Below is the transcript of my interview with Lamido Sanusi, from January 2011. Write up will be in next edition of This is Africa, in March.
AG: You have taken major reform initiatives since becoming the Central Bank governor. What were your primary goals when commencing the role, and are you happy with the pace of change so far?
LS: My first policy interview when I became governor was with the FT, and one of the questions was what objectives did I have as governor. I stated that, as well as macroeconomic stability, I had three principle objectives. One was to to fix the banks and restore financial stability. The second was to transform the payment system, and the third was to ensure that banks contribute to development. We have gotten to the point where the Nigerian banks are now fully recapitalised. We have made a number of reforms to the corporate governance. We have broken up universal banks. We have set up the Asset Management Corporation we have cleaned up the books and bought non performing loans. Credit growth has started coming back, private sector credit growth was about 30 percent in December, so we are well on the way to pinning that down. On reforming the financial system, we have issue mobile banking licenses, we are beginning to move into shared services, centralised cash management, we have launched the cashless Lagos Project. You will have noticed that in the last few weeks when Lagos was shut down due to the demonstrations, nobody had problems with cash; that was a consequence of the massive ATM/POS roll-outs that we have had. We think in the next one or two years, we would have transformed the payment system in Nigeria, and moved more and more transactions to channels other than cash, and modernise it, working with the telecommunications companies and so on. On banks contributing to development, we have played a major role in the power reforms and gotten a lot of long term low interest money to some of the power projects, independent power projects in the country, but I think the greatest achievement will be in the work we will do will be in agriculture, trying to fix agricultural value chains and get banks to lend to agriculture. that is a major area of focus. We have set up an implementation office. We will have another year or two before we will see very solid results in that area. So I do think I am on course to reach all the targets I set up for myself.
AG: Could you talk in a bit more detail about what you think the development goal of a central bank should be?
LS: I have had major discussions with the IMF on this, and my view has always been that the role of a central bank cannot be de-linked from the developmental stage of a country, which also cannot be de-linked from the structure of the central bank as an institution. So where a central bank is nothing but a monetary authority, obviously it can look at inflation targeting as its sole target. But if a central bank is in charge of the regulation and supervision of financial institutions, given the critical role of finance to development, I do not see how a central bank can distance itself from that role. We are a monetary authority, we are also a regulator and a supervisor, responsible for financial system stability, which cannot happen so long as the balance sheet of banks remains de-linked from the real economy. Therefore all the initiatives that a government has put in place: power, infrastructure, agricultural transformation, small and medium enterprise development, housing, will have to be done in coordination with the banking system. To that extent, I would never accept - go back to the history of central banks in Asia today, you look at Chinese , Malaysia, all those banks have played very positive roles to push forward an economic development agenda. I object to the ideological fixation of inflation-targeting as a sole objective. I do think a monetary authority should focus on price stability. We are a monetary authority, but much more than that.
AG: I understand there were some legal queries about the process of selling Union Bank, and now that has been cleared up. What are the prospect for Union Bank going forward?
LS: The reality is that, in this entire process, every step we have taken has been on the soundest legal advice and based on existing rules and laws. We always did anticipate there were people who would just go to court. The CEOs that we removed went to court, and obviously the courts have ruled that the central bank governor had the authority to remove them. They appealed and the appeal court has affirmed that. Some shareholders went to court to stop the sales of Union Bank, these are obviously shareholders in banks where capital had been totally wiped out, who had no value really in the institutions, and the process of recapitalisation was one that was aimed at saving the banks and protecting savers and depositors. These are the kinds of frivolous cases that we expect to continue, and there are many like that but we don’t think any of them will succeed. There is no chance for them to succeed.
AG: Do you think the AMCON interventions has been a success?
LS: Its been a great success. By the time the Nigerian banks publish their annual accounts for December, you will probably find that the non-performing loans of Nigerian banks has fallen to below 5 percent. That is basically because AMCON has been able to purchase the large number of non-performing loans that were acting as an overhang on bank balance sheets and restraining the banks and restricting their ability to lend more. That has been one positive thing. The second thing is that AMCON has been able to inject capital into banks and fill the hole, and act as a broker, because by filling that hole it made it possible for other investors to come in and facilitate the mergers and acquisitions. That has gone, frankly, much smoother than even our most optimistic projections. AMCON has been a key factor in the recapitalisation of the bridge banks which were set up by the NDIC when those banks failed to find buyers within the deadlines. With AMCON we were able to fix the banks by 30th of September, which was our deadline for all the banks, two years after the crisis started. AMCON has also, we have had a unique arrangement in which there is a sinking fund, and therefore the Nigerian banks are the ones who are going to pay for about 70 percent of the costs of the bailout, with the rest coming from the recoveries from the sale of the assets purchased by AMCON and maybe a maximum of 500 billion (naira?) over ten years from the central bank. In terms of purchasing non-performing loans, recapitalising the banks, facilitating the restoration of financial system stability and also having a fair and reasonable distribution of the costs of the bailout, AMCON has been fantastic.
AG On the issue of financial inclusion, a lot of the goals of your reforms are towards building a more efficient corporate culture and institutional, operational reality. Obviously there are gains within the sector, but do you also hope that by bringing down the costs of doing banking, there will be a consequence in terms of financial inclusion?
LS: Yes, there are a number of initiatives for financial inclusion: bringing down the cost of banking, focusing on alternative channels, the micro finance reforms that have just been done. We’ve just finalised a report we commissioned from Roland Berger and the Alliance for Financial Inclusion, which is basically a financial inclusion strategy report, so we’ve already anticipated some of the recommendations of the report through our mobile banking cashless policies and so on, one of the aspects of fin inclusion that we haven’t stressed much, or that have gone missing on many of the reports that I’ve seen, are what we have done no the universal banking model. By breaking up the banks and having what we now call levels of authorisation: regional, national and international, allowing for differential capital requirements - we have opened the space for the re-emergence of medium sized banks that would not be focused on very large multinational corporations but would actually lend to SMEs, because one of the unintended consequences of consolidation is that huge institutions were created and if you look at their their balance sheets, most of their assets are basically government securities and loans to large corporations. They simply have grown so big that they don’t have the time for the small man. By providing these different levels of authorisation, we’ve opened up the space for the re-emergence of the smaller banks. We’ve also licensed a non-interest Islamic bank, we hope to license more, so non-interest banking also brings into the financial system a large group of people who, for religious reasons, have not been patronised in the conventional banking system. This opens up the prospects for new products such as Islamic-compliant bonds, or sukuk, which can bring in some investor classes which have shied away from fixed income market. So it is an ongoing process and it will continue, but we’ve made a lot of progress.
AG: Were there Shariah banking possibilities prior to this, or has this just been introduced?
LS: We have now licensed an Islamic bank. There was always a framework, the law had always provided for the possibility of non-interest banks, but we have basically, by licensing JAIZ [an Islamic bank] and by developing the framework, I think we have opened up that space. Started operations a few weeks ago.
AG: On some of the original reform presentations you had given, you spoke about regulations to limit the capital and the levels of lending to a set proportion of bank’s balance sheets. Has that been passed and is it now at a set level?
LS: We have always had single [limits]. What we have not had are some of the other macro-prudential rules. For example, one of the things we have introduced are limits to how much of a bank’s capital, of a bank’s loan, can be exposed to the capital market, because of market risks. Now that we have got the universal banking model, some of the prudential guidelines we are working on set limits on how much of a bank’s capital can be lent to a related party. So if a bank is part of a holding company group and there is an asset management company in that group, we want to make sure their deposits are not transferred to that asset management corporation. Macro-prudential rules, the guidelines on capital adequacy, the guidelines on leverage, are constantly being reviewed and ruled out.
AG: Do you feel that banking reform is one of those areas that requires a very big, systemic push in an initial phase to set the sector on sustainable ground and then, once you’ve achieved your goals, it’s a case of allowing the regulations to take force, or do you see this as a medium term reform process where there is going to have to to be new interventions, new rules, new regulations.
LS: I think the critical thing is to agree on what is the overarching vision on the basis of which a reform is built? I mean, what are the key requirements for a stable financial system? We believe we need to continue to constantly improve issues of corporate governance, which are a major issue; the questions of integrity of financial statements and the extent and transparency of disclosures. The constant attempt to get the banks to diversify their portfolios and lend to the real economy as opposed to betting against asset prices. And also, ensuring that banks keep to lines of business that do not expose them to excessive risk such as the huge maturity transformation risks that they run when they go into things like private equity or venture capital or project finance when their liability base is basically volatile savings and current accounts. Once those three or four key requirements have been identified, what is left is to continue working within that broad vision, to put in place the regulations and supervisions to make sure those things are strengthened. So in a sense, there can never be a soft touch regulation. But then it has to be a regulation that not arbitrary. The direction needs to be clear. Banks need to understand why we are doing what we do.
AG: The IMF has been very consumed with the global crisis. When Lagarde came in, there was some discussion about the future direction of the fund and of the ways in which the Fund could become a better actor in terms of what Africa needed. Do you feel that the global crisis has seen these issues drop down the agenda?
LS: I have had a very good relationship with the FUnd and we have had very good understanding on a broad range of issues. Obviously we have had areas of difference and they respect the views I have taken. Christine Lagarde came to Nigeria and what struck me about Ms Lagarde was that, it seemed we in Nigeria were obsessed with the Eurozone crisis, we were worried about Europeans not fixing their problems and what that implied for our currencies, for the price of oil. She was very much focused on Africa and how African countries can help build the buffers to protect them from a crisis in Europe. That was very positive. This wasn’t an IMF MD that was so much concerned about how are we going to fix European problems, just more focused on ‘listen, in the event of Europe not being able to fix its problems, are you ready? What would you like to do to make sure you are prepared?’ And that was very positive. I did say when she was there that the Fund in general is very different from the stereotype in the past. I go to Washington, I have debates at the Fund, I have disagreements at the World Bank. They come to us on article 4 consultations. maybe because we’re not borrowing money from them, but we don’t get a sense of anyone trying to impose a view, sometimes we disagree and the report is clear that they don’t agree with us in our exchange rate stance or in some of developmental initiatives, but in general the Fund has been ….there has been a proactive stance taken by the Fund that we welcome.