Safeguarding Nigeria’s financial system through effective regulation

By Chinwendu Obienyi

A nation’s financial system is the lifeblood of its economic growth and development, serving as a powerful catalyst for progress.

Through financial intermediation, seamless payment systems and the effective execution of monetary policies, financial institutions play a pivotal role in shaping economic stability. Given this significance, governments worldwide continuously strive to build resilient and efficient financial systems, ones that not only enhance intermediation but also uphold public confidence and trust.

Recognizing the vital role of the financial services industry in driving economic growth and development, regulatory oversight has long been essential to address market imperfections and the failure of the market system to account for social costs. Without proper supervision, market participants may engage in excessive risk-taking, often leading to unforeseen losses and jeopardizing the solvency of financial institutions. Such unchecked risk appetite not only undermines individual institutions but also threatens the overall stability of the financial system, weakening its ability to support the real economy.

In Nigeria, the Central Bank of Nigeria (CBN) has remained at the forefront of safeguarding financial stability, employing robust regulatory frameworks to ensure resilience, transparency, and sustained economic growth.

Reforms

Apart from using orthodox monetary policies and prioritising price stability, the apex bank conducts regular stress tests and audits to assess banks’ resilience to economic shocks, enforce capital adequacy requirements to ensure banks maintain financial stability, impose penalties for non-compliance and strengthening risk management frameworks, set early warning systems to proactively detect and address emerging risks.

Also, the Banking and Other Financial Institutions Act (BOFIA) 2020 has introduced improvements such as: tighter incentive structure for compliance, wider regulatory coverage of financial sector and severe penalties for regulatory breaches by bank officials.

Furthermore, the bank under the leadership of Olayemi Cardoso has implemented a number of reforms in its bid to stem the rise in inflation, attract foreign inflows and make the naira competitive amongst its peers.

But, one thing that has stood out more during the regime is the transparency and speed of communication the apex bank dishes out circulars or statements in the financial system.

To improve on that, the bank’s helmsman has announced the establishment of a new compliance department within the CBN which would become operational at the end of this month.

He said, “The CBN has taken the transformative step of setting up a Compliance Department with the objective of addressing past challenges, aligning with global standards, and building a more transparent and resilient financial sector that can drive Nigeria’s economic growth and development. This department will be inward-facing and outward-facing as well. The department will be functional by the end of February 2025”.

Cardoso also revealed that the launch of a foreign exchange code would provide clear directives on the expectations of market participants, ensuring that the market operates fairly and transparently.

“We will prioritise exchange rate stability to foster a more competitive business environment, encourage the inflow of foreign investment, and, in addition, support fiscal operations in critical sectors of the economy. The CBN will continue to strengthen financial institutions to enable them to effectively support the real sector,” he stated.

Additionally, Cardoso announced that the CBN would share details about Nigeria’s net foreign exchange reserves regularly starting in early 2025, further promoting transparency. He also highlighted efforts to stabilize the exchange rate, foster economic growth, and restore investor confidence.

Just recently, the bank assured the public that Keystone Bank Limited remains stable and fully operational despite a court order forfeiting the bank’s shares to the Federal Government.

The CBN, in a statement issued on Friday, by its acting Director of Corporate Communications, Hakama Sidi Ali, acknowledged the concerns of the Keystone Bank’s customers over the development.

However, the apex bank maintained that there was no cause for alarm, stating that the stability of the banking sector and the safety of depositors’ funds remained the regulator’s top priorities.

“For clarity, the court order merely reaffirmed the Central Bank of Nigeria’s prior decision to take over the management of Keystone Bank Limited in January 2024, following a change in its leadership,” the statement read.

The apex bank noted that it had been monitoring the bank’s operations to ensure compliance with regulatory standards and operational transparency while safeguarding depositors’ funds.

“Since then, the CBN has closely monitored the bank’s operations to ensure they are in full compliance with regulatory standards, operational transparency, and the interests of depositors.

As part of our commitment to safeguarding the financial system and building public trust, we shall continue to monitor the bank’s performance. We will take all necessary steps to protect the interests of depositors, staff, and stakeholders,” the apex bank stated.

Recapitalisation initiative

Specifically, in March 2024, the CBN announced a bank recapitalization initiative. By October 2024, several major banks had collectively raised approximately N1.27 trillion to meet new capital requirements.

This move aims to strengthen banks’ capacity to support Nigeria’s economic growth targets.

Collaborations

The CBN is big on collaboration with other regulatory bodies to ensure comprehensive oversight of the financial system; Coordinating with the Nigeria Deposit Insurance Corporation (NDIC) for shared supervision of insured banks and engaging with other regulatory agencies such as the Securities and Exchange Commission (SEC) and the National Insurance Commission (NAICOM) to oversee various aspects of the financial sector.

Experts’ views

Industry stakeholders who spoke to Daily Sun noted that the reforms alongside the CBN’s transparent communication approach is expected to have several positive impacts on the Nigerian economy.

Chief Economist and Partner at SPM Professionals, Paul Alaje noted that by providing clear and regular updates on financial policies and market conditions, the CBN helps build trust among domestic and foreign investors.

He added that clear communication of monetary policies and their objectives helps in managing public expectations, which is crucial for the effectiveness of these policies.

According to him, the recent directive on the $25,000 intervention for BDC operators per week is the way to go at this particular time. “The supply side dynamics play a crucial role in addressing the current economic challenges. The CBN has undertaken measures to intervene in the FX market, resulting in a comparatively more stable environment. This may lead to an improvement in per capita income”, Alaje said.