The move by the Central Bank of Nigeria (CBN)to strengthen the nation's monetary policy framework, especially as related to effective bank supervision, interest rate and general price stability, seems to have been locked between the monster and the deep blue sea, perhaps unimagined by the authorities. Finance Editor, Emele Onu, and Senior Correspondent, Kingsley Ighomwenghian, report.

Events of the past months clearly indicate that CBN's dream to bring banks under effective control and also see stronger levels of credit extension to the private sector following significant increase in the recapitalisation of the domestic banking sector are being dashed, as the interest rate curve has instead averaged on the upside and CBN finding it increasingly difficult to monitor the banks.

The apex bank's resorts to the Monetary Policy Rate (MPR) and the continued use of the Open Market Operations (OMO) for liquidity management have failed to align the economy within the set targets.

Recent pronouncements by the apex bank, say experts, suggest that the surveillance function of the apex financial institution on banks is meeting serious hiccups, with the result that CBN instruments can hardly make significant impact on the macro-economy anymore.

"A CBN that used to be proactive and highly assertive is now reactionary and has resorted to shifting the goal post. That is defeatism on its regulatory function," said an economist and banker on the basis of anonymity.

Introduction Of REP

The plan by the CBN to introduce Resident Examiners' Programme (REP) in the nation's banking industry with effect from January 2009 has continued to elicit mixed reactions from a cross-section of experts.

Some experts wonder what that would achieve if the CBN is unable to archive effective monitoring since it commenced the day-to-day surveillance of banks' vaults through the electronic platform.

At a time when the entire financial system was getting used to the reality of banks having to adopt a uniform accounting year end by December 31, 2008, the CBN also announced a shift of the date by one year.

Governor of the CBN, Prof. Chukwuma Soludo, had said at a press conference few days ago that staff of the apex bank would be posted to each of the nation's 24 banks to monitor and supervise their activities on a daily basis and report to the head office.

Speaking at the end of the Financial Sector Surveillance Committee (FSSC) meeting in Abuja, the CBN governor said the move would help strengthen the bank's mechanism for risk-based supervision in line with global trends.

The plan, he continued, "is designed to enhance our hand-on knowledge of the banks' operations, the complexity of their risk profile and to provide real-time and continuous evaluation of their operations." But Gbenga Obisesan, chief executive officer, Topmost Securities, a stockbroking firm, is not convinced that such is necessary, just as he agrees with other economy watchers that the CBN embarking on a project for which everyone knows it lacks capacity to execute.

A source, who craved anonymity, expressed concern that apart from the problem of sufficient staff to implement the plan, there's also the risk that those sent to report at the banks, like members of a special police squad, would most certainly be mortgaged. He is worried that only a very negligible few of these CBN staff would rebuff the lure to immediately agree to be put on the pay rolls of these banks, if only to get them play the ostrich, while top officials of the banks for which they are watchdogs carry on business as usual. Under such a situation, he lamented further, the apex bank in this its new venture would have done more harm than good to its staff and indeed the system in general.

There are those who query the need for this new thinking among members of the committee made up of the very senior cadre of the CBN, including Babatunde Lemo, CBN deputy governor in charge of Financial Sector Surveillance and former managing director and chief executive of Wema Bank before he was appointed almost five years ago into the apex bank. The worry, the argument continues, is the source of the brain wave, at a time when the apex bank ought to be thinking of ways to strengthen the Electronic Financial Sector Surveillance (e-FASS).

The Big Shift

Also, at a time when the entire financial system was getting used to the reality of banks having to adopt a uniform accounting year end by December 31, 2008, the CBN also announced a shift of the date by one year.

"This is in response to the observed desperate behaviour of some banks in deposit mobilisation and hiking of interest rates to levels that cannot be justified by fundamentals," the CBN governor noted.

Unless something is done to check the menace, he hinted, things would worsen, as the interest rate around which every other rate gravitates continues to soar beyond reach, as banks continue to bolster their balance sheets in the competition for market share, size and space, all of which ultimately determine industry leadership.

Continuing, Soludo explained: "The core (non-food) inflation rate is currently at about 3.6 per cent, and both the deposit and the lending rates that currently prevail in the market are not justifiable."

Specifically, a July 18 report by the National Bureau of Statistics said inflation soared to 12 per cent in June from 9.7 per cent during the preceding month, just as cost of food increased. This resulted in pressure on the CBN to further raise its benchmark interest rate at its next Monetary Policy Committee meeting scheduled for August 5, two months after it increased the rate by a quarter point to 10.25 per cent on June 2, and the third of such this year, in a bid to keep inflation in check.

Commenting on the CBN's latest move, analysts at CSL Stockbrokers Limited explained during the week that investigations showed that banks, "especially those that have over-stated their financials over the years, have sent out their staff to mobilise deposits at mouth-watering interest rates."

There are cases of banks whose staff have either been queried severally, had their salaries slashed or have since stopped receiving salaries for failure to meet their deposits target that would ensure that the banks remain leaders in the industry.

As part of the move to remain number one, using critical measurement yardsticks, the banks have since hiked their rates to between 16 and 20 per cent, depending on the value of the deposit.

"The deposits being mobilised by banks was, however, with a proviso that it should be fixed till December 31, when all banks are expected to comply with the uniform financial year policy. The implication of this is that liquidity has moved away from the capital to the money market, where investors are sure of getting at least 16 per cent return on their investment.

"Until the CBN, the banking watchdog, compelled all banks and discount houses to adopt a uniform financial year, many banks, because of different accounting periods, usually went to the inter-bank market (where banks borrow funds from one another to meet immediate needs)to boost their balance sheets. As soon as the regulatory authorities finished verifying their financials, the funds were usually returned to the inter-bank market," the analysts said in their report on Thursday.

The report added that the average lending rate, which "hovered between 13 and 16 per cent some three months ago, has nudged upwards to 23 per cent, minus fees and commission. If other costs are added, the lending rate may stretch to 29 or 30 per cent - just like the pre-banking consolidation era."

As one observer noted on Friday, the direct impact of this announcement would at least ease the liquidity squeeze currently being experienced in the market since the past four months, caused by banks' desperate search for deposits.

Researchers at CSL noted in an earlier report that the common year-end policy indeed caused "a pronounced increase in competition for deposits among the banks, driving interest rates northwards both in the inter-bank and retail deposit markets. We believe that competition for funds will intensify as the countdown to the uniform year end draws nearer, except there is a policy reversal or review. In addition, higher inflation figures released recently by the National Bureau of Statistics might inspire the monetary authorities into taking appropriate actions to cool the economy, during the next meeting of the Monetary Policy Committee."

Should the benchmark MPR be raised at that meeting, analysts say, investors may be forced to seek better and safer returns in the money market, as has been noticed in recent months, thereby further dampening the equities market.

While noting that the largely speculative prevailing sentiments are short-term, analysts insist that: "The key to market recovery in our view remains a total change in general mindset. We can't conclude without pointing out that this has, in a way, presented opportunities for investors seeking long positions, as some equities are currently trading in their oversold bands."

xperts are of the opinion that the CBN structure may have been weakened by events of the recent past and recommends strong refocusing of the body for its primary role of promotion of macro-economic stability.