ONU OKORIE writes that despite the disadvantage of huge cash in the volts of deposit money banks, there are indications that Nigerian banks are still strong

One of the salient revelations that have been recorded in the Monetary Policy Committee, MPC, meetings in recent times is liquidity surfeit in the banking sector. Liquidity surfeit means that banks control huge unexpended cash in the volte. During his press briefing after the January 2016 MPC meeting, the governor of Central Bank of Nigeria, CBN, Godwin Emefiele said, “the Committee acknowledged the continuous liquidity surfeit in the system stemming partly from the recent growth-stimulating monetary policy measures, as well as the tendency of the banks to invest excess reserves in government securities, rather than extend credit to the needed sectors of the economy.” The March communiqué of the MPC noted that money market interest rates reflected the liquidity situation in the banking system. Average inter-bank call and OBB rates, which stood at 0.5 and 2.77 per cent on 25 January 2016, closed at 4.00 and 5.00 per cent respectively on March 9, 2016. Between January 25th and end-February 2015, interbank call and OBB rates averaged 1.43 and 2.68 per cent respectively. This was traced to liquidity surfeit in the banking system. For some industry watchers the excess liquidity portends good omen for the country given that it forms a buffer against systemic distress. According to a financial analyst, managing director, Beacon and Pearl Associates Ltd, Mr Benson Ngene, the current liquidity in the sector will engender confidence in the deposit money banks. According to him, “it is a good story that banks can meet the customer’s obligations despite the current economic situation. With the excess liquidity in the system, banks will not disappoint customers.” The financial expert also said that the banks’ volte portrays the effective supervision provided by the apex banking institution. He argued that banks are reluctant to take risk to avoid being trapped into increasing non-performing loans, because the regulatory institution is doing the right thing now. He however argued that on the other hand, excess liquidity warehouses investible fund and waste opportunity for growth. There is no doubt that the banking sector in any economy is its engine room for growth. For instance, it promotes rapid economic and social development of the economy, facilitates the effective management of the economy, provides non- inflationary support to the economy and enhances greater mobilization of saving and efficient and effective channelling of funds to productive sectors. Emefiele said that the deposit money banks were, however, reluctant to grant new credit because of rising non-performing loans NPLs, mainly in the oil sector, amongst other reasons. Deposit money banks have been urged to improve lending to the real sector, as part of their patriotic obligations to the country and enjoined the management of the Bank to continue to explore ways of incentivising lending to employment- and growth- generating sectors, particularly SMEs. On the monetary side, contrary to the notion of liquidity overhang in the financial system, the wider economy appears starved of the needed liquidity to spur growth and employment. With the exception of credit to government, growth in all the monetary aggregates remained largely below their indicative benchmarks. Obviously, the attendant low rates at that market have not transmitted to the term structure of interest rates. Concerned about the need for low interest rates to support growth and employment, the CBN said it wants to explore innovative ways of ensuring the unhindered flow of credit at low cost to key growth sectors even as monetary policy has to, under the circumstance, address the liquidity surfeit in the banking system, as well as the pressure on exchange rate and consumer prices. The effectiveness of the banking system enhances the realisation of country’s economic potentials, banks are therefore highly regulated in order to protect depositors’ funds ensure the safety and soundness of individual banks, enhance the integrity of the payment system, promote healthy competition, support government macroeconomic objectives, enkindle public confidence in the banking sector. Regulation and supervision are essential for a sound, stale and healthy financial system. Need for banking sector supervision increases as the number and variety of financial institutions increase. Supervision entails the enforcement of rules and regulations, exercise of judgment concerning the soundness of a financial institution’s assets capital adequacy, operational performance, corporate governance and management. The CBN as part of the internal restructuring process has strengthened its on-site and off- site supervisory function, has commenced Risk Based Supervision (RBS) as against the compliance based supervisory approach. The new supervisory approach is proactive, allocates greater supervisory resources to the risky aspects of banks’ operations. It enables the supervisor to appraise the adequacy or otherwise of the risk mitigates put in place by management. The CBN has responsibility for ensuring orderly conduct of financial intermediation within the banking system. The CBN Act 2007 has the promotion of a sound financial system in Nigeria as one of the core objects of the Bank. Off-site supervision qualitatively evaluate the operational parameters of a bank and its compliance with regulatory requirements, off-site supervision of banks and discount houses conducted through the electronics Financial Analysis and Surveillance Systems sFASS. Also a macro-prudential office has been established in the FPRD for analysis and review of risks inherent in the operations of the entire banking sector. The CBN continues to be challenged by the existence of problems in the banking system. There is no gainsaying that CBN is facing challenges in its supervisory role of the banks given the Nigerians setting. These include problem of data integrity from bank returns, poor risk management practices, insider-related credits abuses evidenced by the absence of good corporate governance in the banking sector. Accordingly, the banking system in Nigeria, unlike in other economies,
has not developed the required framework necessary to support the economic development of the country. while the function of the banking sector in Nigeria, as the hub of financial intermediation and engine of economic development had not been fully attained, the CBN continues to formulate polices issue guidelines, and adopt strategies and measures to improve on the effectiveness of the sector. The inability of properly and timely identify the weaknesses in the banking sector through effective supervision contributed to the sector shock, recent initiatives of the CBN to reverse the deterioration which culminated in the initiation a four-pillar reform programme seeking to enhance the quality of banks, establish financial stability, enable the evolution of health financial sector, ensure that the financial sector contributes to the real sector of the economy, to address the challenges of weak corporate governance. The CBN is also reviewing the ‘fit and proper person’ regime in order to ensure that only credible persons of impeccable financial personal and professional character are allowed as major shareholders, directors and managers of banks and OFIs.

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