By Chinwendu Obienyi
The Central Bank of Nigeria’s (CBN) renewed focus on enforcing market discipline is transforming the banking sector, driving greater efficiency and transparency across financial operations.
This move, experts note, is premised on the fact that the financial system is more than just institutions that facilitate payments and extend credit, but encompasses all functions that direct real resources to their ultimate user.
The financial system, being the central nervous system of a market economy, contains a number of separate, yet co-dependent, components all of which are essential to its effective and efficient functioning.
These components include financial intermediaries such as banks and insurance companies which act as principal agents for assuming liabilities and acquiring claims. The second component is the markets in which financial assets are exchanged, while the third is the infrastructural component, which is necessary for the effective interaction of intermediaries and markets.
The three components are inextricably intertwined. Banks need payments system infrastructure to exchange claims securely and markets in which to hedge the risks arising from their intermediation activities. The banking system, therefore, to functions more efficiently and effectively when there is a robust and efficient payments systems infrastructure.
However, the concern to ensure a sound banking system by the Central Bank of Nigeria (CBN) is underscored by the critical role of banks in national economic development.
This has been evident in a number of reforms undertaken by the apex bank since President Bola Tinubu became Nigeria’s President. From collapsing all FX windows, the bank recapitalization initiative, focus on monetary and price stability, support for MSMEs, reforms in financial inclusion, to financial transparency, the apex bank has demonstrated a regulator’s commitment to fairness and justice as public confidence remains vital in a banking system.
To continue its drive to restore trust among customers and the investing environment, the CBN recently reiterated its stance on penalizing Deposit Money Banks (DMBs) involved in aiding currency hawking.
Reaffirming its imposition of a N150 million fine on any bank found engaging in such practices, the bank’s Acting Director, Currency Operations, Solaja Olayemi, in an updated circular issued at the weekend referencing an earlier notice issued November 13, 2024, expressed its dismay at the prevalence of illicit flow of mint banknotes to currency hawkers and other unscrupulous economic agents that commodify naira banknotes.
It noted that the development has impeded efficient and effective cash distribution to banks’ customers and the general public.
According to the circular, the apex bank will continue to intensify periodic spot checks at banking halls/ATMs to review cash payouts to banks’ customers, as well as mystery shopping at all identified cash hawking spots across the country.
“In this regard, any erring DMBs or financial institutions that are culpable of facilitating, aiding, or abetting, by direct actions or inactions, illicit flow of mint banknotes to currency hawkers and unscrupulous economic agents that commodify naira banknotes shall be penalized at first instance N150 million only, per erring branch, and at later instances, apply the full weight of relevant provisions of BOFIA 2020.
Therefore, CBN enjoins all DMBs and financial institutions to strengthen controls, processes, and procedures around their Cash Management Centres, Branch, and Teller Operations,” the circular read.
Reacting to the development, economic experts explained that this initiative is part of the broader effort to promote transparency and adherence to regulations in Nigeria’s monetary operations.
It is safe to say earlier banking reforms were taken to reposition the Nigerian economy to achieve the objective of becoming one of the 20 largest economies by the year 2020.
However, as part of the vision, the FG’s goal of achieving a $1 trillion economy by 2030 means that the banking sector is expected to effectively play its actual role in intermediation and for the banks to be among global players in the international financial markets.
Former Governor of CBN, Sanusi Lamido, now the Emir of Kano, explained that recent experiences from the global financial crisis underscored the imperatives for countries to embark on banking reforms regularly.
“As you are aware, the world economy was hit by an unprecedented financial and economic crisis in 2007–2009 that resulted in a global recession. This crisis led to the collapse of many world-renowned financial institutions and even caused an entire nation to be rendered bankrupt. In Nigeria, the economy faltered and was hit by the second-round effect of the crisis as the stock market collapsed by 70% in 2008–2009, and many Nigerian banks sustained huge losses, particularly as a result of their exposure to the capital market and downstream oil and gas sector.
Therefore, the CBN had to rescue eight of the banks through capital and liquidity injections, as well as removal of their top executives and consequent prosecution of those who committed some infractions. These actions became necessary to restore confidence and sanity in the banking system,” Sanusi stated.
A holistic investigation into what went wrong in Nigeria leading up to the banking crisis in 2008 found eight interrelated factors responsible. These were macroeconomic instability caused by large and sudden capital inflows, major failures in corporate governance at banks, lack of investor and consumer sophistication, inadequate disclosure and transparency about the financial position of banks, critical gaps in the regulatory framework and regulations, uneven supervision and enforcement, unstructured governance and management processes at the CBN, and weaknesses in the business environment.
Each of these factors is serious in its own right. Acting together, they brought the entire Nigerian financial system to the brink of collapse.
Chief Executive Officer of Cowry Asset Management Limited, Johnson Chukwu, speaking at a recent forum, noted that a well-functioning financial system is central to driving growth and development in a country’s economy.
Whilst commending the CBN reform processes, he stated that the CBN must work hard to restore confidence in the system through punitive measures. He said, “The role of punitive measures in ensuring transparency and efficiency in banking systems is significant but must be carefully balanced. Holding individuals and institutions accountable through punitive actions establishes a culture of responsibility. It signals to stakeholders that misconduct will not be tolerated, enhancing trust in the banking system.
But then again, while punitive measures are critical, they should not lead to increased costs for bank customers and undue burden on smaller institutions. Instead, punitive measures must be complemented with proactive monitoring, positive incentives, and transparent legal processes.”