In a recent interview, the new CBN governor, Lamido Sanusi, made very clear his intentions and priorities in the first few months of his term. He gave the strongest indication that he was focused in ensuring that there would not be a collapse of any bank in the country. We agree with this very important conclusion. This conclusion is anchored on transparency, accurate disclosure of weak assets in the banking industry and avoidance of systemic risks.
To ascertain the level of impaired assets, especially as regards the exposure of banks to the stock market, those relating to the consequences of the sudden oil price decline last year, and the property market, the CBN had instituted a two-month period audit. The audit process is expected to verify all claims and links of banks to margin loans.
Though figures of above N400 billion have been mentioned in the past, Sanusi has instituted an audit process of the bad loans on banks balance sheets, especially those related to margin loans for share purposes. Until the process is completed, the CBN will not be able to decide the best option of helping banks that may be in any form of difficulty. “What banks need to understand is that banking is a business,” he said. “They’ve got to take their losses, and then we will do everything we can to make sure they don’t go under,” Sanusi emphasised.
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The audit process will also help in identifying any individual bank risks and the process that will follow will mitigate any form of systemic risks, and mergers between banks will be under consideration and encouraged. The success of this process will be determined by the extent to which the general public can be sure of the “health” of each bank. This knowledge is critical to the progress that will follow in the banking industry and the financial industry, especially its markets.
The future of the banking industry, anchored on necessary disclosures, sound and solid accounting principles, and transparency, is important to the progress of the Nigerian economy. Primarily, it will help prevent different false alarms and rumours that are based on very shaky and little information. A growing and aspiring economy such as Nigeria cannot continue to navigate through crisis that could have been avoided if required information were provided as and when due.
In this context, we believe the banks have started to take important and critical steps in reassuring the investing and banking public in the key area of accounting transparency and integrity. There is now a growing list of banks that have started to adopt the international financial reporting standards (IFRS). The common adoption of this standard by Nigerian banks will afford the investing public the opportunity of standard international comparisons. This will only lead to a greater interest in Nigerian banks and investment in the country in general.
Because of the impact the audit process is having in the stock market, as market values have generally declined in response, critics argue that the timing of the audit is wrong. They argue that the recovery in the market should be allowed to continue so as to improve investors’ confidence. While we agree that investors’ confidence needs to improve, we believe ascertaining the current situation in the market in relation to banks exposures will provide a better platform for a more sustained recovery of the stock market. Indeed, we hope that the completion of the audit process will lay a foundation for a very vibrant and sound banking industry. It will provide an end to uncertainties that have fuelled remarks in many circles in the last year. It will thus provide a basis for continued financial stability in the Nigerian banking industry.
