen
their risk management process, while the present supervisory methodology of risk-based and
consolidated supervision with special emphasis on macro-prudential regulation and sound
stress testing practices would be pursued more vigorously.
More and rigorous emphasis would be placed on the implementation of the Code of
Corporate Governance for banks in Nigeria. Banks that have not fully complied with the
requirements of the code would be encouraged to do so. For the avoidance of doubts,
enforcement of the code of conducts on the board and top management of banks, especially
in the areas of display of professionalism and high ethical standard shall not be
compromised. In addition, we will put in place a code of conduct for regulators to ensure that
our own staff live up to the high expectation of the nation.
Meanwhile, the on-going assets' quality audit by the CBN and NDIC would ensure that
appropriate policies are put in place to address identified lapses.
It should be emphasized that the determination of the health of banks is a continuous
exercise. The CBN on its part will continue to monitor developments in the sector and proffer
appropriate policies to ensure that the Nigerian banking system remains sound and stable.
The decision of the MPC this morning to guarantee inter-bank exposures and Pension Funds
Administrators (PFA) placements in the banks is aimed at reassuring the market and
stabilizing the system while the reform process continues over the next 6-9 months. This
should stop the current overheating in the system and exert a downward pressure on interest
rates.
Conclusion
To conclude, let me reiterate that the conduct and implementation of monetary policy will
continue to be dictated by the prevailing domestic economic conditions. Thus, the monetary
policy framework will continue to be transparent and market-driven using standard monetary
policy instruments, like cash reserve requirements, appropriate interest rate policy, open
market operations, discount window operations, foreign exchange market intervention,
amongst other market-related tools.
Furthermore, while achieving a low interest rate regime remains the principal target of
monetary policy, the determination of interest rate will continue to be flexible and driven by
market forces - demand and supply conditions, amongst other factors. Similarly, our
exchange rate policy will be transparent and dictated by our economic fundamentals while
remaining market-driven at all times, but with due cognizance of ensuring that instability does
not creep into the various segments of the foreign exchange market.
Overall, our ultimate goal is to establish a credible monetary policy regime that will facilitate
the attainment of our two key mandates of ensuring price and monetary stability and
promoting financial soundness and stability, to support government's macroeconomic
objectives of high and sustainable economic growth and low unemployment, in the medium-
to long-term.