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Why
Should The CBN Governor Read This? By Abubakar
Suleiman I
am writing this piece with a very discomforting thought that ‘there is
no way the CBN governor will read this mail’.
I am convinced that it will be rubbished like every other
‘counter proposal’ from bankers and people with a stake in
maintaining the status quo. I
am also writing with the conviction that the presidency has accepted the
position of his governor and will not tolerate any amendment to his
proposal. Yet I feel
strongly that I must attempt to contribute to this discussion, and that
somewhere in the madness of self reservation, something good might come
out of this. Our
banks have to be strengthened urgently but there is a less
confrontational way to do this; 1.
The NDIC should stop charging a flat premium for all banks’
deposits. Banks that meet
the new capital requirement will immediately start paying less (since
the premium for insurance is a function of the risk) while the riskier
banks will have their premium increased or; 2.
The insurance cover for banks’ deposit should immediately be
adjusted such that banks with 25 billion capital have insurance cover
for customer deposit tending towards 100% (or 50%?) while the banks that
have a higher risk of distress will be covered for as little as 1% of
their deposit. This is the
way to immediately penalize banks that do not have sufficient capital to
cover their business. 3.
The CBN should immediately advice all government agencies of the
banks that meet their risk criteria and these should be the only banks
through which government funds must be disbursed or deposited.
It is
only fair that public funds should not be put where the governor will
not put his personal funds. 4.
To ensure that lending interest rate is immediately reduced, the
CBN must put a cap on deposit rate paid for public funds and must cap
the maximum percentage (20 %?) any government agency or ministry may
give to any single bank. That
will reduce the brokerage opportunity in the system and prevent
concentration of public funds in any institution. 5.
I don’t think DAS auction should be used as a basis for
enforcing compliance. Neither
the government nor the customer is exposed to any risk as a result of
DAS auction since banks are required to pre-fund.
The governor should do the following; (1) provide a credit line
for banks that meet or are in the process of meeting the required
capital. These banks may overdraw their account subject to a limit (5%
of their capital?)
if they have funding failure/short term funding need but deny poorly
capitalized banks this privilege and (2) prevent any bank that fail to
fund for a bid from participating in the DAS auction.
This of
course will only affect the banks that are not fully capitalized and
cannot overdraw their account. 6.
The banks that fail to recapitalize will be required to provide a
certain amount of capital for every business outlet/branch (say
NGN100million?) to ensure that they do not over trade.
Any request for branch
expansion will only be considered in this light and banks whose capital
does not cover their current branch network will be required to (a)
close those branches immediately or (b) inject the capital required to
support the branches. The
25billion naira proposed will cover 250 branches. 7.
Scale down the cash reserve requirement for large banks since
they are able to raise liquidity at very short notice.
This will compensate them for meeting your capital proposal and
encourage others to follow. The
immediate impact will be a flight to quality as investors seek to take
advantage of the insurance cover for large banks while small banks,
faced with the higher cost of insurance and lack of access to public
funds, will naturally gravitate towards your mergers and acquisition
proposal. The CBN must be
ready to use the full force of the law to recover the loans given out by
the sick banks and must be willing to spend public funds (with all the
required democratic approval) to pay depositors (not the N50,000
currently on offer). The
fear that they will be a run on the system has led to our current
situation where the CBN has spent so much in providing last resort
lending. Recent publication
has CBN’s ‘credit to banks’ (bad?) at NGN53billion
and this is likely to keep growing if we do not reform immediately.
It
is a general believe that most of the poor credit in the system has come
from insider and related credits. Such
money can be recovered if we seriously pursue the directors of the
institutions, after due process. If
the CBN spend NGN100 billion today to ensure the health of our financial
system, it would have prevented us from the near disaster in reforms
in Let
me repeat my proposal again; (1) take over all the ailing banks and
issue a public statement that the CBN will repay all genuine depositors
to the full (with government money) (2) Vigorously pursue the recovery of
all defective credit using the law and if necessary, publish the names
of those behind the defaulting companies.
Hand over all suspected bank directors/managers/fraudsters to the
EFCC. (3) Auction the branches and assets of the ailing banks (4)
announce the new deposit insurance guideline which will provide higher
cover for infants and the elderly and/or for savings account vis-à-vis
other deposits. (5)
Advice all government agencies and ministries of the new rule regarding
placements and disbursement with banks (6) enforce the new DAS laws as
stated above. Bankers have
argued that mergers and acquisition should be driven by the environment
and other business consideration, not legislation and I agree.
As the governor, you should proceed and create this environment.
That is your job and this is your opportunity to excel. Thank
you, Abubakar
Suleiman |