Stripped of all the strong language and the ferocious recriminations that have been generated by Dele Momodu’s article on Thisday 22nd September on the Central Bank Governor, I believe that the main substance of the original article is whether Sanusi adopted the right approach in dealing with what was not entirely a new situation in the Nigerian banking industry. What are the repercussions of (1) the choice of remedy (2) the style adopted by the CBN governor, Sanusi Lamido Sanusi?
The first and second questions both relate to Dele Momodu’s point that, in trying to punish some bank executives for certain misdemeanours, the Central Bank governor did more damage to the banking sector.
Back in August 2009, exactly two months and ten days into his tenure as the Governor of the Central Bank, Sanusi Lamido Sanusi held a press conference to inform the nation that the banking sector was at risk from the lending activities of five banks. What led to this discovery, according to the Governor, was the fact that about five banks had been frequent users of funds at the CBN Extended Discount Window (EDW). Following this discovery, the CBN governor ordered a special examination of the five banks which revealed that these banks were suffering from liquidity problems due, as he suspected, to non-performing loans. The banks, according to the text of the governor’s speech, were put in this situation by “poor corporate governance practices, lax credit administration processes and the absence or non-adherence to the banks’ credit risk management practices”. So went the narrative. But what was the evidence?
A very good place to start is the activities of the banks at the Expanded Discount Window. And here is where the questions start piling up. According to the literature, the Discount Window is a source of short-term funds for financial institutions experiencing liquidity problems. The Discount Window operation is therefore consistent with the Central Banks’s necessary role as a ‘lender of last resort’. So the question to Sanusi is: why was it such a big deal that these banks were using the facility? At the time, he claimed that it was because the ‘guilty’ banks were “permanently locked in as borrowers”. But the next, very crucial question is this: how ‘permanent’, and what is the duration allowed by the Discount Window for financial institutions to repay their debt?
By convention, the Discount Window is an “overnight” credit facility. Following the global financial crisis, most discount windows were modified to allow for a considerably longer period. Hence the evolution of an ‘Expanded’ Discount Window. On October 28, 2008, the Central Bank of Nigeria issued a circular (BOD/DIR/CIR/2008/GEN/3/17) to “all deposit money banks and discount houses” ‘expanding’ its discount window credit to a tenor of 360 days. Now (and this is extremely serious), between the time the EDW was established (October 28, 2008) and the day the CBN governor struck, (August 14, 2009), the EDW had been in operation for exactly 300 days. So it means then that, theoretically, even if these banks had borrowed on the very first day the EDW came into operation, it would not have been possible for them to have demonstrated that they “were clearly unable to repay their obligation” as claimed by the CBN Governor. So this, at the very least, puts a lie to his claims that he first became alarmed by the activities of these banks at the EDW. If, as far as the EDW logic goes, these banks were carrying out their operations within the rights granted by the rules, and were well within the time limit to meet their obligations, why then was the hurry?
So maybe there is reasonable ground to question the CBN Governor’s motives, as Dele Momodu did.
Looking back at the sequence of steps taken by the CBN Governor raises even more serious questions, both about his credibility as a Central Banker and his motives in taking the actions that he did. According to the literature, the discount window exists to provide short-term liquidity for banks when the market is unwilling to do so. It is therefore surprising that the same Central Bank which was guided by this logic in establishing the EDW suddenly forced the banks back to the same situation which provided the initial justification for its establishment in the first place. By this time (See Sanusi’s August 14, 2009 speech), the CBN started guaranteeing the inter-bank market, without which “almost four banks would not have been able to borrow in the inter bank and would probably have collapsed”.
Now, in providing these guarantees, the CBN under Sanusi effectively chose to assume greater financial liability (since the cost of borrowing at the inter-bank market is significantly greater than the cost of money at the discount window). So why would the CBN close the discount window, only to turn around to subject public funds to higher market risks? The only plausible explanation for this is that, it seems somebody was desperately trying to amplify the problem in order to justify a crucifixion. Even when it meant subjecting these banks to greater exposure and at increased cost to taxpayers.
And, were they actually 5 banks? It seemed that, in the heat of the moment, no one actually thought to question Sanusi about the highly speculative tone of his presentation. Looking again at the text of his famous speech, it appears to me that the CBN governor was not really sure if there were 5 banks, or 4 banks, or 3. For instance it says in the CBN governor’s speech that, at the time he was appointed, “four banks had been almost permanently locked in as borrowers”. So there weren’t completely five of them, were they? And were they ‘locked in’, or ‘almost locked in’? Then, later in the speech, the governor said that there weren’t quite four, but (again), almost four of them who “would not have been able to borrow in the inter-bank and would probably have collapsed”. So, how almost? Three? Or two? And would they have collapsed, or probably?
While it would be very prudent for a financial sector regulator to take keen interest in any sign of distress displayed by any bank, it is downright reckless (even irresponsible) to take such drastic action on issues that he had largely prevaricated on. It looks clearly mischievous.
Of course one is not suggesting that the CBN governor should have waited until the said banks got into proper trouble. The real point being made here is that, what are the practical steps that were taken before applying such drastic measures? Beyond driving the banks back into the inter-bank market to compound their problems and expose them, Sanusi seemed to have done nothing else in the two month that he had been in charge. He said in his speech that the CBN took the step to guarantee the inter-bank market to give them time to investigate the banks. But this does not make any regulatory sense. Banks’ examination is usually undertaken as a matter of statutory responsibility. Between 2007 and 2009, the NDIC carried out a total of 117 of such examination/investigation, some in collaboration with the CBN. You certainly do not need any special ceremony to do that. All Sanusi needed to have done was spend sufficient time as the new head of the CBN to ensure proper banking supervision and enforce corporate governance practices in the banking sector.
Since he determined that poor credit administration was the reason for the banks’ liquidity problems, would it not have been more appropriate to enforce the rules and use the same instruments he is now using to collect the debts? Why did he need to demand that the banks make full provisioning for those loans in one fell swoop without a proper provisioning schedule that gives those banks the required time to adjust? It seemed now that Sanusi needed to do that to drill a deep enough hole in the banks’ equity funds, in order to justify new capital injection – hence the eventual CBN bailout; because it is only through this route that he can forcefully take over those banks.
You certainly don’t demand full provisioning for loans you have not taken time to certify as bad debts. According to the literature, bad debts are debts that are absolutely uncollectable because (1) all the measures to collect have been exhausted (2) the debtor is bankrupt and (3) the cost of collection exceeds the amount to be collected. It is definitely not bad debt when it is clearly the case that the debtors are unwilling to pay, and would pay if forced to do so.
But of course it didn’t matter since Sanusi would rather do a presidential-style national broadcast to announce his arrival than do the appropriate thing. Even when it is very clear that nothing kills the financial system faster than negative publicity. It turns out that the run on the banks created by this tackles and self-serving action is the worst we have experienced in a long time. In the ten years preceding Sanusi’s arrival and in the two years since, no other year has recorded a decline in total demand deposits in the corresponding period (August – September, 2009). It is the only year in more than 12 years (according to CBN data) when the total amount of demand deposits as at December fell below the amount at the beginning of the year. Apart from the fact that it is the most ‘runnable’ deposit category, demand deposits constitute the largest (55 – 60% in 2008/2009) of total deposit funds in the banking sector. On the micro (individual household) level, most Nigerians would know somebody who withdrew their money in panic only to loose it to phoney property deals.
But this is a story Sanusi is not now telling us, even though he has the data. Sack bank managers if you must, but do you have to destroy the financial system and the economy just for self-glorification? Did the other Sanusi (Joseph) not remove the management of some banks, most notably UBA for the same corporate governance issues? Is that bank not standing strong today?
It may still take some time before we summon the courage to take proper stock of the cost to Nigeria’s economy of Sanusi’s actions. I have heard some people bring up the moral hazard argument, but I can tell them that nothing creates a bigger moral hazard in the credit market than providing unnecessary bailouts, which creates ex ante incentives for banks to take greater risks the next time. In our case, a bailout was clearly unnecessary, only made to look otherwise because the regulator was brazenly manipulating the numbers. We were clearly ambushed then, and while it may be too late for an inquisition, the questions are necessary in order that we do not fall for such mischief ever again.
Uche Igwe, a Governance expert, wrote in from firstname.lastname@example.org