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2009-07-01:Q: Given the fact these mistakes have been made, given the questions that have been raised in the past about the level of supervision at the central bank, how will you ensure that the central bank as an institution can regain its credibility?

Q: Given the fact these mistakes have been made, given the questions that have been raised in the past about the level of supervision at the central bank, how will you ensure that the central bank as an institution can regain its credibility?

A: A lot depends on what we do. These problems are not going to be fixed in a week or two. You’ve got to deal with the immediate problems of liquidity and the survival of institutions. You’ve got to deal with the issues of solvency and capital adequacy. You’ve got to deal with the toxic assets – and those are all complex issues, how do you take them out? And if there is a cost to be borne by the Nigerian people, where that money is going to come from at this time of economic melt-down. You’ve got to deal long-term with risk management systems, risk-based supervision, how to deal with subsidiaries, cross-border transactions. It’s an ongoing process. The market begins to have confidence when it’s convinced that the regulator understands what these issues are.

Q: Would you consider bringing in an external actor such as the IMF which would help the central bank to perform these sorts of tasks in a way that would restore that credibility?

A: We work very closely with the IMF, and we would work closely even with private sector operators. I would work with the World Bank, I would work with international investment banks who have experience in those areas, I would work with local investment banks and regulatory agencies, so there are a number of parties involved. There is the level of giving ideas and bringing experiences from other countries. There is the level of bringing in resources and capacity building within banking supervision within the central bank, to strengthen the capacity of employees to understand banking risks. There is the question of capacity building within the banks themselves. My primary responsibility at this point in time is to restore health and confidence in the system and not hasten its death — it’s just that balance. The fundamental reasons for capital coming to Nigeria remain there: you’ve got a country of 150 million people, you’ve got an economy operating far below its capacity. If you do the right things on power and infrastructure and stimulate growth, potentially the upside is amazing, but there are risks.

Q: Going back to the question of margin loans, you’ve said that you want to diagnose the problem. What are the options that you are looking at for dealing with these assets once you’ve figured out how big the problem is?

A: The first thing obviously is that banks have to recognise losses if they are losses. We’ve got to know how much is true capital that every bank has. We’ve got to look at the possibility of taking those assets off their books. If a bank has weak capital and it wants to raise capital, the investor might want to have clean balance sheet…That might mean sterilising those assets, holding them until the market recovers and so on.

Q: Are you considering the idea of creating an asset management company that would buy up these toxic assets?

A: I think it’s a very strong possibility, and it’s one of the options on the table. The only thing is that the asset management company, even if set up, would only take off assets after the owners have taken the hit. We’re not going to take on assets at cost. They’ve got to be properly written-down on the books of banks. What banks need to understand is that banking is a business. When the stock market was going up some banks took risks and made a lot of money from the stock market. If it goes down, they take the losses. As somebody once said, you cannot privatise your profits and socialise your losses.

That is for me a minimum. They’ve got to take their losses, and then we will do everything we can to make sure they don’t go under.

Q: What if there are some banks that have sustained so much of a loss that they can’t survive, what will happen to them?

A: My intuitive feeling is that there isn’t any bank that cannot survive in one form or the other, either in the form of getting some of the stronger banks to put in equity and merge with them or inviting foreign banks and letting them agree the conditions for them to invest capital and management and revive the bank. Fundamentally, these banks have large branch networks, they’ve got huge investments in infrastructure, they’ve got a wide and diversified customer base, they’ve got therefore access and potential for growth. Banking remains fundamentally an attractive business, and for that reason there is always the possibility of finding some solution.

Q: It sounds from what you are saying like there is a strong chance that there may be more consolidation in the sector as the extent of the losses at some banks become known?

A: That’s my feeling, that there will be consolidation, that’s what I think.

Q: How many banks would you like to see in Nigeria?

A: I don’t have a target. My sense is that we might end up with fifteen banks.

Q: This consolidation may be triggered essentially by the audit process that you’re doing. As the regulator, will you step in to encourage consolidation among certain banks if you feel that it is necessary?

A: I wouldn’t force any consolidation but I think it’s important to send out signals to the banks that may have difficulties that merging with stronger banks is certainly a very good possibility for saving themselves and saving their shareholders and their businesses. And we would try to create an environment that encourages that. We would try to encourage foreign banks that are coming, not just with money, but with management and systems, to come in and acquire. But we will not force any bank, or push any bank to merge. We are not going to have a Bank of America-Merrill Lynch situation.

Q: As I understand it, under the current regulations, there is a limit on foreign ownership?

A: In theory yes. The laws of Nigeria do not restrict that. The central bank obviously has the authority to approve. What we have today is that the central bank is not likely to support a foreign bank owning more than 10 per cent of a top tier Nigerian bank. That is something that in my view needs to be looked at again.

Q: Where would you like to see the upper limit?

A: I would not place an upper limit.

Q: So you would open the possibility that a foreign bank would acquire a Nigerian bank outright?

A: That’s the law, those are the laws that we have in Nigeria.

Q: Have you been approached by any foreign banks who are seeking to take a position in Nigeria?

A: I have not met any foreign bank.

Q: But it sounds like your vision for the sector then is perhaps, again, a different one from your predecessor who came out a few times and did make statements about limits on foreign ownership. You are sounding like you would prefer to open the field very much to foreign players?

A: I think my vision has always been different from my predecessor’s. We’re two different people. On this particular matter, my view has always been different. Look at this way, if you look at the register of many banks, you’ve got shares that are owned by nominees. Now I don’t know who these nominees are. And I believe under the laws in which they are set up, the nominees are not obliged to disclose the persons behind them. So if as governor of central bank I am okay to have a bank owned by nominees and I don’t know who owns them, why wouldn’t I be comfortable with a bank owned by a Barclays, or HSBC or China Construction Bank, who I know? For me it’s a no-brainer. At the end of the day, the bank takes on the character of its owners. The greater transparency I have in the ownership of a bank, the better run that bank will be.

Q: Is your feeling then that we’ll see foreign banks keen to get into Nigeria, and doing so in the coming months?

A: I do hope they will be interested, and I do hope they will understand that the economic fundamentals remain very strong. Apart from this problem with the financial system, oil prices have turned, the government is clearly re-energising itself. There is progress in key areas. Inflation is coming down. We are going to see what we can do about having low interest rates as much as possible and encourage the real sector to grow. I would hope that the analysts in those banks would see that as long as the central bank is addressing the issue of confidence and transparency in the financial system, Nigeria still remains the best investment destination on the continent.

Q: How long do you think this system of auditing and then imposing tougher regulations and addressing the problems of the weaker banks will take before you have the sector on the sort of footing you would like to see it?

A: A lot depends on what kind of information we come up with. I have set myself a target of December, and the very latest March, to have concluded everything I need to do. We could just find that all that the banks need is to declare losses and they have got enough capital do that and we move on, or we could find there is capital that could be brought in either by the owners or by other people. Or we could find – and this is the reality – that some have started talking to other partners and they’ve just not disclosed it, and a time will come when they will announce that they are ready.

Q: Given that the central bank has allowed banks to reschedule their margin loans until the end of December this year, do you think that will serve to concentrate minds and make sure that these issues are tackled?

A: I don’t have any issues with restructuring, even beyond the end of this year. What is important is that if they are non-performing (loans) then they should be recognised as that. If they are restructured and all the income is taken in on the assumption that it’s going to come back then we are living in the dream that the markets will go back to the highs that they were at and that’s not likely to happen. We would work on the most conservative and prudential basis and see how things go.

But as a risk manager I can tell you that margin loans are not a problem they are a symptom. The real problem is weaknesses in risk management systems. You may find that a bank has serious margin loans problems but it also has other problems in other portfolios, whether it’s oil and gas or real estate and so on, so we don’t know.

Q: You’ve outlined measures that you want to take that will take a considerable amount of work presumably. Do you think the central bank itself actually has the institutional capacity to carry these out?

A: I did say that we are going to work with institutions like the IMF on capacity building. I agree totally that there are skills issues. I was a risk manager out there, and I used to tell the regulators that they never really asked me the right questions. Part of the advantage of me being here is that it is really an area where I feel pretty comfortable. I have made my own mistakes as a risk manager and I have learned from them. But I have also come from managing risk in a big financial institution therefore understanding how do you look out for the kinds of things that could place an institution at risk? I will try to pass on a lot of that to those in banking supervision and give guidelines on exactly what I want them to look out for.

We’ve seen the central bank try to adopt measures in the past that have essentially been reversed under pressure from the banks themselves.

Q: We know that many senior bankers are powerful individuals in Nigeria with powerful friends within government. We’ve also seen in many other parts of the economy attempts of the kinds of reforms you are talking about running aground because of entrenched vested interests that have an interest in the status quo. What gives you confidence that you will be able to muster the political will to challenge the vested interests?

A: The first thing is that I am not a politically-connected person and I’m not part of any vested interests, but the fact that I was appointed by the president to this job would suggest that he is willing to have change. The personal assurances I have received from the president are that he would give me his total support in everything that I feel I need to do to sanitise the financial system. My sense is that he was concerned about the same questions you are raising, about concerns being raised about the credibility of the financial institutions, and he would like those to be addressed. At the moment I can only move on confidently with the support of the president.

Q: You mentioned that an asset management vehicle may be one of the possibilities you would look at in terms of dealing with the margin loans. Do you think the government is in a position to be able to afford those assets?

A: I told you it was one of the options we are looking at that. At the moment we do have money given to banks in the expanded discount window and it’s been there for some time. We would do everything we need to do. How we do it, how we disclose it, will have to be based on a realistic estimation.

Q: Could you envisage a situation where there would be government-appointed boards having to run some of these banks?

A: I would not like to have that. It would be a last resort. They’ve got boards. If you need to have a transition in the institution, the boards can appoint a new CEO. I don’t think there is compelling evidence that in the past having government officials managing financial institutions has worked. My preference is to get private capital.

Q: Are there steps that you might take that would encourage it?

A: I would send the signals that I would try to create as much as possible an environment that would make it possible — if it means showing some flexibility, if it means giving some forbearance, if it means providing some incentives. On a net cost- benefit basis, if it is seen that those incentives, or those forbearances, would cost the Nigerian people much, much less than having to put in capital in those banks and then manage them, then I would make the recommendations.

Ultimately, the decision as to how far the government will go is that of the president, and I will have to discuss with him.

Q: One could easily say that you’ve come here to clean up the system. Is that how you envisage your role?

A: In the short-term, that’s a role, but this is a five-year job, and the economy is a long-term issue. My role still remains the fundamental role of the central banker. I need to ensure we have price stability, I need to protect the value of the national tender, I would like to see that we push for lower interest rates and stimulate growth in the economy.

Q: We’ve got this current cap on deposits on lending at 15 and 22 per cent. Do you have plans to lift that?

A: I don’t think there’s a cap in the sense of the central bank saying ‘you can’t lend more than this’. The Bankers Committee met and it’s part of a discussion. I would probably use a lot of moral suasion…for banks to understand that the long-term growth and long-term survival of our banks will have to depend on stability and growth in the real economy, and that sometimes some decisions that may seem to take a hair-cut off today’s profits are not unwise if they are going to lead to long-term income streams. At the same time, we’ve got to address some of the fundamental reasons for high interest rates. Today you’ve got a very wide divergence between the monetary policy rate and NIBOR and again it goes down to your question of credibility, because we’ve got banks who have got a tremendous amount of liquidity but they are not lending to other banks, so the money comes in T-bills and to the central bank. As we begin to address issues of transparency and risk in those banks and get money moving from bank to bank, you bring down interest rates. I am one that is more for market-based solutions and moral suasion.

Q: There is a perception in the market that these banks have had to agree to these caps on deposits and loans. Are you happy to see those limits continue in their current form or would you lean on the side of them being removed?

A: We will have to discuss at Banker’s Committee. What I would like to do is to see if we can have policies and ideas on how using purely market-based solutions, interest rates come down. I think 24 per cent is too high, as a lending rate.

Q: But you are not going to impose or lift restrictions?

A: My economics tells me that any kind of imposition leads to black markets.

Q: Is that 22-15 per cent band going to be changed in the near future?

A: There isn’t a circular on this, this was a general agreement by the banks. If the banks decide they want to change then we will look at that. At the moment it’s a decision taken by the banks themselves.

Q: When do you think we will see the fully liberalised exchange rate regime restored?

A: I don’t want to say at the moment. The central bank has said three months, but I believe we should do it earlier, but I can’t say when.

Q: What is your vision going forward for the kind of monetary policy strategy you want?

A: I think if there is anything that central bank has done very well over the past few years it’s been monetary policy. We did have hiccups, naturally, during the melt-down, but monetary policy has been extremely good. The central bank has kept a hold on money supply. It’s grown because of the need to provide liquidity to the banking system, inflation is coming down. This is the second consecutive month it’s coming down. We will aim to see if we can bring it down to a single digit by the end of the year. Obviously it’s a problem keeping inflation down, keeping interest rates down and having a strong exchange rate – the ‘Unholy Trinity’ that economists always deal with. I would like to keep inflation down, and I would like to bring down interest rates, and then depending on what happens to the oil price, and revenues and capital flows, I would hope the Naira will hold. But long-term, I think lower interest rates are far more fundamental than a very strong exchange rate.

Source:PM News

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