Lamido Sanusi, the new governor of the Central Bank of Nigeria, lays out his agenda to restore confidence in Nigeria’s banking sector, in an interview with Matthew Green, the FT’s West Africa correspondent, on June 18.

He spoke about his plans to open Nigeria’s banks to foreign takeovers, tackle an overhang of bad debt from banks’ losses on the local stock market and tighten disclosure requirements. He also gave insights into his approach to monetary policy and delivering lower interest rates. Here are excerpts from Mr Sanusi’s interview with the Financial Times:

FT: There’s a huge crisis of credibility in the Nigerian banking sector, in the opinion of many analysts. It seems to many of the people I speak to that your fundamental task is to restore that credibility. How are you going to that?

Lamido Sanusi: In addition to the standard central bank duties of monetary policy and financial stability, I’ve set myself two primary tasks. The first one is restoring confidence in the financial system. The second one is slightly less conventional but it is actually playing an important role as an agent for development.

I think the governor of the (Nigerian) central bank cannot be the governor of the Bank of England, and just talk about money supply and interest rates and inflation. The financial system plays such a pivotal role in the economy, that the governor of the central bank has to see himself, even though not a politician, as an important part of the government with a responsibility for delivering economic growth.

The financial system suffers from a number of sources. First there is a clear fact, which we’ve always known, that banks do have margin loan exposures (Ed: exposure to losses on the local stock market). Now, some of those banks have margin loan exposures that are not in any way fatal. Their profits this year may be less than their profits last year. Maybe some will make minor losses.

There are others that I think people believe will need help in terms of recapitalisation, or maybe some encouragement to merge and consolidate into stronger banks. The credibility deficit comes not so much from the fact that the risks have been taken, but from the fact that there has been a seeming failure to acknowledge that there are problems.

I think the market would understand if you acknowledged that there were some problems, if you disclose the extent of the problem, and if you are seen to be working professionally and diligently towards resolving those problems.

In my view the number of banks that need serious help is relatively small. Unfortunately a few of them might be systemically important, and therefore how it is handled in terms of communication, how it is handled in terms of prioritisation at this stage is extremely important so that in addressing the problem you don’t create a bigger one.

FT: From what you are saying then it seems like there are several banks that you are concerned may be at risk of going under?

Lamido Sanusi: Not going under. I don’t have all the details, but before I came in here, for instance, there was a general sense that you had about Naira 800bn to Naira 1trn in margin loan exposure. If those numbers are true and the market has crashed by 70 per cent, you would expect that, to be optimistic, maybe 50 per cent of that is non-performing: another 500bn. What you would then expect to see is something close to that to show up as additional non-performing loans in the books of banks. And if it is not showing up then we have got to find out where it is. Now whether or not a bank is at risk of going under depends on the distribution of that 500bn. It also depends on the amount of capital that the bank has. So if the bank has a lot of capital and has a large margin loan exposure, it may make a loss, but it will go on. If, on the other hand, its capital base is small and its got huge leverage and huge concentrations then, like other banks, it is at risk.

We have to go through a proper diagnostic phase and we have already started that. And then we have to go through a phase in which we open up the possibilities and the options available to them. For example, we’ve got to look very closely at this rule limiting foreign capital investment in banks to 10 per cent because it simply restricts capital.

We’ve got to open up sources of capital to the banks. We’ve got to work with international investment banks, with the IMF, with whoever has experience in those things. It’s happened in Malaysia, it’s happened in Indonesia. We’ve got to revisit the issue of the asset management company. So there are a lot of issues to deal with. How do you deal with capital? How do you make sure that depositors do not lose their money? How do you deal with the questions of foreign exchange risks, and how do you make sure that what has happened does not repeat itself?

FT: There’s a huge clamour in the market for more clarity on the size and shape of this (margin loan) problem. You mentioned that a diagnosis needs to be done. Could you expand on what kind of procedure you would envisage carrying out to do that?

Lamido Sanusi: It’s extremely important that whatever we do does not cause a panic in the system. We’re dealing with two different participants with completely different profiles and mindsets … You’ve got on the one hand the investors, and while many shareholders might just be retail shareholders a substantial part of the investments in banks is in the hands of institutional investors … These are generally educated, they understand finance and they would be extremely happy to have the full picture blown up in the newspapers so that everybody knows. But on the other hand you’ve got the millions of retail depositors who would easily just panic if you send out signals that this particular bank has a problem without putting in place the mechanism and the structures for resolving them. I suppose the communication strategy is extremely important as we go through.

We’ve got our own examination teams, we’ve got our own supervision teams in the central bank and NDIC. What I would like to do is have them go into every bank, including those we don’t think have problems. I would start with First Bank among the first batch of banks to go and actually do an asset quality audit and a capital audit and bring a report. (Ed: Mr Sanusi was formerly head of First Bank before he took up his post as central bank governor). We would then sit down and dimension. Ideally would like to break them into three. We would like to break them into the banks which are really marginally affected by the margin loan thing. The second category — and that would be the largest number — would be banks who have some margin loan exposure but who have enough capital to deal with it., who really have not exhibited any kind of liquidity pressures in their balance sheets.

The third category would those banks which seem to have a strong liquidity problem and maybe even a solvency problem. And then with those banks we’ve got to work out a strategy and frankly its not yet fully worked out … There are a number of options, there are a number of models which have worked. The strategy for dealing with it and the strategy for communicating it and the remedial steps that need to be taken — all of that will have to be worked out.

FT: Are you saying that you are planning to launch an audit exercise under the aegis of the central bank to diagnose the scale of the margin loan problem?

Lamido Sanusi: And the NDIC, yes I am.

FT: How long would that take do you think?

Lamido Sanusi: If we start immediately you could cover the 24 banks in six to eight weeks max.

FT: When are you planning to launch the exercise?

Lamido Sanusi: I have launched it.

FT: So in six to eight weeks you feel you’ll be in a much more confident position to really understand the scale of the margin loan problem?

Lamido Sanusi: Yes I think so. I will. In the interim we’ll be looking at the various options of how to handle them.

FT: But it sounds like you are not planning to make those figures public immediately upon completing the exercise?

Lamido Sanusi: I may actually. It depends on what communication strategy is adopted. I certainly would expect that long before December we begin to apply prudential accounting standards and we will continue to increase the disclosure requirements for banks. Even before IFRS we will decide what we think banks should disclose from June and from September when they publish their accounts and what information they should make public.

FT: It sounds like you are planning to impose more stringent disclosure regulations quite soon?

Lamido Sanusi: Yes, we should be able to have full-blown disclosures by the time the financials end in December.

FT: When you say “full-blown” what do you mean?

Lamido Sanusi: We might, even before the December accounts, require certain things to be disclosed. How much is disclosed between now and December depends on how much risk we perceive to be to the system with too much information in public hands.

FT: Could you give me a sense now of what types of figures you’ll be requiring the banks to reveal at minimum?

Lamido Sanusi: I think at the very least, since margin loans are a problem, people should know exactly what percentage of the loan book is exposed to margin loans, they should know exactly what kind of proprietary positions the banks are holding and they should know what the value is and they should know which loans are performing and which loans are non-performing, those should form part of disclosure requirements.

FT: What would be the key way in which the new requirements will differ from the existing set up?

Lamido Sanusi: Remember the disclosure requirements are requirements principally of listing on the stock exchange…The stock exchange simply requires some key figures, so what’s published quarterly tends to be gross income, profit-before-tax, profit-after-tax, sometimes one or two more lines. The asset quality details are not there, and frankly this is true of all accounting numbers … The risk complexion differs depending on concentrations, on industries, on collateral … .Ideally we should get the stock exchange to agree on the disclosure requirements for listing, not just for banks but for all public companies so we improve information and transparency.

FT: Are you talking about imposing mandatory IFRS on banks?

Lamido Sanusi: IFRS helps, as you know in First Bank we did convince the board to adopt IFRS. But it’s extremely important to understand that if the problem is the integrity of data being presented, then IFRS does not address that problem. If it is true — and I’m not saying it’s true — but if it is true that an institution presents significantly distorted figures … .there is nothing that stops them presenting false numbers under IFRS.

FT: And that’s going to be a problem you may confront throughout this whole exercise. How will you ensure that you can actually believe the numbers that banks are presenting you with?

Lamido Sanusi: That is what this whole exercise is about: send our own people to check. I think we do have ways of testing those numbers. I’ve already told you that if you have an idea of the global picture then you would expect certain results that you would see. Statistically things can point you to areas that look suspicious. So for example, if the bulk of banks have margin loans and on average you find that 40-50 per cent are non-performing and a particular bank has only 5 per cent that is non-performing, that is enough reasons to say ‘go and look at those numbers closely.’ There is always a way of getting an idea of where the wrong numbers are.

I think it’s also important to send very clear signals to bank executives that it’s not a crime to make a loss, but it’s criminal to lie about it, and people need to understand that. It’s actually better to disclose truthfully that we had a bad year, or we made a mistake, than to deny that there’s a problem. It goes into governance issues, into sanction issues, into fit and proper issues.

FT: When you conduct this audit then, you will be looking out for evidence of banks that may have not been declaring truthful numbers. Will you be seeking to sanction any banks that you find have been manipulating their books?

Lamido Sanusi: You wouldn’t sanction a bank. You would as much as possible see what you can do about deciding whether certain individuals belong in this profession. The banks are so much bigger than individuals. It’s important, I think, for the investor to know that there are many stakeholders in financial institutions. The bank managing director is one person. These banks have millions of depositors, they’ve got millions of shareholders, they’ve got thousands of employees and they play a major role in the economy. In the event of finding out that a management team has been errant, it’s extremely important that in dealing with that problem we do not place the investors, the depositors, the employees and the economy at risk. It’s about that balance, but certainly we’re not going to ignore it.

FT: If this audit reveals that some bank executives have been cooking the books, if you like, you will take action to remove them from their posts?

Lamido Sanusi: Not just this audit — if at any point in time I have reason to believe that a bank chief executive is not fit to be chief executive I will remove him.

FT: What’s your gut feeling? Do you think that in the next few months we’ll see a few bank chief executives leaving their jobs?

Lamido Sanusi: I would rather not say anything about that. I would rather wait for the results.

FT: Your predecessor was sometimes accused by his critics of having a rather cosy relationship with some senior bankers, and some people in the market believe he was compromised as a result. (Ed: Mr Soludo denies this). It sounds like, from the language you’re using, you are keen to take a much tougher line.

Lamido Sanusi: I have avoided making any comments about my predecessor that are adverse. I would rather continue like that. But I do believe that the dividing line between the regulator and the operator needs to be very clear and I need to be very clear about my role as a regulator, and that includes creating a level playing field. It also includes very clearly avoiding questions of conflict of interest. I will give you an example. I have just left First Bank, and as an employee of First Bank I had loans that were staff loans at concessionary rates. Usually, what happens in institutions like that is when you have left they leave your loans at that concessionary rate. One of the first things I did was to call the MD and say I wanted my loans converted to a commercial rate, precisely because I am the governor of central bank. I did not take advantage of the opportunity to just leave the loans at that rate because I’ve got to set for myself standards if I intend to hold other regulators to those standards. I think we need to make that distinction clear and we also need to understand that there are certain circumstances that could lead to conflict of interest, and we need to be very explicit in our definition of those circumstances. You may not avoid everything, you may not stop people from borrowing from banks, you may not stop people buying shares in banks, but then if they do, to what extent? What are the terms? What are the disclosure requirements? We’ve got to look at all of those and generally improve governance.

I would personally say senior regulators shouldn’t be shareholders in the institutions that they regulate. I personally would sell any shares I own in any banks.

We also need to sit with other regulatory bodies and agree on a code of conduct for regulators. The problem is not just the central bank. A lot of this problem has also come because of governance issues in the stock exchange, the Securities and Exchange Commission, rules around insider-trading, rules around margin lending, the conduct of stock brokers. There has been a general problem in this country where we de-regulate and liberalise and privatise and then we don’t put in place the appropriate regulatory mechanism. The institutions are there, but in terms of what it means to be a regulator, there has been a constant problem. And markets when they are left unregulated can come with problems.