The opinion is jointly contributed by Gotetti Akabike, to whom I owe a lot of credit. Indeed, this is not the best of times for the Central Bank of Nigeria. Whatever is the case, we must not lose faith in our institutions such as the Central Bank. We can learn some lessons from past mistakes and emerge stronger.
The only constant thing in life is change. In that wise our institutions must continue to undergo strategic reforms.
From the establishment of the Central Bank of Nigeria in 1958, the CBN has undergone several changes. In its capacity as lender of last resort, the CBN continues to exceed the lending limits imposed by the CBN Act. This is not entirely the fault of the apex bank but due to the insatiable spending appetite of the government.
According to the Central Bank’s 2020 credit policy, the “Ways and Means Advances” shall continue to be available to the Federal Government to finance deficits in its budgetary operations to a maximum of five per cent of the previous year’s actual collected revenue. As at 2022, the CBN exceeded the statutory limit of five per cent of the previous year’s revenues as stated in the CBN’s policy. The direct consequence of Central Banks financing of deficits are distortions or surges in monetary base leading to adverse effect on domestic prices and exchange rates i.e., macroeconomic instability because of excess liquidity that has been injected into the economy. This opinion seeks to assess the need for a reform of the Central Bank of Nigeria. Specifically, it seeks to assess the performance of the CBN against its mandate and core objectives.
The global financial landscape is increasingly becoming more volatile, uncertain, complex and ambiguous, causing Central Banks globally to review their financial regulatory approach. In recent years, raging factors such as COVID-19 and the Russian-Ukraine crisis have adversely affected growth and worsened socio-economic conditions of the global macroeconomic environment.
The current financial landscape has become increasingly complex due to key trends, signalling a need for review: Emergence of new business models e.g., provision of financial services by non-financial players, rise in FinTech’s, etc posing regulatory challenges.
The collapse of several reputable banks in recent years has highlighted the need for stronger regulation and oversight of the financial system. Regulators globally have responded by introducing new regulations and policies aimed at reducing systemic risks and increasing the resilience of their respective financial systems.
Nigeria currently operates the institutional model with some of its inherent regulatory inefficiencies: Potential for increasing regulatory overlaps where agencies oversee similar conducts under potentially different rules e.g.., bancassurance between the CBN and NAICOM, especially as the market evolves. The risk of over-regulation of conglomerates, which may also increase overall regulatory cost burden. With increasing growth and complexity of the financial system comes a potential rise in the number and sophistication of fraudulent activities. The Central Bank of Nigeria today has five broad mandates, which form the basis for its functions, namely:
• Develop and implement monetary policies to drive price stability, regulate exchange rates and manage inflation
• Conduct macro-prudential regulation i.e., manage the resilience of financial system and address systemic risks
• Issue legal tender currency, regulate currency circulation and manage the currency supply
• Maintain external reserve to safeguard the international value of the legal tender
• Provide economic and financial advice to the Federal Government
The country’s growth stagnated partly as a result of higher inflationary pressures which induced monetary policy tightening by Central Banks globally –
Nigeria’s economic output growth slowed with performance majorly driven by the non-oil sector, while the oil sector has remained contracting since 2016. Recovery in the oil sector is expected to improve but is slow and subject to oil theft, pipeline vandalism, declining investment in the sector and general security and technical risks. FX supply shortages remain a challenge creating instability in the exchange rate and leaving the gap between the official window and the parallel market as high as c. 61%3. The existence of multiple exchange rates has caused market distortions and contributed to high parallel market premiums which have kept imported inflation high. It has also contributed to a decline in foreign investor confidence, which has further discouraged foreign capital inflows into the country. A two-lensed approach was adopted in this concept paper, i.e., ‘Country-focused’ approach and ‘Type of Regulatory Model’ approach to evaluate the regulation of financial systems of key jurisdictions/economies across the globe.
Country Approach:
– Consider/ select countries based on defined criteria:
• Type of country e.g.., BRIS, MINT
• Country that may have a similar financial system as Nigeria i.e., financial depth, financial access etc.
• Country should typically have undergone some structural reforms within its financial sector e.g. United Kingdom, South Africa etc.
– Distil prioritised countries, which meet defined criteria
– Deep dive/ assess regulatory models across the prioritized countries
Note: Whilst this approach streamlines the assessment to high-priority countries and ensures that critical emerging/ frontier economies are considered, it may limit the absolute breadth of countries that can be evaluated in this concept paper.
Type of Model Approach:
• A comprehensive approach that seeks to evaluate/ assess the prevalent regulatory models across advanced and emerging economies and categorizes them based on critical structural similarities.
• It also highlights the countries adopting each model and conducts further analysis to understand their peculiarities
From the study, there are three prevalent financial regulatory models adopted by global financial systems. These include:
1. The institutional or traditional model: one in which the legal status of the financial institution determines the primary regulator for providing oversight i.e., micro prudential and market conduct. The institutional model is the oldest regulatory model where different financial sectors, driven by differing risks and the need for specialist agencies, are overseen by separate regulators for banks, insurance companies, securities businesses etc.
2.) The single integrated model: one in which a single/ super-regulator provides oversight i.e., macro and micro prudential regulation and market conduct across all financial sectors e.g., banking, securities, and insurance.
3.) The Twin Peaks model: one in which two independent regulators/ two peaks provide oversight of all financial sectors based on their objectives namely prudential supervision and market conduct. The Prudential Peak (PP) is responsible for systemic stability, supervision and crisis management for financial institutions e.g., banks, insurance institutions, pensions etc while the Market Conduct Peak (MCP) is focused on customer protection across all financial sectors.
There are three possible scenarios and recommendations for Nigeria to adopt along the regulatory transformation continuum. These include:
• Optimise CBN/ current regulatory model – Expected to be completed in the short-term period (1-2 years), least disruptive option given the minimal changes, retain the current structure of financial system regulation, strengthen the operations of the CBN to enhance ability to successfully perform core mandates.
• Revise the mandates of the CBN – Expected to be completed over a short to medium-term period (2-3 years), moderate disruption of the financial system, re-organise current institutional arrangement of the Central Bank into two separate agencies i.e., the CBN and the Banking Supervisory agency (market conduct and prudential regulation of banks), conduct micro-prudential oversight of banks, this option envisages the current structures and mandates of other financial system regulators e.g. PENCOM, NAICOM, SEC, remain unchanged.
• Transform into Twin Peaks – High-level of financial system discipline, restructure the regulatory oversight of the Nigerian financial system to three primary agencies i.e., the CBN, financial conduct authority and the prudential authority
• Key advantages include; limited risks of bureaucracy as there is distribution of power, accountability as mandate of the distinct peak is well defined, co-ordinated/single view of the financial system, with leverage to drive growth in poorly performing sector e.g. insurance
• Key disadvantages include; complexity of transformation (relatively longer transformation timeline of 3-5years and entails a high degree of change, institutions may be burdened with having to answer to two distinct rule books.
Overall, the CBN’s performance across its core mandates, revealed successes in ensuring a sound financial system (i.e., effective supervision of banks, enhancing safety of funds and protection of consumers). However, in areas such as ensuring monetary and price stability, issuing and redesign of legal tender and maintenance of reserves, there may be room for improvement.
Based on these triggers of change, we opine that there is a clear need for a reform in Nigeria. Hopefully this article will join a litany of others in presenting preliminary ideas for a possible reform agenda of the Nigerian financial system.