• Thursday, February 29, 2024
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BusinessDay

Repairing trust in Nigeria’s central banking system

How reforms can boost productivity as money supply rises 77%

In my remarks today, I would like to offer perspectives on some of the lessons learned over the past months. Specifically, I will focus on how the central bank can effectively manage trust and the importance of repairing trust once it has been broken. I should make it clear that the views expressed in this article are solely my personal opinions.

I spend time engaging in discussions with bankers and gathering insights from reviews online, and I am left with no doubt that there are numerous missed opportunities for enhancing trust in the banking sector.

I want to begin by welcoming the investigation into the affairs of the central bank as part of the new reforms in the financial sector. It is worth noting that since its establishment by the CBN Act of 1958 and its commencement of operations on 1 July 1959, trust in the central bank has never been lower.

As you will understand, my preoccupation at the moment is repairing trust. Therefore, some clarifications are necessary before proceeding.

Simply put, trust is the confidence in one’s capabilities and the belief that one would behave in the way that is expected. Distrust, on the other hand, is the opposite of trust – it involves suspicion about one’s undesirable behaviour stemming from knowledge of the capabilities and antecedents. This simply means that for trust, there is a positive expectation based on ability, integrity, and character, while for distrust, there is a negative expectation that one will not act as expected.

Reflecting on recent events, including the arrest of the former bank Governor, the circulation of alleged draft reports online prepared by the special investigator (which may not accurately represent the final report to the president), and claims of mismanagement, along with assertions that the design of the Naira was not legally approved, it becomes evident why a shadow of distrust persists over the central bank. Nobody wants to hear such concerning news about their country’s key financial regulator.

Let me move on to deposit money banks, as another example.

As this audience will know, a significant number of the public harbour distrust towards their banks. A quick desktop search would readily reveal that nearly every bank struggles to pass the fundamental test of minimising distrust within their operational systems.

The rebuilding trust phase involves consistent and demonstrable actions that align with the promises made during the reconciliation process.

A more penetrating analysis, for instance, captures widespread concerns regarding difficulties in withdrawing money when needed, unnecessary bank deductions, issues around transaction reversals, and unconsummated transactions.

What I’d like to explain is that even the reputed ‘big banks’ seem to fall short of meeting the expected standards. An important qualification to what I mentioned earlier is that the responsibility of ensuring trust lies with the central bank and not just with deposit money banks.

Now, I would like briefly to change tack and discuss what the central bank needs to do to repair trust in the system. In my recent research, I found that trust repair can be considered through two sequential but fundamental tactics: reconciliation and rebuilding.

In the reconciliation phase, apologies to the public are the most effective steps when found to be sincere, and an admission of responsibility is conveyed. On the substance of this, the public needs to see a sincere acknowledgement that lessons have been learned from past missteps—while ensuring a genuine commitment to reform.

The rebuilding trust phase involves consistent and demonstrable actions that align with the promises made during the reconciliation process. This should include implementing robust controls that actively promote ethical business practices across the banking system.

But we also shouldn’t kid ourselves.

So long as deposit money banks continue to engage in arbitrary deductions and inefficient services, they will always be vulnerable to distrust from the public. Regulation, in itself, does not eliminate that risk; actions are what need to be taken. Actions, such as fines and sizable sanctions, can reinforce that concrete steps are being taken to repair trust in the system and mitigate likely recurrence.

Furthermore, enhancing the architectural framework of banks is essential to guarantee the provision of high-quality services while concurrently boosting liquidity within the system. That is why the central bank has an important supervisory role in ensuring that these actions are not just rhetorical but are embedded in the day-to-day operations of the banks.

I should conclude.

It is essential to acknowledge that the assumption of bank independence should not be taken for granted, as it has the potential to erode trust and damage public perception. An illustrative example is the ongoing public criticism faced by the central bank in its management of the ‘ways and means’ advances.

For this reason, I expect that a constructive and effective approach should include heightened sensitisation for policymakers and the public regarding central bank policies. This includes a realistic portrayal of what the central bank can and cannot accomplish. Finally, trust is crucial, but, in my view, it needs to be currently well-anchored in the expected standards of ability, integrity, and character, which are important for repairing trust. It is only when the public witnesses these efforts materialise that trust in the banking sector will be firmly repaired.

 

King Omeihe is the President of the Academy for African Studies and serves as a Senior Economic Advisor at Marcel. He holds the position of Associate Professor at the University of the West of Scotland.