In the face of sweeping changes in Nigeria's banking sector, NEXT reproduces excerpts from an exclusive interview with CBN governor Lamido Sanusi conducted shortly after his appointment.
What do you see as the role of the CBN governor?
The role has been properly defined - ensuring economic stability, financial stability, developing an effective and efficient payments system.
My sense is that those functions are handled principally by the deputy governors and I think what we need to do going forward in the selection of deputy governors is that we select people who are capable of taking full responsibility for each of those functions.
Right now, we've not looked at specific individual skills. We've looked at people who were former bank EDs or MD, or DMDs, people who've just grown through the system and made them DGs.
We've thought that deputy governors should be generalists.
I see the CBN governor's role as that of providing strategic direction and leadership for the enterprise and that means ensuring that he's got the right people helping him.
Typically, he (governor) would have strengths in some areas and weaknesses in others and you would hope that the deputy governor would complement these areas of weakness.
I have major strengths in risk management so I think I'll be able to add a lot of value to financial surveillance and risk management. I also have strengths in economic policy, since I started as an economist.
But I don't have strength in operations so it's important to have a good deputy governor running operations.
I see the role of a central banker as also being a very political role, not in the sense of being a politician but political in the sense of being the point of contact between the central bank and monetary policy on the one hand and other ministries and state governments on the other hand.
The governor reports to the president, he reports to members of the executive council, he interact with governors and part of his responsibility is to ensure that in a collaborative and cooperative sense, there are policies developed outside monetary policy that complement and can help the overall objectives set by government.
The management of the financial system is not something that should be taken out of the overall economic framework for the government.
You can't for instance say that you are not interested in which sectors of the economy the capital of banks is directed to because it's important that the capital flows into those areas that are priorities of economic policy.
And while you can't just throw money at a project because the government says it wants it, you can help structure that area and that sector and the rules around that sector, so as to make it profitable and prudent for banks to lend to those areas if properly incentivised.
Those are the kinds of things that I see the central bank governor doing rather than micromanaging the various directorates in the institution.
What kinds of things do you want Nigerians to judge you with at the expiration of your tenure?
I would like to settle down and set out a clear plan and define clear targets. But if what I succeed in doing is improving regulation, improving transparency, improving risk management and therefore significantly reducing the risk of financial instability that would be a major contribution.
I would also like to see how we can take further steps towards FSS 2020 and making Nigeria the financial hub for Africa.
And how do you intend to make Nigeria the financial hub for Africa exactly?
Some of the things we've talked about with regards to improving the governance and reporting in financial services.
Some of the other issues would be legal frameworks that would allow capital to flow in and out, but in general I think what you need to have is a well managed economy and financial system where international capital will feel comfortable flowing in.
You have made several references to law. Are there particular laws you feel we must have?
There's the Public Private Partnership (PPP) framework and the need to have regulations around that and guaranteeing the safety of investments and the sanctity of contracts.
I think the laws that we have need to be effectively implemented, for example, the anti-corruption laws.
Before the meltdown for instance, I know for a fact, a private equity firm had $1 billion lined up just waiting to invest in Nigerian power.
They were not able to, because of governance issues. There were demands made on them that they thought were inconsistent with their corporate governance and ethical standards so we need to look closely at those because it's a major disincentive for inflow of capital.
We need to have strict laws against mis-reporting and deliberate failure to disclose material facts.
We need to treat that as economic fraud and we need to take action against chief executives who deliberately distort financial statements because.... if you publish wrong accounts and your share price goes up, you are effectively taking money out of the pockets of shareholders that are buying those shares.
It is stealing. It is procurement under false pretences and we need to make sure there are several sanctions for that kind of activity.
I don't think the system is going to be better simply because you have more laws or more regulations. I think it will be better when we focus more on the kind of people that are key operators and actually either make them live by certain codes or get them out of the system and get in people who are more professional and ethically inclined.
But these are your people on the bankers committee. How are you going to deal with them?
I am not making any specific allegations of any of my colleagues on the bankers committee but certainly if any bank chief executive is not fit and proper then he has to go. Paulson was in Goldman Sachs.
It didn't stop Managing Directors of financial institutions from being asked to go. Indeed in several cases, the boards of those banks told them to go. You can't place your franchise name at risk.
You talk about the boards of banks and not just the individual who is Managing Director or Chief Executive. To what extent will you have reach to make changes in boards if necessary?
There's a limit to how much the central bank can intervene in a board. But again, remember that the Central Bank actually has the right to define who is fit and proper.
There are guidelines in the law and these guidelines are not just professional qualification. If there is enough evidence that people are not doing their role, then they can be declared not fit and proper.
But very often what you will find is that the boards will take a decision on individuals within the institution who have, through acts of commission or omission, subjected their institutions to risk. It has happened before in this market.
You are clearly recognised as a risk manager within the industry but you've also publicly said to a gathering of chief executives, ‘we all invested in margin loans and we're now all a bit broke'. Given that you have been in the system, to what extent do you feel that Nigerians should trust you going forward?
I think people don't understand sometimes, the limits of risk management. Banks are in the business of taking risk. If you don't take risk, you don't make a profit.
The duty of a risk manager is to make sure that the risks taken are not excessive, that they are properly understood and measured and that the bank has enough capital in the event of things going wrong.
When you go into the capital market, you take the risk that you might make money or you may lose it. When you go into the capital market thinking that you will not lose money but you will definitely make money all the time, then you have not managed your risk.
There's always a difference between the bank that decides to bet a small part of its assets in the capital market in the hope that it will make money, but with the understanding that if things go wrong it might lose money, but knowing that whatever happens, the loss is not going to place its capital at risk... and a bank that simply keeps putting capital into the capital markets thinking that the markets will keep going up.
I think on the matter of trust, the market does trust me. First Bank has disclosed its losses. The bank has non-performing loans that have moved up from under 2 percent to about 5 percent and is going to take provisions of about N12 billion.
And in addition, First Bank is going to look at whatever it is on the subsidiaries books that is being held as treasury stock or investments or whatever and simply march to the market.
While these are not actual losses that have crystallised, the bank is taking a prudent approach.
So, I don't think that First Bank is a bank that has not been trusted for the numbers it published. Trust has never been a problem for me.
Can you give us a sense of where you expect the country to be under your term as CBN governor in terms of inflation, currency and interest rates?
It's difficult to say. There have been different forecasts for economic growth this year - the Central Bank said 6 percent, the International Monetary Fund said 2.9 percent, the African Development Bank said 4 percent.
I believe the IMF may have been too conservative but the Central Bank may have been too optimistic. I think the ADB's 4 percent would be a more realistic number given all the things that have happened.
I will hope that we get over this once we clean up whatever issues we have in the financial markets and we should go back on a growth trajectory.
If we can grow by double digits by the time my tenure expires that will be good but it's not just up to me, it's up to my colleagues and the cabinet. Inflation is at 13.1percent now.
We'd like to bring that down to single digit, even if that is 9 percent, but then sustained over a period. Low interest rates are critical at this point in time because when you have counter-parties with risk of default, high rates of interest simply exacerbate the default risk, so low interest rates are better.
But it is very difficult to attack interest rates, exchange rates and inflation at the same time - it's called the unholy trinity or the monetary policy trilemma, so you have to let one go.
Very often, in the attempt to conquer inflation and exchange rates, interest rates suffer. I certainly don't think we should risk going into hyper inflation.
So which of the three (exchange rates, interests, inflation) would you drop/de-prioritise?
Personally, I think that in the kind of economy that we have today, a low interest rate is more important than a strong exchange rate.
For the simple reason that you've got a country of 150 million people and like I keep saying, if you address some of the linkage problems in this economy, the upside potential for economic growth, driven by the domestic market is far more than what you will get from exports.
We keep talking about non-oil exports and primary production for exports. That is a right wing fascist Latin American model of a banana republic - the belief that you export goods in which you have a comparative advantage and you get rich.
Nobody has ever done that in reality. I do not know of any country in the world that developed based on agricultural exports.
Until you actually re-build your manufacturing base... For development you need scaled economies, and you need the benefits of enhanced technology....The British and the United States protected their industries, even recently George Bush protected the steel industry in the United States.
I am not a protectionist and I am not saying that we should go into tariffs and subsidies but if you invested a lot in those things that would bring manufacturing back on track like power and infrastructure and security, then you are actually kick starting the process for development.
If you spend a lot of your resources on primary production and primary exports, you are simply going into areas with diminishing marginal productivity and falling terms of trade.
What do you think about the expanded discount window?
In a time of financial instability, providing liquidity to banks and making sure that banks are able to lend to the private sector is absolutely critical.
I don't know exactly what types of assets are being taken by the expanded discount window and that's where the opacity comes in.
If you're taking Commercial Paper and banks are taking funny loans because if a bank is pledging a CP to borrow money for one of two reasons - one reason is that the loan has not matured and they need liquidity.
Another reason is that the loan has matured and the counterpart has not paid and then the bank gets liquidity with the Central Bank.
If it's the second case, the issue is that have they taken a provision or are we simply providing them with money that will allow them to pretend that these loans are good and take the profits on those loans, whereas in fact they are non-performing loans.
(When the expanded window was granted), there was no definition as to what kind of CPs were going to be taken, no issue of rating, no issue of the quality of the assets... so I think that we need to have more information, more transparency, but more importantly we need to make difficult decisions... we've got resolution costs for those toxic assets and those costs are to be borne by somebody.
Primarily they've got to be borne by the shareholders of the banks, but then the government and the people have to bear some of the costs later.