Saturday, 12 September 2009

Sanusi the Cowboy (The Politically Correct Version)

The CBN Governor's new position is that the funds, not bailouts, were given as loans to the distressed banks. He rightly states that he is empowered (under Section 42.2) to give loans to banks that are unable to raise capital from any other source. This is the lender of last resort role the CBN plays.

In truth, however, the banks must approach the CBN for a loan. And as far as I can tell, this did not happen.

Being a lender of last resort basically means that you are in a position to lend money to an institution that is unable to raise credit from other sources. It is not a status exclusively reserved for central banks, so the suggestion that it carries with it a responsibility for compulsory, pre-emptive action is flawed.

For the CBN, being a lender of last resort simply means that the distressed bank has approached other banks or financial institutions, was unable to get credit, and is now approaching the CBN as a last resort. Simple, when you think about it, isn't it?

The clause that brings the CBN Act into play here is the one that specifies that the bank must be experiencing liquidity problems. When the CBN determines this, it is then empowered to lend money to the distressed bank if it chooses to do so, and under this clause it can set any interest rate, any repayment schedule, etc. What Sanusi is cunningly implying is that once a bank is in distress, the CBN can inject a loan even if no approach has been made by the distressed bank.

According to Sanusi, “the reinforcing provisions of Section 42 (2) of the CBN Act allows CBN to inject capital into any bank facing liquidity problems by way of loans and other accommodation facilities on terms it deems fit, notwithstanding the restrictions imposed by Sections 29 (1) and 34(d) of CBN Act."

That is a lie.

Only in Nigeria could it be suggested that a fund injection is the same as granting a loan.

What the Act actually says is that "The Bank may grant any bank which may be having liquidity problems."

The banks, since they haven't been nationalised, are still independent entities. So how can Sanusi claim that the CBN has the right to issue unsolicited loans to institutions it does not control? The CBN is empowered to replace bank executives, but no law ever gives the CBN direct control over the affairs of any bank, ever. Instead, the BOFIA states that if the CBN is not satisfied with a bank's current state, it may turn control of the bank over to the NDIC. Quoting section 42 of the CBN Act that says "the CBN may grant any bank" is a different kettle of fish from saying "the CBN can inject funds into distressed banks ".

The funny thing (not ha-ha funny, but sad-funny) is that the CBN is actually empowered under the BOFIA (section 33.2.b)to require a bank to undertake a certain course of action. All Sanusi had to do was instruct the banks to request for the loans. They would have had to comply.

It's a procedural error, and it's one that shouldn't be swept under the carpet.

The devil's in the details, when he's not fishing for souls (or fish).

But on a more positive note for Sanusi (the sun does shine on a dog's ass some days), he completely annihilated the members of the House of Representatives who invited him to the National Assembly for a question and answer session. How he manged to do this, with half-baked arguments, should be a source of concern to every Nigerian who expects proper representation from their legislators.

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