The new governor of the Central Bank of Nigeria (CBN), Lamido Sanusi, won strong approval from foreign investors when he used his first policy meeting to unveil a comprehensive reform of Nigeria’s banking system.

As a result of the current global downturn and like a lot of economies around the world, Nigeria’s economy has recently hit some road bumps. A darling of frontier markets, Nigeria’s economy, sub-Saharan Africa’s second-biggest, has been further hit by the sharp decline in oil prices.

Regulators have scrambled to defend the local currency and capital markets in Africa’s most populous nation. In its first monetary policy meeting under Lamido Sanusi, the revitalized CBN on Tuesday lifted foreign exchange controls, guaranteed interbank transactions for the next nine months, and slashed interest rates by 2%.

“There will be no half-measures when it comes to resolving Nigeria’s financial sector problems and supporting growth,” said Razia Khan, Standard Chartered’s Head of Africa Research. “The steps taken (on Tuesday), initiated by the new CBN governor who has promised to priorities the cleanup of the financial sector, are the most promising yet.”

Lamido Sanusi, former Managing Director of Nigeria’s First Bank, said bold financial reforms were necessary to enable the central bank to impose effective monetary policy. “The financial market has not as yet attained the depths that are necessary to have efficient transmittal of policy stance,” he said at his first news conference — at which he asked journalists to stop the tradition of standing when the central bank chief enters the room.

Sanusi blamed many of Nigeria’s troubles on the banking sector, saying financial institutions have kept lending rates too high despite efforts to limit them by his predecessor. “A major impediment to the realization of development through the intermediation role of the banking industry is the wide and persistent spread that exists between deposit and lending rates,” Lamido Sanusi said. To help reduce this spread, the central bank reintroduced corridor interest rates of 8% for lending and 4% for deposits. It also guaranteed all interbank lending from July 2009 to March 31, 2010. “The move to guarantee interbank lending until March 2010 will help restore trust in the interbank market and this will be key in re-establishing a stable rate environment in Nigeria,” said Mike Hugman, Emerging Markets Strategist at Standard Bank.

Analysts expected financial institutions will be more open with the central bank under Sanusi, who built a strong reputation for corporate governance and conservative lending strategies at First Bank. Lamido Sanusi favors market-driven bank consolidation and plans to loosen regulations on foreign investment in Nigerian banks to help alleviate the rising cost of doing business in Nigeria. “We will encourage the banks to explore the idea of infrastructure sharing to improve efficiency and reduce cost of operations,” Sanusi said.

Analysts say that the central bank must improve transparency in the banking industry to attract the necessary foreign investment. “It remains to be seen what the actual effect (of lower interest rates) would have on economic activities as this would depend very much on other complimentary policies around improving transparency in the banking sector,” said Weyinmi Omamuli, Economist at Lagos-based Asset Management & Financial Advisory. Lamido Sanusi said banks would adopt common accounting standards by the end of the year.

Beyond the banking sector, Lamido Sanusi has set his eyes on developing the corporate bond market, so companies can diversify their funding sources away from banks. “The central bank will work with the tax authorities to have a tax-free yield curve and encourage the development of a bond market,” Sanusi said.

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Source(s):
CNBC