"The King is Dead, Long live the King" - My wish list for the next Governor of the CBN

It is becoming increasingly likely that Prof. Chukwuma Soludo, the Governor of the Central Bank of Nigeria (CBN), will not be getting a second 5-Year term in office. His replacement or, unlikely, renomination is due to take place on Friday, 29th May when President Yar'Adua is expected to forward the name of the nominee to head the apex Bank to the Senate for confirmation.

Although Prof. Soludo has received some knocks in the recent past over some of his recent actions, such as the poor handling of the recent naira devaluation and hurried closure of the Interbank Fx Markets, most market participants are of the opinion that he has performed creditably. The consolidation programme embarked upon during his first few months in office has been widely hailed as a success and has led to the emergence of 24, relatively, strong banks from an unwieldy bunch of 89 banks that could hardly finance projects or transactions of any significance.

Without the consolidation process, the disappointments and setbacks witnessed in the last one year in the Nigerian Financial markets will probably have degenerated into a full scale crisis. In addition, the stealthy and effective use of the Expanded Discounted Window offered by the CBN ensured continuous liquidity in the banking industry and prevented the collapse of any bank, an event which may have resulted in an acceptably high risk of systemic failure. To further assure the stability of the system the CBN, under Prof. Soludo, gave its tacit approval and encouragement to the acquisition of certain perceived weaker banks by other banks deemed to be stronger and capable of absorbing potential losses.

I believe the skills needed in the next CBN Governor are those of a consolidator; effective regulator and technical specialist not necessarily that of a grand strategist in the mould of Prof. Soludo. The Nigerian banking industry is entering a new era in which the gains made in the last 5 years will need to be consolidated; bigger and more systematically important financial institutions more closely monitored and the foundations of a more effective and modern financial sector laid.

Strategy for the industry should be left to the industry players to decide and not be suggested to them by a regulator (I see no reason why every bank should seek Shareholders' Funds of at least US$ 1 Billion, as they should not all have the same strategic focus and capital requirements). I do not think every one of the 24 banks in Nigeria ought to have an Investment Banking/Capital Markets subsidiary or branches across Africa and Europe, some banks may position themselves as wholesale banks while some others can emphasise retail/consumer lending activities.

While the average central banker wears two (2) hats: that of a regulator of a country's banks and that of its macroeconomic manager, the focus of central bankers for such a long time in Nigeria has been on the regulatory aspect to the detriment of the macro economy. The next CBN Governor should strengthen the linkages between the banking sector and the broader economy to ensure that profits and activities in the Banking Sector reflect the health and performance of the real sector. The health of the national economy must be reflected in the profits/performance of the financial industry (as US President Barack Obama said: "we can't have a thriving Wall Street while Main Street suffers").

In addition to the above, the Central Bank needs to broaden its scope and appropriate the role of national economic manager and guardian of systemic risks. The scope of the next Governor should go beyond the Money Markets and the familiar economic management tools such as Open Market Operations ("OMO") and others. The CBN must take an active interest in the evolving Debt Markets and even the Equity Markets to ensure that potentially destabilizing
bubbles are not been built in areas it has been overlooking, for example Banks' exposures to the Stock Markets have to be actively monitored by the CBN and limits placed from time to time on their activities. These exposure measures have to be reasonably broad, with limits set not only on the level of margin loans that may be granted by a bank but also on the level of loans that may be collateralised by equity instruments. This exposure monitoring should not be limited to only the equity markets, exposures to Real Estate markets need to be monitored and curtailed when necessary as well. The real estate sector is as prone to disaster causing bubbles as any market in the world (the entire world probably has the American real estate market to thank for the problem we are all in!).

Finally, and somewhat contradictorily to my earlier points, the new CBN Governor should champion financial innovation both in products and service delivery. Because derivatives and securitization have been blamed as the main causes of the current global economic crisis, it is easy to forget the very important roles they have played in broadening access to financial markets; reducing financing costs and generally supporting the upward march of civilisation and innovation. It is shameful and unacceptable that structures have not been put in place to ensure that credit worthy people in Nigeria have access to mortgage loans, this is largely a consequence of the absence of a secondary market for mortgage trading in Nigeria. Swap lines are largely non-existent for transforming fixed rate loans into floating rate and vice-versa. Nigerian corporates can hardly hedge their foreign currency transaction risks as our banks are severely curtailed in their ability and capacity to deal in Foreign Exchange Futures and Forwards, thereby making our largely import dependent companies have highly volatile earnings (case in Point: Starcomms Plc declared a loss of 8 Billion Naira (the worst in Nigerian Corporate history)largely as a result of foreign currency translation losses). Even Automated Teller Machines ("ATM") only became widespread in Nigeria in the last 5 or so years!!, and Naira Credit Cards are about a year old. Ultimately, I believe the next CBN Governor should be judged not only by how well he manages to avoid financial disasters but by how much he succeeds in laying the foundations of a banking and financial system that supports Nigeria's economic aspirations and empowers our companies and citizens in their quest for increased prosperity and a better life.

"Investors from the vasty deep" - Nigeria and the quest for new Oil and Gas Investors

Reading the news report in the Tuesday papers that the Special Adviser to the President on Energy: Dr Emmanuel Eghogah was seriously lobbying for new investors at the Offshore Technology Conference ("OTC") holding at Houston and assuring them of the security of their investments in the nation's Oil & Gas Sector, I was reminded of a dialogue in one of William Shakespeare's plays: Henry IV.

In Part 1 of the Play, two characters (and bitter rivals): Hotspur and Glendower had this very interesting conversation:

Glendower (boasting):
I can call spirits from the vasty deep.

Hotspur (responding):
Why, so can I, or so can any man;
But will they come when you do call for them?

The moral of the dialogue is that anyone can wish upon or command anything he desires, the critical thing is whether the desired outcome/wish will occur. This dialogue seems all the more relevant, when one considers the fact that the Nigerian government is currently seeking new foreign investors for the upstream Oil and Gas sector while the deep-seated investment-inhibiting issues plaguing the sector remain unresolved.

The security situation in the Niger Delta, which was alluded to in Dr. Egbogah's statement at the conference, is abysmal and has led to a situation of near anarchy with various "packages" (i.e. human beings, preferably Caucasian) being kidnapped at will and huge ransoms being demanded and, almost invariably, paid to secure their release. A kidnap and ransom industry has blossomed to complement the already established bunkering industry in the Delta, culminating in the emergence of large numbers of young men with criminal careers that are so lucrative, and near risk free, as to make the pursuit of any legitimate career or trade unrewarding and unreasonable in comparison. All this happens despite the launching of various "expeditions"(with often scary names) by the police and armed forces which seem not to make a dent in the seemingly impenetrable armour of militants motivated by quick riches. To solve the Niger Delta crisis, we need to go beyond sloganeering and begin to tackle the structural issues which have made lawlessness second nature to the youths of the region. The problem at hand has gone beyond that of ensuring a nice and friendly neighborhood, it has become a matter of national economic survival. The activities of these "restive youths" have led to severe losses in Crude Oil production (Nigeria's lifeblood), reducing our current average daily production rate to about 1.78 million barrels as against 2.6 million in 2006 and a 2009 budget benchmark rate of 2.29 million. Yet no end seems in sight to this crisis as our politicians seem incapable and/or unwilling to make the tough choices and concessions necessary to maintain our collective security and prosperity.

The security situation in the Niger Delta is by no means the sole militating factor against foreign investment in our Oil and Gas industry, equally troubling is the incoherent and often volatile policy regime of the current administration. In the last 2 years, various companies have watched their concessions and/or contracts being revoked, with the Korean National Oil Corporation (KNOC) being the latest company to join the "revocation club". KNOC is currently contesting the revocation of its Oil Prospecting Leases (OPL) in the federal courts and if the antecedents of our justice system are anything to go by, the company faces a long, hard and tortuous road to justice. The government cites the non-payment of US$ 231 million out of the US$ 323 Million required for the leases as the reason for its revocation order, while KNOC maintains that the US$ 231 million balance being cited by the government had already been written off by the immediate past administration in return for the construction of much needed infrastructure (such as a power plant and gas pipelines) by the Company. This incidence just adds to the string of policy somersaults and reversals that have plagued our country in the recent past, how can we begin to think seriously about attracting investments into the country when companies can't be sure that agreements survive the transition into another government of the same political party!. I don't want to sound unduly alarmist, but it is increasingly beginning to seem as if agreements in this country are not worth the paper on which they are written.

Until we begin to adopt investor friendly policies; strengthen our judicial and other independent institutions and improve the security of lives and property, we may struggle to attract serious investors with long term investment horizons. And like Glendower, we may continue to boast of the ability to call "investors from the vasty deep" but it is far from assured that they will come!