Soludo, Teriba and Managing Reforms

The language of reforms should not be spoken and understood by only the reformers.

06.08.2004

SoludoAt the conclusion of Dr. Ayo Teriba’s attack on CBN’s recent bank consolidation initiative as recently announced by its Governor, Prof. Charles Soludo, it became easy to discover that his angst may not only be academic but also personal when he wrote that “he had no deadlines for any of the things he had promised to achieve under the NEEDS document in the eleven months or so that he was busy talking to the nation about it”, an assertion that is merely a false conjecture. In any case, the greater part of his piece was dedicated to the issues addressed by Prof. Soludo in his speech to the Special Meeting of the Bankers’ Committee i.e. mergers and acquisition (M & A), minimum capital requirements, withdrawal/placement of FG deposits, access to official FOREX, deadlines and international benchmarking. Using pseudo-excellent fact conjuration he presented his case with a good use of the written word.

Contrary to Dr. Teriba’s perception of a “case for forced mergers across the board as put forward by Soludo”, the CBN Governor did not decree M & A for the banking industry. In his speech, he only sought to “share some thoughts on why mergers and acquisitions should be taken seriously as an instrument for enhancing banking efficiency, size and developmental roles.” He merely gave a few examples from the United States of America, France, Germany, Argentina, Brazil, Korea and South Africa. On his part, Dr. Teriba pointed out the cross-country trigger factors that necessitated particular country scenarios. It did not, in any way, negate Prof. Soludo’s thoughts that “mergers and acquisitions should be taken seriously”.

Dr. Teriba went on to challenge the CBN Governor on facts. Former US President John Adams said that facts are stubborn things. Prof. Soludo said “in Korea, for example, the system was left with only 8 commercial banks with about 4,500 branches after consolidation.” Dr. Teriba sought to contradict him by visiting the Bank of Korea website. But he did not tell the entire story. According to that website, “as of the end of September 2003, commercial banks consisted of eight nationwide commercial banks, six local banks and forty foreign bank branches.” The website went further to state that “nine banks merged to form four successor banks in 1999, and two merged to form one successor bank in 2000.” Indeed, facts are stubborn things. “Malaysia”, the CBN Governor said, “has recently gone through its first round of consolidation whereby about 80 banks shrunk to about 12 within one year.” He did not say that Malaysia has only 12 banks neither did Dr. Teriba prove that 80 banks did not shrink to about 12 in one year. On South Africa and ABSA, is it not instructive that one bank has an asset base larger than all of Nigerian commercial banks put together?

Dr. Teriba rested his case for minimum capital requirement on “the famous Basel Accord”. The Basel Accord is the International Convergence of Capital Measurement and Capital Standards produced by the Basel Committee on Banking Supervision of the Bank for International Settlements. It was originally drawn up in July 1988. That Committee comprises banking supervisory authorities and was established by the central bank governors of the Group of Ten countries in 1975. Its members are drawn from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Switzerland, the United Kingdom, and the United States. It usually meets at the Bank for International Settlements in Basel, Switzerland. The original 1988 Accord was revised and published in June 2004 now referred to as Basel II. For the avoidance of doubt, I will quote relevant sections of Basel II.

Basel II “stressed that the revised Framework is designed to establish minimum levels of capital for internationally active banks” The recent rankings of the top 1000 banks in the world by the highly influential The Banker magazine aptly published in its July edition revealed that only two Nigerian banks, Union Bank and First Bank, made the list. Coincidentally, these are the only banks that presently meet CBN’s new N25 billion minimum requirement. Should our banks not become really internationally active before we rush to implement Basel II’s minimum capital requirements? As an aside, The Banker magazine said that “besides profits, consolidation provides another key theme in this year’s list. . . . a steady stream of smaller mergers and acquisitions across the globe has continued as bankers acknowledge the advantages of size”. Back to Basel II. While retaining a key element of the 1988 capital adequacy framework, which is “the general requirement for banks to hold total capital equivalent to at least 8% of their risk-weighted assets”, a significant innovation of Basel II “is the greater use of assessments of risk provided by banks’ internal systems as inputs to capital calculations. In taking this step, the Committee is also putting forward a detailed set of minimum requirements designed to ensure the integrity of these internal risk assessments”, which Nigerian banks should meet. It is for all these that Basel II states that “while the revised Framework has been designed to provide options for banks and banking systems worldwide, the Committee acknowledges that moving toward its adoption in the near future may not be a first priority for all non-G10 supervisory authorities in terms of what is needed to strengthen their supervision.”

Other issues raised by Dr. Teriba are really a matter of legalese and scholarship. Who has the authority to decide the withdrawal or placement of Federal Government deposits? Who has the authority to decide on access to the official foreign exchange market? What drives down inflation? Are there linkages between a sound financial sector and inflation? How do interest rates come down? How can we achieve exchange rate stability? In the final analysis, who superintends or regulates Nigeria’s monetary policy? Answers provided, may be as good as mine.

A lot of other seasoned bankers and knowledgeable Nigerians, like Mr. Atedo Peterside and Prof. Pat Utomi have commented on the issues raised by Prof. Soludo. The commentariat are somewhat united in their acceptation of the need to sanitise Nigeria’s banking industry. I quite agree that there is need for stratification in applying minimum requirements so that niche banks that are efficiently engaging in specialized aspects of banking can operate. But, we also need mega banks in the Nigerian economy for purposes of growth and development.

The banking reform announced by the CBN Governor is only a major component of the overall reforms agenda – the National Economic Empowerment and Development Strategy (NEEDS). It is complex and challenging to manage reforms in an environment of sarcasm and mistrust as that of Nigeria. This is made worse by the fact that most components of reform agendas reside in the domain of political economy and so people-sensitive. The onus is on policymakers to successfully manage reforms in these difficult climes because they have to contend with a number of vested interests, pressure groups, political considerations and above all a cynical public. In a previous commentary I had pointed out certain soft issues that are required to make NEEDS work and in another one I enumerated the likely consequences of failure.

We need to create adequate middle-level manpower in the public sector to manage reforms. Efforts should be made to infuse people with skills in managing reforms into the public sector. The language of reforms should be homogenous and ought not to be spoken and understood by only the Okonjo-Iwealas, El- Rufais, Usmans, Soludos, Agustos and Ezekwesilis. We are made to believe that the ongoing public sector reforms is aimed at achieving this objective but even that, if not properly managed could create a system dysfunction. For the past four decades, we have been good at introducing policies but clumsy in managing them.

Managing reforms require analysis, planning and implementation because it entails creating new bases of support. To manage reforms, it is extremely important to avoid transmuting proposals to policy overnight. In most instances it requires adequate public education and communication. For instance, the decision of Peru’s government to withdraw gasoline subsidies in August 1990, which resulted in a 3,000% increase in gasoline prices, did not record any public protests because the finance minister extensively and effectively communicated the reasons to the Peruvian public. Policymakers can also internally inform policy stakeholders of proposals and initiatives for technical input so that such policies do not become caricatures through the presence of critical gaps, gaffes and goofs that cause unwarranted embarrassments to well-intentioned policies. Policies are bound to either succeed or failure depending on externalities but a tidy process throws up alternatives to issues and functional justifications for positions taken, backed up by empirical facts and figures.

The Federal Government’s faltering steps on the path of deregulating the downstream sector of the petroleum industry started with its persistent juxtaposition of the policy of deregulation with that of petroleum products pricing. The arguments for ‘appropriate pricing of petroleum products’ at the time were untenable and fraught with mockeries and inconsistencies. The deregulation brouhaha with its attendant strikes and shutdowns became a classic example of how not to manage an otherwise good policy. With my eyes set on possible shocks that will result from job losses due to bank restructuring as well as bank failures due to deposit runs, CBN’s bank consolidation initiatives must not follow suit. With proper management and a real constituency, this is a very good reforms policy.

But, as the former Finance Minister of Brazil, Luiz Carlos Bresser Pereira, warned, “if democracy is not to be undermined as a consequence of economic reforms, the representative organizations and institutions must participate actively in the formulation and implementation of the reform program, even if this participation weakens the logic of the economic program or increases its cost.” Is anybody listening?

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