Nigeria embarks on new round of banking reforms

Michael Dynes

Lamido Sanusi, the newly appointed governor of the Central Bank of Nigeria is set to up the pace of finance reform

The name Lamido Sanusi, the aristocratic Muslim banker from northern Nigeria appointed as the new governor of the Central Bank of Nigeria (CBN) in June, may not be a familiar one in Western circles but he is already making waves in the African banking community.
 
Sanusi replaces Charles Soludo, the architect of Nigeria's ambitious 2005 banking consolidation exercise, who oversaw a wholesale reduction in the number of banks operating in Africa's biggest market from 89 to 24 after the banks were forced to dramatically increase their capital adequacy ratios or be swallowed up by rivals.

Those reforms were seen as the principle reason behind the runaway growth experienced by the Nigerian financial sector between 2005-08, which attracted substantial foreign investor interest. But the saviour of the Nigerian banking system subsequently presided over a reckless expansion of credit, which saw most of those gains wiped out during the past 18 months as investors began to fear that banks loan books had expanded too much, too quickly.

As Nigeria's oil revenues collapsed under the weight of the economic downturn Soludo compounded his error by seeming to rollback some of the key financial reforms introduced since the end of military rule in 1999, including shutting down the interbank foreign exchange market in February, and imposition of maximum deposit and lending rates in March.

The embattled governor insisted that the Nigerian banking system's capital adequacy ratios of around 22 percent - two to three times higher than their US or British counterparts - were more than sufficient to help the banks withstand the downturn. But with bad bank debts mounting, and levels of financial disclosure insufficient to convince domestic or foreign investors otherwise, things went from bad to worse.

Soludo had lobbied hard for a second term. But President Umaru Yar'Adua - who has been dubbed Papa Go Slow by the Nigerian press impatient at the snail-like pace of reform - decided that it was time for a new broom to sweep away the failures of the past and help breathe new life into the ailing financial reform process.

Sanusi, 48, is widely seen as a champion of banking sector reform, with a reputation for robust corporate governance and conservative lending policies. A former managing director of Nigeria's First Bank, with 20 year's experience in the banking sector, he oversaw First Bank's adoption in April of international financial reporting standards (IFRS), which require significantly greater disclosure on a range of issues from risk management to accounting practices than most Nigerian banks are accustomed to.

Within his first month in the job Sanusi had announced his intention to abolish the military-era prohibition on foreign takeovers of Nigerian banks - a move which would effectively throw open the African continent's potentially biggest market for financial services to international competition.

Sanusi made clear that he not only wants foreign capital to help bolster domestic bank balance sheets, he also wants foreign management expertise to help improve the domestic banks' operational - especially risk management - performance. The new governor clearly intends to move fast and hit hard. The domestic banks are now in for a rough ride. Bank regulation can only get tougher, and penalties for regulatory compliance failure are likely to get more stringent. But the banking system will have more solid foundations as a result.