Thoughtful editorial on the Central Bank of Nigeria and Nigerian banks

I was just thinking of writing a column on the new term limit imposed by the Central Bank of Nigeria on bank CEOs when I saw this thoughtful Next editorial:

Is the CBN too powerful?

In the national confusion over our president who has vanished into thin air, a significant but little remarked event occurred earlier this week. The Central Bank announced that it was retroactively imposing a 10-year limit over the tenure of bank CEOs, effective July 31.

It was not lost on most discerning observers that the primary targets of this new policy appeared to be two of our most prominent bank chiefs, Tony Elumelu, who engineered a takeover of UBA by the much smaller Standard Trust Bank that he used to run six years ago; and Jim Ovia, who built Zenith Bank from scratch and made it a ubiquitous presence.

The legality of the CBN decision is hardly in question: we have a central banker so powerful that it can dissolve the boards of banks, dismiss their executives, dictate their operations and pretty much act in almost any way it pleases.

The necessity for such level of authority is not hard to see. The banking system of any country plays an outsize role in the national economy. Poorly regulated or supervised, banks are quite capable of destroying the economy and impoverishing the rest of us. The United States barely dodged the bullet in the last quarter of 2008, when its banks tottered and nearly collapsed, bringing the world’s financial system down along with it. And the level of sheer criminality in our banking system, exposed in the past seven months only because a complicit Central Bank governor was replaced with a more alert one, was an object lesson in the need to guide the banking system with a firm hand.

No one can deny that the wretched excesses of banking chiefs with supersized egos, exemplified by Cecilia Ibru at Oceanic Bank and Erastus Akingbola at Intercontinental, made an aggressive posture by the Central Bank an urgent imperative.

But the question needs to be asked: should the Central Bank be assuming the roles of board directors to dictate how long a chief executive may serve? Heavily regulated though they are, unlike, say, a cement company or a flour mill, banks nonetheless remain the property of private investors, and in the absence of a specific regulatory breach by identifiable bankers, should the Central Bank be in the business of stipulating how long they may serve? Setting term limits, as a general principle, of course works well in politics and government. The basic assumption, which is well founded in our experience of the frailties of leaders, is that power corrupts, and the earlier we can kick the bums out, generally the better for the state.

This may, of course, not necessarily work in private enterprise. Bill Gates built Microsoft from the scratch and ran it for 25 years. The mercurial Jack Welch, during a two-decade tenure, rebuilt General Electric into at one time the world’s largest company by market capitalisation. And in our own country, Atedo Peterside founded and ran IBTC for nearly 20 years, making it one of the country’s most respected banks.

Central Bank officials justify their latest action thus: A banking license is a rare privilege, granted on the implicit assumption that the holder will act in the highest traditions of prudence and restraint, and essentially run a bank in the best interests not only of depositors and shareholders but of the public at large. Needless to say, many of our most powerful bankers failed that test in recent years, culminating in last year’s crisis that has forced the treasury to pony up about N1 trillion to rescue the banks lest the economy collapse. That’s a number with a lot of zeroes to clean up after Mrs. Ibru’s mess.

Officials also argue that banks are unique because they hold custody of other people’s money to trade with, with the clear understanding in the public mind that the government, by giving them such a right, is putting the full faith and credit of the public treasury behind them. And this is not simply a shareholder matter. In general, for every one naira shareholders place in a bank, the public deposits six, seven, eight, maybe even N20. This distinguishes a bank from Guinness or Chicken Licken.

Crucially, officials argue that our recent experience makes it a matter of prudence and commonsense to impose limits on the tenure of banking chiefs. “The certainty that they can stay as long as they wish and maybe even transmute to bank chairman makes some CEOs act with impunity,” one senior regulator told us last week. “Knowledge that there will be change conditions behavior.”

There lies the rub. Those leery of a Central Bank with untrammeled powers say that the CBN, by making such a sweeping rule regarding tenure, is inadvertently admitting its own failure to regulate and supervise the banking system. Were the CBN competent in the discharge of its duties, it would have had a bit more confidence to prevent widespread abuse by bank CEOs and to punish rogue bank chiefs where the situation demands. As one senior banker tells us, “a one size fits all rule does not often work well.”

Cynics might feel free also to point out that Tunde Lemo, a powerful deputy governor of the CBN, was directly in charge of banking supervision over the past few years that the most reckless behaviour on the part of bank CEOs occurred. It would not be unfair, and might even be somewhat generous, to accuse Mr. Lemo of negligence. But a term limit apparently does not apply to him.

It is instructive that the bank chiefs immediately affected have refrained from raising any hackles regarding their sudden forced exit. In one fine example, Mr. Elumelu immediately got his board to announce that a succession plan was in place and appears to want a tidy exit that does credit to the UBA, as he makes clear elsewhere in this newspaper.

Our view is that, while the CBN governor had got most of the big things right so far in his turbulent nine-month tenure, one must always be wary of a government official with power to do almost anything.

We will remain vigilant.