Tag: alarm

•Result of CBN’s liquidity stress test on banks is not encouraging

Nigerians have every reason to be worried at the outcome of the recent liquidity stress test conducted by the Central Bank of Nigeria (CBN) on 21 deposit money banks and 14 foreign subsidiaries, published in the CBN Financial Stability Report released last week.

Based on findings from a 30-day shock test to assess banks’ resilience to liquidity and funding shocks, the report summarises, to wit: three banks – two of them large – recorded negative liquidity ratio; most banks’ liquidity ratio was found to be below 30 percent threshold based on the same parameters. Overall, the finding was of an industry “resilient to liquidity stress although the test results indicated deterioration in the banks’ resilience compared with the position in the preceding period”.

As usual, the report would acknowledge the twin challenges of corporate governance and risk management practices as subsisting.

No doubt, the result says a lot about the vast ground still left to be covered before the banking sector can claim to have achieved a reasonable measure of stability. But, as a whole, the findings raise the larger question of whether therapies applied in the last 10 years can be said to have delivered the expected outcome in terms of financial sector stability, given the energy and resources pumped into it.

We say this because the challenges facing the sector have remained largely the same as it was when the nation began the restructuring odyssey 10 years ago. We recall that in July 2004, the then Central Bank Governor Chukwuma Soludo had described the Nigerian banking system as “fragile” and “marginal”. He had specifically diagnosed the sector as suffering persistent illiquidity, weak corporate governance, poor assets quality, insider abuses, weak capital base, and over-dependency on public sector funds, etc. If his 18-month long recapitalisation therapy under which 84 deposit money banks were collapsed to 25 by the end of December 2005 was meant to address these multifarious problems, the fact that variants of the same malignancies requiring even more drastic therapies would manifest barely three years after, obviously says a lot about its efficacy.

We refer here to the free-for-all era of banking which followed the consolidation exercise during which operators simply went on to plunder the system. To clean the Augean stable, Sanusi Lamido Sanusi, Soludo’s successor would sack a generation of top bankers in what is now famously described as sanitisation. Even at that, the challenge has remained one of delivering a banking system that is sound and stable.

What the latest findings suggest is that the nation is a long way from that. However, while the suggestion that the sector is far from being out of the woods would seem troubling enough, the grim possibility of the sector being plunged into another round of crisis in the face of continuing deterioration in asset quality and in the atmosphere of weak corporate governance must be seen as portending grave danger for the Nigerian economy.

We expect the CBN to treat the report as a wakeup call, and with all the seriousness that it deserves. It goes without saying that the apex bank’s authorities must put necessary strategies in place to avert a systemic distress that the nation can ill-afford; not at this time or even in some distant future.

Moreover, if it’s not too late in the day to ask: what has happened to the so-called proactive, risk-based regulatory framework the CBN claimed to have put in place – the early warning signs which it claims to place so much store in? Perhaps the time to activate that is now.