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Emefiele: Ensuring Financial System Stability

When Godwin Emefiele took office as the governor of the Central Bank of Nigeria (CBN) in 2014, his mind was set on not only developmental finance and exchange rate stability. A resilient financial system was also one of the main goals he highlighted in his maiden speech.
A stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and investors and, by so doing, help promote growth in economic activity. The safeguarding of financial stability is a forward-looking task that seeks to identify vulnerabilities within the financial system and, where possible, take mitigating action.
While financial system stability is one of the core mandates of central banks around the world, regulatory agencies also became more strategically sensitive in the aftermath of the 2008-2009 global financial crisis.
The 2008-2009 global financial crisis resulted in the loss of 8.7million jobs, foreclosure of 15 million homes, collapse of some giant financial institutions hitherto considered too big to fail, and wiped out $2.8trillion savings in the United States of America alone and the effect was almost just as the same in almost every part of the world.
As part of the global community, Nigeria had had its fair share of the crisis as the financial system including the capital market experienced massive capital flight. Net outflow from the Nigeria Stock Exchange alone spiked to N480 billion in 2008 from N104 billion in 2007.
The exchange rate had to be sacrificed as demand for foreign exchange soared. The demand for forex at the official and parallel BDC segment spiked from $17 billion in 2007 to $32 billion in 2008 due to capital flight. Inflation went from single digit of six per cent to 15.1 per cent in the course of one year.
The stability of banks and other financial institutions in the country were also threatened by the crisis, as many of the banks were already exposed to the oil and gas sector when it was booming and were left counting their losses when oil prices fell. Others had also placed huge bets on the stock market and it was estimated that the banks lost over N900 billion to the stock market crash.
Huge loans had also been granted to firms and individuals who defaulted on payment and to make matters worse, the loans were not backed by adequate collateral. The Non-Performing Loan (NPL) ratio of the banks rose to 20.7 per cent in 2009, which is close to the 22 per cent NPL that preceded the banking consolidation of 2007. The banks were already filled with toxic assets and facing serious liquidity challenges, which impaired their ability to give credits to the real sector. Many of the banks even had to downsize on staff and tighten expenditure to scale through the challenges thus increasing the number of the unemployed in the country.
The impact on the banking system would have been much worse had it not been cushioned by the Nigerian Financial System Strategy FSS2020. Designed to enhance stability of the financial system, FSS2020 was strategic, futuristic and pre-emptive as it were. It fortified the banking system ahead of the 2008-2009 fiasco and largely cushioned the devastating blow the global crisis would have dealt on the Nigerian banking system.
Coming on board in 2014, Emefiele, in his maiden press briefing noted that the core of his vision was to effectively manage potential threats to financial stability and create a strong governance regime that would be conducive for financial intermediation, innovative finance and inclusiveness.
A robust financial system has three basic characteristics, namely flexibility, resilience and internal stability. Among other benefits, it facilitates the smooth flow of funds from surplus to deficit ends, engenders macroeconomic stability which enables businesses to plan conveniently and attract foreign capital for the greater benefit of the economy.
CBN places financial system stability on the front burner, and as Emefiele remarked, the 2008-2009 global financial crisis necessitated the development of adequate framework and appropriate tools for managing financial stability, particularly macro-prudential and micro-prudential policies and crisis management conundrum.
He said, in this regard, that he hoped to anchor on two main pillars: managing factors that create liquidity shocks and zero tolerance on practices that undermine the health of financial institutions. His strategies in achieving these included the establishment of Secured Transaction and National Collateral Registry, and enhancing the operations of credit bureaux.
He was also focused on strengthening the sanction system to include: blacklisting of companies or individuals that have been found to be serial loan defaulters and implement stringent loan provisions and penalties for banks that lends to blacklisted persons and companies.
At the 2017 Nigerian Bar Association (NBA) conference, Emefiele notably remarked that the Financial Services Regulation Committee, led by the CBN was structuring a robust financial framework that would adequately promote stability in Nigeria’s financial system.
Recent CBN policies on the foreign exchange market have enhanced public confidence inflow of more foreign capital into the economy. Data from the National Bureau of Statistics show that the total investment inflows into Nigeria peaked at $1.792 billion in Q2 2017, $884.1million higher than Q1 2017, representing 95 per cent increase. And the year-on-year inflow, rose to 43.6 per cent from $1.042 billion same period in 2016. Foreign portfolio investment was noted as the main driver of the inflows.
Delivering the keynote address entitled: “Strengthening the Economic Recovery Process in Nigeria” at the 53rd Annual Bankers’ Dinner of the Chartered Institute of Bankers of Nigeria (CIBN) late last year, Emefiele had outlined the monetary policy thrust for 2019.
He said that the short-term outlook of the economy remains good, adding that current tight stance of the bank will continue in the near-term. He added that the bank, working with the Federal Government, was open to foreign investors who were keen to support efforts at unlocking the immense opportunities in Nigeria’s economy.
“Your Central Bank today is more committed to creating wealth and putting in place strong policies for creating jobs for our growing youth population; your Central Bank today is ever more committed to promoting a more stable and resilient financial system,” he said.
While advising against hasty criticism of monetary policies, which he said were taken based on macroeconomic and geopolitical contexts, he assured that the CBN would always act in good faith, with the best available information and in cognizance of current economic conditions, to pursue price and financial system stability, support job creation on a massive scale and ensure a more inclusive growth in the economy.
On the restriction of access to foreign exchange from the Nigerian market for 41 items that can be produced in Nigeria, he reeled out statistics to show that the policy had helped to boost local production of the items. He said that the combination of the restriction on 41 items along with other measures imposed by the fiscal and monetary authorities helped to promote the recovery that got Nigeria out of recession.
He warned that any attempt to reverse the policy could negatively affect economic growth in the country, particularly as it relates to the push to diversify the Nigerian economy. He also disclosed that the CBN’s Economic Intelligence and Banking Supervision Departments would work closely with the Economic and Financial Crimes Commission (EFCC) to expose and sanction any bank, company or Foreign Exchange operator that colludes with individuals or companies to undermine the policy on 41 items.
Speaking on the success of the Anchor Borrowers’ Programme, he said that the development finance intervention scheme had ensured that Nigeria emerged from being a net importer of rice to becoming a major producer of rice, supplying key markets in neighbouring countries. According to him, as at October 2018, a total number of 862,069 farmers cultivating about 835,239 hectares, across 16 different commodities, had so far benefited from the programme, which had generated 2,502,675 jobs across the country.

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