Agenda for next CBN chief Emefiele

By IAfrica
In Nigeria News Feed
Feb 23rd, 2014
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The exit of Central Bank (CBN) Governor Sanusi Lamido Sanusi, to analysts, means more work for the incoming CBN Governor, Godwin Emefiele. They say he should consolidate on his predecessor’s policies, writes COLLINS NWEZE

Six days before his suspension as the Central Bank of Nigeria (CBN) Governor, Sanusi Lamido Sanusi inaugurated the $50 million Biometric Solution project. It is aimed at providing a central database for the country’s bank customers.

The innovation means Automated Teller Machines (ATMs) and Point of Sale (PoS) machines will be biometric-based. This means the project will help fix identity challenges facing the banking system. The project will be driven by satellite technology being worked on by the Nigerian Communications Satellite (NICOMSAT) and MainOne .

The CBN governor-designate, Godwin Emefiele, who is also Chairman, Bankers’ Committee Sub-Committee on Biometrics, believes the project is ambitious and will revolutionalise banking.

Analysts say it is good Sanusi and Emefiele, who is the Group Managing Director, Zenith Bank, are on the same page as far as this project is concerned. They also believe their thinking should be the same on other reforms carried out by Sanusi.

A Currencies Analyst at the Ecobank Nigeria, Olakunle Ezun, said the incoming governor must consolidate on the successes recorded by his predecessor in both the payment system and banking reforms.

He said: “ The foreign investors will look out for some qualities in the new Governor, especially independence of the CBN.”

Mortgage Refinance Company

Emefiele is also expected to sustain Sanusi’s drive for cheap and affordable housing for the population. He had during his tenure, instituted the operating guidelines for the MRC. About N25 trillion is needed to fix Nigeria’s housing deficit in the country. A report on the mortgage industry titled: ‘Retrogressive view on the Mortgage Refinance Company (MRC)’ said Nigeria has an estimated 18 million housing deficits, which grows by two million units annually.

Already, some banks are promoting serious investment in the mortgage industry. An expert in the property market described the real estate market as investors’ haven as the industry holds great potentials for operators. Speaking on “Growing a diversified group of businesses” at an SME Forum, organised by Fidelity Bank, Chairman/CEO, Genesis Group of Companies, Ichie Nnaeto Orazulike said investors could make quick returns on their investments in the property business.

Agric credit/NIRSAL

The Federal Government’s plans to double agriculture’s share of banks’ credit to 10 per cent in two years also means that the new CBN boss will need to consolidate on the successes recorded by his predecessor.

Sanusi moved loans to agriculture as a share of total credit rose N320 billion, or five per cent, at the end of last year from less than one per cent in 2011.

Agriculture Minister Akinwunmi Adesina said the Federal Government has made a fundamental shift that agriculture is not a developmental activity, but a business. “The CBN has shifted the mind-set of the banks. It’s a new agriculture sector in which they can actually invest money and make money,” Adesina said. He said the Agriculture Ministry is partnering with the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL), a unit of the CBN, to provide credit guarantees to enable banks lend to farmers.

CRR: Hard times ahead

Equities Analyst at Renaissance Capital (RenCap) Adesoji Solanke said the bigger banks, also called tier-one banks, will this year face some daunting challenges, chief of which are the impacts of higher Cash Reserve Ratio (CRR) and cuts in commission-on-turnover (CoT). The tier-one banks include FirstBank of Nigeria, Guaranty Trust Bank, Zenith Bank, United Bank for Africa and Access Bank.

The analyst, in a report titled: “Nigerian banks: Tier one – growth precariously balanced”, said with an average CRR of 20 per cent, the banking environment does not allow for significant earnings growth, a trend that would be felt by the banks.

Solanke advised that the lenders must be disciplined on the cost line and properly manage their impairment charges before they could deliver earnings growth.

“We think there is a precarious balance between these headwinds and a number of tailwinds, and think it remains challenging for banks to deliver attractive earnings growth; the risk of another year of flat-to-negative earnings growth cannot be ruled out,” he said.

He said strong loan growth is expected from the banks this year, as well as further upward adjustments to lending rates, as banks try to offset the lost income from the higher CRR.

Naira Vs Reserves

The Bankers Committee rose at its 315th meeting in Lagos and agreed that a robust defence of the naira and the foreign reserves should top the economic policy. Both the naira and reserves have been battered in recent months and it is expected that Emefiele focuses on getting them back on track. The naira exchanges at N155.75 to the dollar . Foreign reserves stand at $41.17 billion.

The Group CEO of First Bank, Mr. Bisi Onasanya, who spoke to reporters after the meeting, said rising capital outflow and dwindling oil revenue are taking a toll on the naira and the reserves. This trend, he said, must be reversed.

He said Quantitative Easing taking place in most advanced economies have raised incentives of investing in those countries, stalling capital inflows into emerging markets like Nigeria. He said this is adversely affecting the naira and the reserves.

Among the measures being taken, according to Onasanya, is the raise in CRR. He said the target of the CRR hike was to address the exchange rate problem and to defend the naira. The Committee also agreed that the CBN needed to take proactive measures that would lead to improved deposit into the foreign exchange reserves. ‘Given the dwindling revenues from oil and the impact on foreign reserves, it became apparent that the options open to the CBN and the MPC were reduced and that was why they further agreed to increase CRR to75 per cent. These were measures taken in order to ensure that we continue to address the exchange rate problem in Nigeria,’ he said.

Continuing, he said: ‘There is no country that will just allow its exchange rate to be left and not managed. The mere fact that those actions have been taken also indicates the fact that the central bank is willing to do everything within its power to ensure that the currency is not devalued. We have seen statistics from the CBN in terms of the continual reduction in the balance of foreign exchange reserves and when you are confronted with that, the only option is to continue to tighten until you see the reverse”.

Onasanya added: ‘The CBN has also made it very clear that there is a limit to which it can continue to defend the naira. But when you have depletion in external reserves and external factors, it simply means you can’t control the outflow from the country. So it is not unlikely that you will see some portfolio investors moving their funds out of Nigeria into where they consider being more attractive,” he said.

With the above picture in mind, analysts see likelihood of further CRR tightening.

A sub-Saharan Africa economist at RenCap, Yvonne Mhango said the Acting Governor Alade will remain committed to price stability. “Given that she is in essence a caretaker governor until June, we do not expect her to make any major policy moves at the next monetary policy committee (MPC) meeting on 24 to 25 March. We think the MPC will hike the policy rate by at least one percentage point and the public sector cash reserve requirement (CRR) to 100 per cent, which the banks expect,” she said in an emailed report titled: ‘Sanusi exits, Emefiele is nominated’ obtained by The Nation.

She said such step would help stabilise the market, assuming the exchange rate target band adjustment met the market’s expectation and estimated that leadership change at the CBN will take the foreign exchange reserves down to $35 billion by year-end.

Naira Devaluation

Mhango said should Alade fail to devalue the naira before June, Emefiele may be compelled to devalue the mid-point of the exchange rate band to N170 to dollar at his first MPC meeting in July.

“We estimate this will lead to inflation of around 11 to 12 per cent at year-end, which implies rate hikes to help preserve real rates of at least five per cent that make the carry trade attractive. Higher inflation is likely to be negative for consumers, but we expect the effect of this on Gross Domestic Product (GDP) growth to be mitigated by the positive impact of higher liquidity on the back of an increase in election-related government spending,” she said.

The analyst insisted that devaluation is negative for the consumer stocks as it implies higher inflation, which companies will find hard to pass on to consumers.

She described Emefiele as a very conservative banker.” Under his stewardship, Zenith Bank has established itself as a leading, well-capitalised and stable bank with a high portion of assets sitting in T-bills and bonds. We believe he is likely to maintain a firm policy environment and would be inclined to tighten policy in the current environment of naira weakness,” she said.

Cash-less policy

That the Sanusi era witnessed the most outstanding improvement in the transaformation of the payment system is not in doubt. The CBN under his watch had on January 2012, started the cash-less Lagos Initiative.

The policy is aimed at reducing the dominance of cash in the system. It specifies penal charges for individuals and corporate organisations that want to withdraw or lodge cash above prescribed limits. Under the policy, the CBN pegged the daily cumulative cash withdrawal or deposit limit for individual accounts at N500, 000 per day and N3 million per day for corporate accounts.

At the initial stage of the policy, there were less than 10,000 Points of Sale (PoS) in Lagos, but there are over 150,000 PoS machines in the state alone. CBN Head Shared Services, Chidi Umeano said the policy, which currently running six states plus Federal Capital Territory (FCT) Abuja will be implemented nationwide come July 1, this year.

He said: “A decision was reached today that the cashless initiative would now be deployed nationwide. As you are all aware, the pilot phase was done in Lagos about two years ago and last year we implemented in six other states namely Abia, Anambra, Ogun, Kano, Rivers and Federal Capital Territory,”.

Continuing, he said from the success recorded in those states, the CBN decided to move to other states in the country.

“By July 1, we are going live in all the states of the federation. As you well know, this is a critical part of the payment system modernisation and the success registered so far has been very impressive,” he said.

Finance Houses reforms

Operators believe Emefiele should speed up the ongoing reforms in the Finance Houses subsector. Finance Houses operators earlier rejected N200 million minimum capital base being proposed by the CBN for the subsector.

An insider in the Finance Houses Association of Nigeria (FHAN) who spoke anonymously said the operators are bent on getting the minimum capital base raised to N100 million instead of the N200 million. The source said the subsector expects the incoming CBN boss to conclude the ongoing reforms to allow investors pump money into the sector to revatilise it. The source said both local and foreign investors are willing to recapitalise and invest in some of the ailing finance houses but have to await the CBN to specify the guideline. The reform is expected to look at regulatory framework that will govern finance lease practice; institutionalise a funding pool to stimulate lending activities; structured programme to address the reputation and poor visibility challenges of the sub-sector among other issues.

Bank Directors’ voice

Some of these policies have been out rightly opposed by banks and stakeholders. The Bank Directors of Nigeria (BDAN) strongly feels Emefiele should not continue with the CRR tightening policy. It expressed concern at the decision of the CBN to raise the CRR on public sector deposit from 50 to 75 per cent. The CRR is a portion of banks’ deposits kept with the CBN.

BDAN President, O’lorogun Sunny Kuku said the group observed that raising the ratio by 25 per cent within six months after it was jerked from 12 to 50 per cent would adversely affect the banking sub-sector and the economy. He said the increase would weaken the ability of banks to lend to economic agents and slow down the improved growth rate the country has enjoyed in the past few years.

The BDAN boss noted that as the economy slows down, the poverty rate and incidents of social upheavals, which have constituted serious hindrance to national development, worsen.

“Since banks do not have much liquidity to lend, they will increase interest rates. Two consequences could naturally evolve from this. The first possibility is that many people will shun bank loans because they cannot afford it, while those who bear the excessive cost of funds will pass it to consumers of their products and services. These will reduce the productive capacity of the economy in favour of short term high margin trading, which is not in the interest of the country,” it he said.

The BDAN also lamented that the policy will reduce returns on capital investment in banks adding that the weak lending would translate to lower incomes, noting that some banks could consider staff downsizing to mitigate the impacts. “Unfortunately, the squeezing comes when the economy is crying for interventionist programmes that could make funds available for the real sector. With the mop up, the already credit-dried economy faces harsher funding environment,” he said.

But former Executive Director, Keystone Bank Richard Obire said the new CBN boss needed to take steps that ensure that lenders are not exposed to cheap public sector funds. He said there is no need allowing banks to source cheap funds from government, only to turn round and lend same funds to government at exorbitant rates. “I am in support of the CBN policy on CRR. I want the new CBN boss to continue in that direction,” he said in an interview at the weekend.

Assurances from govt

The Acting CBN Governor, Dr. Sarah Alade, assured stakeholders that the recent changes in the bank’s leadership will not affect monetary policies. Alade assured that the bank would continue to intervene in the interbank foreign exchange market to ensure stability of exchange rate of naira and preserve the value of the domestic currency.

“I wish to use this opportunity to reassure all our stakeholders, including the international community, that the recent changes at the CBN will not in any way affect the country’s monetary policy direction. It will not also affect the pursuit of the bank’s primary mandate of maintaining price and financial system stability,’’ she told reporters in Abuja, at the weekend.

Alade said the Nigerian economy had remained strong, sound and resilient over time, adding that available statistics from the National Bureau of Statistics indicated that inflation rate was eight per cent in January.

Also, the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, assured that the Federal Government would remain resolute in the management of the nation’s economy in spite of Sanusi’s suspension.

She said the pursuit of macro-economic stability, which has become the hallmark of the Goodluck Jonathan administration would continue. She expressed optimism that the tight monetary policy at the CBN would be sustained.

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