What Dr. Olayemi Cardoso needs to do as CBN Governor – CPPE

Dr. Olayemi Cardoso, the newly appointed acting CBN Governor must restore confidence in Nigeria’s Forex Markets, deepen the financial system, encourage efficiency in Nigeria’s financial system and suspend the naira redesign policy indefinitely.

This was disclosed in a statement by Dr, Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise in a statement shared with Nairametrics.

Restoring Confidence in the Forex Market

They added that Dr. Cardoso is assuming the leadership of the CBN at a very crucial time in our economic history.

“The economy is grappling with severe adverse effects of the depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, a huge backlog of foreign exchange obligations that need to be cleared and debt service obligations that need to be redeemed

“The CBN must ensure strategic and transparent intervention in the forex market to minimize volatility, as far as the reserves can support. In addition to the I and E window, it has become necessary to create an autonomous window in the banking system where the currency can trade freely without any encumbrances.

This is necessary to avert the diversion of remittances to other jurisdictions or the black market. We cannot afford to live in denial at this time.

Deepening the Financial System

CPPE called for an imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy.

“Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.

“Banking system credit to the private sector in Nigeria, as at 2022, was a mere 20.6% of the nation’s GDP, as sub-Saharan average of 28% and global average of 145%.

“Besides, small businesses which account for an estimated 50% of the GDP, have access to just about 1% of the credit in the banking system. The implication is that the banking system is still largely disconnected from the investing community, especially the small businesses in the economy. The financing gap in the small business space has been estimated at over N600 billion.

“This anomaly needs to be corrected. All these underscore the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.

Efficiency of the financial system

They urged that the spread between deposit and lending rates in the Nigerian banking system is too high.

“It is an indication of serious efficiency issues in the banking system.
“In Nigeria, the spread is over 20%, one of the highest globally. The average for sub-Sahara countries is 10% and the global average is about 6.6%. The large spread is detrimental to investment growth and disincentive to savings.

Capital Requirements for Banks

CPPE noted that the minimum capital requirements of the banking industry need to be reviewed in light of the considerable loss of value amid depreciating domestic currency.

“During the banking consolidation exercise of 2004, the minimum capital requirements for banks were raised from N2 billion to N25 billion.

“The revised capital requirement was an equivalent of $187 million. Today the same N25 billion is an equivalent of just $32.5 million.

“ This is a clear indication of the phenomenal erosion of the capital base of the banks. Recapitalization of the banks has therefore become imperative.

Naira Redesign Policy

CPPE noted that the naira redesign policy should be suspended indefinitely and it should not be a priority at this time.

“There was really no compelling argument to undertake the naira redesign in the first place.

“The approach was very disruptive and inflicted unbearable hardships on businesses and the citizens.

“Economic activities need not be disrupted to achieve a reduction in cash transactions in the economy.

“Nigeria has one of the best rankings in cash dominance metrics. Cash as a percentage of GDP in Nigeria is one of the lowest globally at less than 2%. For many other developing countries, the percentage is as high as 10%.
Tenure and Cost of Funds in the Banking System

CPPE warned that the tenure of funds in the country’s banking system is extremely short as over 85% of deposits in the banking system are less than one year tenure.

“This maturity structure of funds cannot support economic growth. What it means is that long-term investment cannot be supported by our banking system.
“In 2021, the banking industry recorded a negative asset-liability mismatch of N45.6 trillion, according to the NDIC. This is not healthy for the banking system and the economy.”

They added that this is why there has been a dominance of development finance in the economy, citing a need to address the macroeconomic fundamentals to correct this maturity structure of funds in the banking system.

Concentration risk in the banking sector

CPPE noted that Steps should be taken to reduce concentration risks in the banking system as a strategy to manage systemic threats to the bank system, adding that the top ten banks account for over 80% of bank assets, total loans, and deposit liabilities.

What you should know

Nairametrics reported last week that Dr. Cardoso together with his designated deputies took the oath of office on Friday, 22nd September 2023 at the bank’s Head Office in Abuja.

“Dr. Olayemi Michael Cardoso, recently nominated by President Bola Ahmed Tinubu, has on Friday, September 22, 2023, formally assumed duty, in an acting capacity, as the Governor of the Central Bank of Nigeria (CBN), pending his confirmation by the Senate. 

This follows the resignation of Mr Godwin Emefiele as Governor of the Central Bank of Nigeria (CBN), Similarly, the Deputy-Governors-Designate have also assumed duty, in acting capacities, the sequel to the formal resignation of Mr Folashodun Shonubi, Mrs Aishah Ahmad, Mr. Edward Lametek Adamu, and Dr. Kingsley Obiora as Deputy Governors of the CBN.