There is need to review the CBN ACT of 2007 as Amended to prevent Executive Arm overbearing on the CBN and frequent interference.
By Jona N. Ezikpe
1. Introduction
The CBN announced that some Naira Denominations namely: N200, N500 and N1000 notes would be redesigned. The old notes of the same denominations would be withdrawn and cease to be legal tender. They will be replaced with the newly redesigned notes. Dateline for the cessation of the old notes was initially given as 31st January, 2023 while the new notes, would begin to circulate concurrently with the old notes beginning from December 15th 2022.
Reasons for the redesign which sounded plausible, were given among which, were to reduce the excess currency in circulation, move towards a cashless society, check money laundry, reduce the effects of money in politics as the nation was approaching the Presidential election that was slated to take place on 25th February 2023. The CBN was to implement this currency redesign policy which had the approval of President Buhari.
The implementation of this policy however, brought unexpected consequences on the citizens of Nigeria irrespective of one’s place of residence. The new notes, were not injected into the economy in such a volume as to sustain normal economic activities as could be measured by the transaction demand for money. At the same time, the old notes withdrawn ceased to be legal tender. The insufficient currency in circulation, resulted in chaos especially in banks. Banking halls were besieged by bank customers who came to withdraw cash to meet their daily spending needs on essential items of mostly food.
The poor implementation of the currency redesign policy by the CBN inflicted untold hardship on every Nigerian.
The impact was more devastating on the poor who were already bearing the burden/pain of the poor performing economy that is characterized by high interest rate, high inflation rate, high unemployment rate, low productivity, high level of insecurity, high foreign exchange rate or highly depreciated naira value etc.
The quality of life of Nigerians was further reduced as the misery index increased.
The insufficient currency in circulation created also opportunity for Currency Arbitrage.
Informal financial markets grew over night where currency conversion cost went up to 40 percent of a customer’s book entry balance in the bank. Point of sale (POS) machines, were now used for funds transfer and those firms in Agency Banking had a field day.
Keke (tricycle) and Motorcycle riders also became money changers. The poor teacher with the meager salary and the farmer who had to pay rural farm workers who do not maintain bank accounts had to purchase Naira Currency at a high premium of between 40-60 percent. This impacted on the teacher’s disposable income and the farmer’s operating expenses went up leading to either a reduction in profit or in some cases, a loss to the farmer.
The poor implementation of the currency redesign is an error of judgment on the part of the CBN and the Executive Arm of the Federal Government (FGN). It does not matter how the issue is spinned in the media by the CBN and FGN, the responsibility or blame is on the two institutions especially, the CBN whose core mandate is to manage the money supply which includes currency in circulation or outside the non-bank public.
The insensitive attitude of the CBN and the FGN to the sufferings of Nigerians was the aspect of the confusion that bothered me so much. It took the Supreme Court ruling against this policy for them to reverse course. To show how unpopular the implementation of that policy, the Governor of Kaduna State, Mallam Nasir El-Rufai on the Television, ordered the residents in that State to ignore the FGN and CBN directive and continue to transact business with the old notes which had ceased to be legal tender. Even after the Supreme Court decision, conditions on ground have not changed significantly.
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Banking halls are still besieged by bank customers who want to withdraw cash to support their daily living. What is happening in the banks is not different from a run on the banking industry. If the run had been on an individual bank, it would have resulted in bank failure, however this is different because, it is a systemic problem imposed on the banking industry.
The aftermath of this policy may work against one of its objectives of reducing the currency in circulation. We may see a growth in precautionary balances of households held as currency outside the banks.
Some precautionary currencies may be kept in home vaults or under the mattress. This will invariably affect the velocity of money as fewer Naira Notes would exchange hands thereby resulting in hoarding of currency. The GDP may even decline this first quarter due to this policy.
The two major institutions responsible for managing our economy are the FGN and the CBN through their monetary and fiscal policies. In the case of currency redesign, the responsibility for its implementation lies more on the CBN, hence any review of this error of judgment, must focus primarily on the CBN.
The review to be made in this paper therefore, is aimed at finding what went wrong especially as it relates to the error of judgment by the CBN management. The structure that derives the CBN business will also be looked at and necessary reforms recommended.
This review will start on how the leadership of CBN management is selected and compare the selection process with what obtains in the recruitment of CEOs of Deposit Money Banks (DMBs).
2. Selection of CBN Governor – Current Practice
CBN as a financial institution is owned by the Federal Government of Nigeria and established by the 1958 Act of Parliament of Nigeria.
The details about the formation and winding up of CBN can be found in the CBN Act 2007 as Amended.
The Management and Board of CBN like the Deposit Money Banks, are appointed by the shareholders. In the case of the CBN, the President of the Federal Republic of Nigeria who represents the collective interests of all Nigerians.
Being an outsider and to the best of my knowledge, the appointment of a CBN Governor, is primarily based on the recommendations made to the President. The individual being recommended must have been chosen in the first place because of tribal, social, family etc linkages that do have little or no relationship with the ability of the nominee candidate to perform the job.
The appointment of the CBN Governor is less rigorous than the appointment of the CEO of a DMB.
In most cases, names are forwarded to the President by a Supervising Minister, Legislators, Friends, Special Advisers etc. According to the CBN ACT 2007 as Amended, the President will forward the names of the nominee CBN Governor and the Deputy Governors to the Senate of the Federal Republic of Nigeria for confirmation based on 2/3 of members present.
3. Constitution of The Board of Governors of CBN – Current Practice
The constitution and appointment of Governors and Directors of the CBN according to the CBN ACT 2007 are vested in the president.
The Governor of CBN when appointed, becomes the Chairman of the Board.
4. Problem with Current Practice
The flaw with the current method of appointing the Governor of CBN and constitution of its Board of Directors is that it is not rigorous and also not based on objective criteria.
Rather, it is based on personal relationship. A review of the appointments of some CBN Governors 1999- Present may shed light to the point being made here and the need to reform the process by coming up with a template for such selection.
4.1 Joseph Oladele Sanusi 1999-2004
Mr. Sanusi was appointed CBN Governor when the country returned to civilian rule in 1999 by President Olusegun Obasanjo, a fellow Yoruba. Mr. Sanusi before his appointment, had worked at the CBN. Unlike the employment of CEOs of DMBs, reputable employment organizations were not involved in the selection process. In the case of a CEO’s recruitment, recommended or interested candidates are sent to the employment firm for rigorous interview and screening. Nomination of Sanusi to the best of my knowledge, was not publicized before his name was sent to the Senate for confirmation. We were not told of the selection procedure that was used by the Presidency.
4.2 Chukwuma Soludo 2004 – 2009
Soludo succeeded Joseph Sanusi. Soludo, an Igbo, before coming to CBN as Governor, was a Special Advisor to President Obasanjo on Economic Matters. Probably Soludo’s intellectual capacity must have been responsible for his appointment by Obasanjo. Soludo, like Sanusi, probably was not subjected to a rigorous selection process before his name was submitted to the Senate for confirmation.
4.3 Sanusi Lamido Sanusi 2009-2014
Lamido Sanusi was appointed CBN Governor by President Umaru Yar’dua. Both are Northerners. Lamido Sanusi probably got the job after Joseph Sanusi and Chukwuma Soludo both from the Southern part of Nigeria, the first, a Yoruba and the second Igbo must have held the job. It was felt that the CBN Governor should go to the North. Lamido coming from the ruling or Royal family in Kano probably was simply nominated for the job without rigorous interview or screening obtainable in the recruitment of CEOs of DMBs.
4.4 Godwin Emefiele 2014 – Present
Emefiele was appointed CBN Governor to complete the tenure of Lamido Sanusi who was suspended a month to the expiration of his tenure by President Jonathan. Emefiele came from the Igbo speaking area of Delta State. At the time of his appointment, the then Minister of Finance Dr. Ngozi Okonjo Iweala by birth, was also from the Igbo speaking area of Delta State. Emefiele was the CEO of Zenith Bank Plc at that time while Mr. Jim Ovia, the majority shareholder in Zenith Bank was serving on the Economic Management Committee of the Federal Government of which Dr. Iweala was the chairperson. I do not think that Emefiele was subjected to the rigorous screening before being nominated by President Jonathan an Ijaw man for confirmation as the CBN Governor by the Senate.
I have taken time to show probably how CBN Governors are selected which is quite different from recruiting, a bank CEO.
One of the implications of this method of selecting CBN Governors is that the Governors when appointed, tend to show their loyalty to the appointing person rather than preserve the Independence of the Institution they are appointed to head.
This lack of independence of the operations of the CBN has been the bane to some extent, of the poor performance of the CBN, the downward trend in the performance of the economy and the increase in misery and sufferings of the citizens.
4.5 Currency redesign and independence of CBN
The structure of CBN is not significantly different from any other company or DMB. It has shareholders or owners, in this case, the people of Nigeria as represented by the President. CBN has Board of Directors/Governors and the Management Team. All these stakeholders are equally seen in DMBs.
The difference between the misstep of CBN and that of a DMB is that the intensity of the impacts differs. While mismanagement of a DMB will affect primarily, its shareholders and depositors, any misstep by the CBN such as the recent currency redesign, affects the pocket books of everybody in the country as long as money matters and remains an acceptable medium of exchange.
The implementation of the currency redesign in my opinion leaves much to be desired. It inflicted pain on people due to the scarcity of the new notes and the untimely phase out of some denominations of the old notes. It created opportunity for illegal currency traders who charge what I may describe as Usury rate in lending parlance.
The cost of currency swap was in some cases 40%. Similarly, the cost of converting deposit balance in bank books to cash was even higher in the large commercial centers, where the velocity of money is high.
Just think of how a low-income worker can survive under such a regime where his meager income is further reduced by currency conversion cost.
The unscrupulous behaviour of officials of some financial institutions did not help matters as they also were engaged in Currency Arbitrage.
Whatever were the good intentions of the currency redesign, the accompanying pains more than outweigh the benefits.
This misstep by the CBN is possible because of lack of independence of the CBN from the Presidency especially under the current CBN management that is headed by Emefiele.
Other CBN Governors, may have shown some types of dependence on the Federal Government as regards Instruments Autonomy, but where the CBN Governor is seen often with the President discussing matters of monetary policy etc. shows lack of independence of the CBN.
The President is a politician and we cannot rule out the possibility that some of his decisions could have political colorations as against being based on objective criteria as expected of a CBN that is truly independent and non-confrontational.
Central banks in other climes like the FED in the USA and BOE in the UK have succeeded due to the high degree of autonomy they enjoy. The autonomy allows the heads of such Institutions to focus on the performance and direction of the economy irrespective of the conflicting interests and views of the Government in power.
Former USA President Donald Trump was complaining how the FED Chairman Jerome Powell was pushing monetary policies that were causing a down turn in stock prices and was threatening to fire him. He later realized that such a decision was very unpopular and it could cost him re-election as Americans, use the Ballot Box to express either approval or disapproval of elected officials.
6. Recommendations for CBN Reform
6a. A Template for Selecting A CBN Governor
As I have said above, the selection process of a CEO of a DMB should not be significantly different from that of the CBN Governor. Some of the inputs in the selection process of the CEO of a DMB came from the CBN itself. The owners of DMBs have profit motives as the driving force for establishing the business, hence they tend to be more thorough and rigorous in picking the CEO who would actualize their dream and goal.
Central bank on the other hand, is not totally different from the DMBs. The owners of CBN are Nigerians represented by the President. CBN even though is not established based on profit motives like DMBs, the services it provides affects the quality of lives of every Nigerian. The selection process of the head of such institution should be more than mere referral of a candidate to the appointing authority. In that regards, you will find below, some criteria that maybe considered when selecting a CBN Governor.
These criteria are not exhortative and they are what I have labeled as variables or elements in the Template.
1. Candidate’s vision of CBN and what he is bringing along
Does the person know the objectives of CBN?
How does his personal vision ally with that of the CBN?
2. Candidate’s monetary policy philosophy
Does he know how Central Bank functions?
Which School of Monetary Economics does he/she subscribe to if any and why?
How will that affect him in the choice of monetary policy instruments and overall decision making?
3. Independence of the CBN
How is the candidate going to preserve and protect the independence of CBN especially as regards Instruments Autonomy?
How is he/she going to navigate the pressure from the Presidency without being seen as either confrontational or subservient?
Here we attempt to assess the candidate’s strength of character.
4. Financial system stability
How does the candidate intend to handle this in order to deliver quality service?
5. Co-ordination between monetary and fiscal polices
How will the candidate advise the government who is the owner of the CBN when she is breaching any stature or rule? Or exceeding her drawing limit as established by stature?
6. Educational level, area of discipline and career development program for the governor and deputy governors
7. Work experience
Being a banker, does it make a candidate a better CBN Governor?
8. Innovative ability and application of Fintech
How much analytical and computer experience does the candidate possess?
9. Relationship between management, staff, board and shareholders
How does the candidate intend to handle that?
10. Relationship with external institutions and governments
How does the candidate intend to relate with IMF/World Bank Group?
These elements in the template are weighted differently with the independence of CBN having the largest weight.
6b. Reform of the CBN Board
While an attempt is being made here to reform the selection process of picking the head of the Central Bank of Nigeria in order to improve on its operating efficiency, it is also necessary, to review the nature /structure of CBN Board of Directors and make some recommendations for possible reforms.
The CBN Board of Directors as presently constituted, has the Governor Emefiele and the Deputy Governors.
These are the working or Executive members of the Board. There are also Non-Executive Directors appointed to serve on the Board by the President of Nigeria.
The Chairman of the Board is the Governor, in this case Godwin Emefiele.
Emefiele thus, heads both the Board and Management. In the developed climes like USA and UK where there is limited interference of Government in the affairs of the Central Bank, this structure or model of consolidating powers in the hands of one person is okay.
But the operating environment and nature of our society where the rule of law is rarely adhered to or grossly flouted by those entrusted with authority for the common good of the people, this model of having the CBN Governor to serve as the Board Chairman may not be optimal.
Similar management practice had been adopted by the DMBs and we were witnesses to how most of those banks failed.
With Emefiele being the Board Chairman, he reports to no other person than the owner of the Bank, in this case, the President of Nigeria.
That is the reason you see Emefiele most often at the Aso Rock instead of being at the CBN attending to daily matters.
If the CBN had exerted more independence, the interference of the Government would have been limited especially in the redesign of the Naira currency and perhaps, the outcome would have been different.
Emefiele’s regular visit to the Presidency is similar to a CEO of DMB going to see either the Chairman of the Board or the majority shareholder on regular basis. The implication is that the CEO more or less, takes directives from the boss and in most cases, decisions especially credit decisions, are made to favour the boss without applying the required prudential guidelines. Most often, facilities given under such circumstance, tend to turn bad and result in a high volume of non-performing loans and the attendant impairment of capital and possible bank failure.
This analogy is applicable to the relationship between Emefiele and President Buhari especially in the implementation of the currency redesign.
Emefiele’s close contact with the President would influence his ability to exert independence especially as regards monetary instruments autonomy. If the law gives the President the authority to change the design of the currency, how the new currencies are injected into the economy and old ones withdrawn, should have been left with the Management of CBN who can forecast the volume of currency in circulation given the growth in economic activities as measured by the Nominal or Monetized GDP and the velocity of money. CBN has data on money supply and the component that is made up of currency. They have the tools to figure out the amount of currency that should be made available to make the redesign seamless. However, with the significant involvement of the President of Nigeria as reported in the Newspapers, other motives not based solely on introduction of a redesigned currency were imputed especially by the political class during the Presidential election campaign. President Buhari being a member of a political party cannot totally divorce himself of any political influence in the currency redesign. Emefiele in this case was like a CEO of DMB taking direct instructions from the boss and implementing the wishes of the boss which may have some undesired consequences, in this case, the pains and sufferings of Nigerians.
6bi. Removing the Governor of CBN as the Chairman of the Board of Directors
By appointing a different person that is well qualified to head the CBN Board other than the CBN Governor himself, there will be greater checks and balances and accountability.
The person will now serve as a buffer between the President, the owner of the bank and the Governor of the CBN the head of the management team. It will give more time to Emefiele to focus on administering the bank than engaging in politics. His/her Chair will do the politicking for him and the direct influence of the President will be highly reduced.
Emefiele or any governor would know that he reports to someone before rushing to Aso Rock. This model in my opinion will increase the independence of the CBN.
7. Summary and Recommendations
7.1 The introduction of the currency redesign inflicted untold hardship on Nigerians. This is in addition to the poor performing economy that is characterized by high interest rate-current MPR is 18% and about 40% in the informal financial sector, high unemployment rate especially among the youths in the rural communities, high Foreign Exchange-Rate, Low capital formation and weak production and manufacturing sectors, high Inflation Rate. These factors have invariably reduced the quality of life of Nigerians and increase their misery index
7.2 With the non-repentant attitude of the CBN and the Federal Government who still felt that the currency redesign policy is working and on course, I was prompted to analyze the consequences of the currency redesign policy to see where possible reforms are needed in the management of the CBN who should bear most of the blame. A policy that is making people to die in the banks, families cannot feed themselves not because they do not have money, but they cannot even withdraw their own money they gave to banks primarily for safe keeping. Such policy however spinned is not good.
7.3 I came to the conclusion that there was error in judgment by the CBN due to excessive interference of the Executive Arm of Government. Ordinarily, CBN has the tools and human resources to implement a seamless currency redesign.
7.4 The Executive interference could have been significantly reduced if the CBN had been exerting a high degree of independence. Rather, the relationship of the CBN and the Executive Arm was so interwoven that CBN was being portrayed as a department of the Federal Government.
7.5 I compared the process of recruiting a CEO of a DMB and that of the CBN Governor, I concluded that appointment of CBN Governors was based on subjective factors and less rigorous than that of CEO of a DMB.
A Template for selecting a CBN Governor was therefore suggested and the variables in the Template are not exhaustive. The Template emphasized the independence of the CBN and the strength of character of the potential CBN Governor who must be a person of strong conviction and who places service to the organization over his personal job security.
7.6 The paper also reviewed the structure of the CBN Board of Directors and recommended the separation of the Board and Management where the CBN Governor can no longer be the Chairman of the Board as presently practiced. This separation will achieve a couple of goals; make the CBN Governor focus on the management of the bank; make the Governor accountable to someone other than the President of Nigeria who represents the owners of the bank.
Insulate the Governor from the interference of the Executive Arm as the President of the country will need to reach out to the Board Chairman before getting to the Governor. Where the President contacts directly with the CBN Governor, the Governor must inform the Board Chairman who may bring the matter to the full knowledge of the Board.
The Chairman who must be a person of proven integrity in the society can always politely, advise the President about the consequences of his action, especially as it relates to the Stature establishing the CBN.
7.7 Critics may argue that the separation of the Board Chairman from being also the head of the management might create a bitter rivalry between the two which may affect the efficient functioning of the CBN. The answer to this, is to draw up a code of Corporate Governance for the CBN that will detail the responsibilities of Management and Board in the administration of the CBN.
7.8 There is need to review the CBN ACT of 2007 as Amended to prevent Executive Arm overbearing on the CBN and frequent interference.
This will help increase the CBN independence. Where a President in the light of the Act preventing him from interfering in certain aspects of CBN operations goes ahead to do so, he has breached the Act and can be prosecuted after leaving office when he is no longer protected by Executive immunity. Similarly, where a CBN management allows the Federal Government to exceed its drawing limit, the management should be made to face criminal charges.
CBN ordinarily frowns at overdrawn accounts in DMBs. Severe penalties at times, are imposed on the erring DMB for such infraction.
Then it is logical, that CBN should be held to a higher standard of accountability if it allows the Federal Government to exceed its authorized drawing limit. This is so because, if tough sanctions are not imposed on CBN management, it may lead to financial system instability as the DMBs would have the moral grounds to flout CBN rules in this regard. After all, CBN is expected to demonstrate a superior prudential behaviour.
8. Conclusion
Finally, I will like to conclude this paper by telling the CBN and the Federal Government that Nigerians are still suffering seriously because of the Naira Currency Redesign Policy. They need to change course.
The motives for introducing the currency redesign may be laudable, but the implementation is highly flawed.
CBN trying to crack down on the Agency Banking Firms is not the solution. The problem is a gross shortage of currency especially in a high cash dependent economy. Lately, the cash squeeze has been easing as the CBN has put into circulation, more of the old currencies. One would have expected a disproportionate increase in the newly redesigned notes relative to the old ones by now. However, if the CBN does not inject more of the new notes as we approach the December 2023 dateline as directed by the Supreme Court, we may have a repeat of what happened at the beginning of the year which is choas in banks.
Godwin, this paper is not aimed at running you down and you know that I cannot be a party to that. But, knowing my character as your former teacher, you will realize that my comments are designed to help you improve on the job by constructively pointing out areas that need improvements in your job which will benefit you and all of us.
The reforms suggested are my personal views and I would appreciate further discourse on them. I take full responsibly of the contents of this paper.
*Dr. Jona N. Ezikpe is former MD/CEO Manny Bank Plc
