CBN: A regulator with operator mindset

This writer is one of the professional bankers that opposed the practice of appointing Central Bank of Nigeria (CBN) governors from commercial banks. Since the era of Paul Ogwuma, who was Managing Director of Union Bank as Governor of CBN, the trend has continued.

In the beginning, it was not like that. Available records show that the first indigenous governor of CBN was Dr Clement Isong, a PhD holder in Economics. The advantage of appointing an economist or someone who studied economics, especially economics of money and banking, in the university is knowledge and understanding of the Nigerian economy and international lending institutions like the International Monetary Fund (IMF) and World Bank. While working in such organisations is an advantage, it should not be a necessary condition because economics is an international subject with local adaptation.

“Do you find it surprising that the Tin Can Island port is overflowing with various types of imported used cars?”

For instance, in countries that manufacture cars or have technology for the manufacture of cars, used cars are very cheap. In many cases, the purchase price of the cars is written off after four or five years maximum. Theoretically, after four or five years of purchase, the book value of the car is zero. In practice, such cars are sold at their salvage value of, say, US$2000, which is a token of the original purchase price. So bought for $20,000 after being used for four or five years is sold for $2000.

In a country like Nigeria that does not have an indigenous technology for the manufacture of cars, indigenous business persons import such used cars and sell them at high profit. Do you find it surprising that the Tin Can Island port is overflowing with various types of imported used cars?

The point I am making is that the position of CBN governor should not go to a candidate that necessarily holds a PhD in Economics from Europe or America but to someone who studied in Nigeria and has the capacity to apply general economic theory to solving local financial problems. That will ensure value addition by the incumbent. Thus, a CBN governor must be versatile, or rather, understand money and banking in Nigeria, the structure of the Nigerian economy, and the Nigerian financial system. This knowledge will equip the incumbent with knowledge and the ability to make domestic policies that will address Nigerian peculiar financial and economic problems.

With due respect, the position of CBN governor, which is by political appointment by the President and commander in chief of the Nigerian Armed Forces, has been made very cheap. People who do not have an orientation or mindset for banking regulation have become CBN governors. What do they do?

First, they outsource monetary and economic management to the IMF. There is a mismatch between the structure of the Nigerian economy and the structure of advanced economies on which IMF policies are based. This mismatch results in motion without movement in the Nigerian economy.

Second, having come from commercial banks, they begin to make policies that revolve around banking operations rather than banking system regulation. A case in point is the Anchor Borrower’s Scheme.

That scheme made the CBN engage in retail lending, which traditionally is not the function of the Central Bank. It is a case of a regulator thinking like an operator; otherwise, such a policy should not have been made and implemented because it distorts the microeconomic environment. Sometime ago, the IMF reported that retail lending by the CBN causes inflation in Nigeria. Let it be said that new money is created when lending takes place.

The effect is that while the CBN is raising the reserve ratio for deposit money banks to reduce their lending activity, the CBN itself is engaging in unregulated money creation, which is why the IMF reported that retail lending by the CBN was causing inflation at that time. It is noteworthy that the CBN has suspended the Anchor Borrower’s Scheme. They did not stop it because it was causing inflation. They stopped it because the rate of default in repayment by borrowers became embarrassingly high and the recovery rate too low. This is one of the dangers of a bank regulator dabling into banking operations.

The recent CBN circular to deposit money banks on how to deal with dormant accounts in banks is another incursion by CBN as a regulator into banking operations. This topic was addressed comprehensively by this writer in his write-up titled DORMANT ACCOUNT CIRCULAR DEAD ON ARRIVAL published in the July 29 edition of the Guardian and need not be repeated here.

Like we said earlier, the position of CBN governor has been made very cheap by politicians at the highest level. Most of the political appointees are political jobbers with limited exposure to policymaking as bank regulators. Ideally, the CBN governor should be appointed from within the CBN itself, not from outside. These crop of bankers have a mindset of regulators and are trained as regulators. . Let me give the CBN the benefit of doubt in their incursion to retail lending because of their development function in a developing country like Nigeria. . However, it should be an exception, not the general rule of engagement and sustainable policy.

Finally, the position of CBN governor and, by extension, the Minister of Finance became cheap because they simply adopted the IMF template rather than putting on their thinking cap and solving Nigeria’s problems based on the structure of the Nigerian economy, money and banking in Nigeria, and the Nigerian financial system.

We mentioned the Minister of Finance because the mistake made by the Ministry of Finance during the Ibrahim Babangida era as Head of State in 1986 in devaluing the Naira has devastating consequences for the economy of the country. At that time, Nigeria was suffering from a balance of payment disequilibrium. Our balance of trade with trading partners was negative. It was touted that the naira was overvalued and must be devalued to align it with its true value. This was achieved by not only devaluing the naira to boost exports. The foreign exchange market was deregulated. The era of fixed exchange rates was abolished.

Textbook Economic theory has it that you boost exports by devaluing your currency. This is not without the usual economic assumption “all things being equal.” What is equal in the instant case is when you devalue your currency, you begin to invoice exports in your home currency to benefit from the devaluation. Tragically, Nigerian policymakers at the time did not do that. After the devaluation of the naira, they continued to invoice exports in dollars in an import-dependent economy that has import substitution as a development policy.

The above policy led to very high Naira requirements to import raw materials, which many manufacturing companies did have. This led to the folding up of manufacturers nationwide in the late 1980s and has continued till today. Sustained Naira devaluation forced many foreign companies to leave Nigeria. The naira will continue to deteriorate in value as long as we devalue it and keep invoicing exports in US dollars and other foreign currencies.

Chris Enyinnaya, Fellow Chartered Institute of Bankers Email:[email protected]