CPPE Sets 10-point Agenda for New CBN Governor

*Says banking recapitalisation imperative

Dike Onwuamaeze

As the value of the naira weakened to N1,000 per dollar on the parallel market last week, the Centre for the Promotion of Private Enterprise (CPPE) has identified restoration of confidence in Nigeria’s foreign exchange market and the recapitalisation of the banking industry as the most urgent tasks facing the Acting Governor of Central Bank of Nigeria (CBN), Dr. Olayemi Cardoso.  

This was contained in a statement titled, “10 Points Agenda for the CBN Governor,” issued yesterday, by the Founder of CPPE, Dr. Muda Yusuf.
According to the CPPE, the 10 points agenda are restoring confidence to the foreign exchange market, deepening the financial system, ensuring efficiency of the financial system, capital requirements for banks, addressing ways and means financing of fiscal deficit and complete jettisoning of the controversial naira redesign policy.

Others are the tenure and cost of funds in the banking system, reducing concentration of risks in banking sector, initiation of stakeholders’ engagement and corporate governance.
Yusuf added: “Dr. Cardoso is assuming the leadership of the CBN at a very crucial time in our economic history. There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira. “The economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that needs to be cleared and debt service obligations that need to be redeemed.  

“Sadly, these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered.”
He pointed out that economic management orthodoxy of market forces was being called to question in the country following the social outcomes of the recent market-oriented reforms of President Bola Ahmed Tinubu’s administration, adding that, “this is evidently an economic management quandary that the new economic team would have to manage, and urgently too.  And the CBN has a key role to play in this.”

He, therefore, enjoined the CBN to ensure strategic and transparent intervention in the foreign exchange market in order to minimise volatility, as far as the country’s foreign reserves can support.
“In addition to the ‘I & E’ window, it has become necessary to create an autonomous window in the banking system where the currency can trade freely without any encumbrances. This is necessary to avert the diversion of remittances to other jurisdictions or the black market. We cannot afford to live in denial at this time.

“The clearance of the backlog of foreign exchange obligations should be accorded high priority to restore the confidence of domestic and foreign investors,” Yusuf said.
Yusuf also told Cardoso that the time was ripe for another recapitalisation exercise in the banking industry because of the considerable loss of value due to the depreciation of the naira in the foreign exchange market.    

He recalled that the minimum capital requirements for banks was raised from N2 billion to N25 billion during the last banking consolidation exercise in 2004, which was an equivalent of $187 million capital base.
He, however, noted that, “today the same N25 billion is an equivalent of just $32.5 million.  This is a clear indication of the phenomenal erosion of the capital base of the banks.  

“Recapitalisation of the banks has, therefore, become imperative.  It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system.”
He advised the governor of the CBN to suspend the naira redesign policy indefinitely.
“It should not be a priority at this time.  There was really no compelling argument to undertake the naira redesign in the first place,” he added.

The CPPE called for the deepening of the financial intermediation role of the deposit money banks to increase the ratio of credit to the private sector in Nigeria that was a mere 20.6 per cent of the nation’s GDP in 2022, against sub-Saharan average of 28 per cent and global average of 145 per cent.  
The CPPE also highlighted the, “need to reduce the ratio of non-interest income as a percentage of income of banks, which was 42.5 per cent two years ago and would have gone up by now given the numerous headwinds confronting investors in the economy while in most developing economies, the ratio is less than 30 per cent.

“This income structure is a reflection of the failure of financial intermediation in the economy. This, therefore, needs to be addressed. The core function of the banking industry is financial intermediation.
“A situation where non-banking activities are crowding out the financial intermediation functions of the deposit money banks is detrimental to the growth of the economy,” CPPE said.

Yusuf, pointed out that the spread between deposit and lending rates in the Nigerian banking system was too high.
“It is an indication of serious efficiency issues in the banking system. In Nigeria, the spread is over 20 per cent, one of the highest globally. The average for sub-Sahara countries is 10 per cent and global average is about 6.6 per cent. The large spread is detrimental to investment growth and disincentive to savings.”  

He also called the attention of the governor of the CBN to the use of ways and means to financing of government’s fiscal deficit.
He argued that, “ways and means finances of the CBN must be kept within statutory limits to avoid the damaging impacts of high-powered money on the macroeconomic environment. The experience of the last few years must not be allowed to repeat itself.”