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The Central Bank of
Nigeria (CBN) recently released two exposure drafts, as part of its
ongoing reform of the financial services sector. Designed to complement
the proposed dismantling of the universal banking model, the “CBN
Scope, Conditions and Minimum Standards for Commercial Banks”, and “CBN
Scope, Conditions and Minimum Standards for Merchant Banks”, lay down
the conditions precedent to the licensing of these categories of
financial services providers, going forward. Industry practitioners
have been invited to review the proposals, and make comments where
necessary. Given the rather unassuming nature of industry operatives
vis-à-vis their regulator, they may well endorse these proposals in
their entirety. But from a much different vantage, all one hears are
sighs over the dangers from “reform creep”.

A slight variation
on a phrase first used in 1993 by journalists working with the
Washington Post to describe the status of the UN Peacekeeping mission
in Somalia, a useful definition of this malady is “the expansion of a
project or mission beyond its original goals, often after initial
successes”. It is also the case that persons who use this term mean no
endearments, because the new phases in the mission are perceived as
undesirable due to the fact that the dangerous path of previous
successes only breed more ambitious attempts, a process that invariably
stops with a catastrophic failure. Largely, this reading of the CBN’s
current reform trajectory is educated by one interpretation of the root
cause of the most recent financial crisis in the country.

Second-round
effects of the Great Recession, there may have been, but the main
finding of the apex bank’s special audit of the banking industry last
year, was the full extent of the failure of governance in the industry.
This failure showed up in the inability and unwillingness of the
managements and boards of some of these institutions to govern and
control them with a “view to increasing shareholder value and meeting
the expectations of the other stakeholders”. However, no less important
was the fact this governance failure was also about the CBN and allied
regulators’ capacity to oversee the industry properly. How much
interest did the apex bank show in the effectiveness of the corporate
governance of the institutions under its regulatory remit? And to what
extent were compliant directors able to rely on the CBN’s continuing
oversight of the risk profile and of the adequacy of the internal
control systems that were in place in their banks?

If these were
central worries then, they are no less so now. The only difference is
that the bulimia with which the apex bank has pursued its reform
initiative raises the question of the extent to which the new licensing
requirements address these concerns. How does a tiered commercial
banking licensing arrangement conduce to improve governance in the
financial services sector? Does it not instead add to the CBN’s
regulatory burden? In which case it helps to know, what effort the apex
bank has made to address its own regulatory lapses. What guarantees are
there that ahead of the next crisis, the CBN’s structure will not act
as it did before the last one, by ignoring wiser counsel from down the
ladder in favour of the ostriches in positions of authority? This test
is failed immediately, if the response to this latter query is that the
ostriches have since been gotten rid of. For the critical concern was
always with how the ostriches got into such positions in the first
place, and the support institutions, which subsequently kept them there.

Now, flightless birds apart. The other problem arising on the back
of the apex bank’s never-ending reforms is that it gives the impression
that we are doing all that is necessary to avoid the next crisis. This
is impossible. At best, we’d be working to ensure that lapses
identified as responsible for the last crisis are fixed. Part of the
crisis of capitalism is its need for regular cleansing – Schumpeter’s
process of creative destruction. So, that there will be another crisis
is without question. The markets are thus best served by a process that
strengthens institutions against observed lapses, while reinforcing the
capacity of most participants to auto-regulate. Micro-management is so
at odds with this requirement, and at variance with the need to ensure
that the market proffers solutions to our most difficult worries.