Analysis by Emeka Chiakwelu firstname.lastname@example.org
Central Bank of Nigeria (CBN) have infused the total sum of N600 billion naira ($3.96 billion) into the Nigerian banking sector to recapitalize the banks that have been plagued with liquidity crisis and credit crunch caused by excessive lending, profligacy and corruption.
The recent audits of the Nigerian banks by the Central Bank of Nigeria (CBN) have exposed the inefficiency of the banking sector. When the new governor of Central Bank came in he found out that some major banks were poorly managed and that corruption has eaten deep into the fabric of Nigerian banking system. Therefore the boss of CBN Mr. Lamido Sanusi committed himself into cleaning the financial mess.
Mr. Lamido Sanusi, the newly appointed chieftain of CBN, conducted initial audits of the some of the banks. “Those audits revealed that five banks holding 30% of Nigeria deposits – Afric Bank, Fin Bank, Intercontential Bank, Oceanic Bank and Union Bank were on the brink of collapse due to reckless lending.” There was a lax in the system and it was revealed that many loans made to some of the banks’ customers were neither repaid nor serviced but were left dormant.
The CBN bailed out the five banks with 400 billion naira. The managers of the banks were sacked and those customers including many important business tycoons and respectful bureaucrats were compelled to pay back those bad loans.
The governor of Nigeria’s apex bank Mr. Sanusi Lamido Sanusi went further with comprehensive investigation and audits of the entire banking sector. The audit findings including: lax in regulation, credit strangulation and low holdings among many banks. Due to the plunge in the deposit holdings among many of these banks, there was credit crunch in the system. The business cannot raise adequate capital from the financial institutions due to paucity of liquidity in the system.
Again the Central Bank of Nigeria on October 2 recapitalized another four banks at the amount of 200 billion naira – “Bank PHB, Equatorial Trust Bank, Spring Bank and Wema Bank — also judged to be facing a grave liquidity risk.”
Replenishing the holdings of the banks was a great move by the CBN, for that will make credit available to the business community and consumers. But that will not be the panacea to the problems of the Nigerian banks, which compels a comprehensive and invasive restructure of the banking system.
Lamido Sansui‘s Central Bank must re-evaluate the rules and regulations and come with more stringent regulations that will close all the loopholes in the system. The regulations must be enforced aggressively with verifiable checks and balances. The frequency of the audits must be increased together with random audits can become a deterrent mechanism to inhibit the weakness in the system.
Recapitalization and bail-out of the banks with this large sum of money – N600 Billion naira -may loom inflation. At the moment in Nigeria the inflation is hovering around 10-10.4% and it’s expected to dip below 10% in the next quarter. Therefore the commercial banks must be instructed to be meticulous in their lending in order to avoid excessive money in the circulation that might trigger inflation. Subsequently undermining the value of naira and further depreciation of already weaken naira.
When CBN prints and borrows money to recapitalize the banks that may lower the Nigerian credit rating. And it may unleash higher inflation and the devaluation of naira. When CBN finances its recapitalization by withdrawing excessively from the foreign reserve, it poses a threat to value of naira and credit standing of the country.
Mr. Emeka Chiakwelu is the Principal policy strategist at Afripol Organization. Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.