Countering regulation risk in Nigeria’s financial sector (1)
There are major risks inherent in the regulatory reform process in Nigeria’s financial sector, especially in terms of the policy-making process. The banking, securities and insurance sectors have all recently undergone, or are undergoing, significant reforms. However, the policy-formulation and rule-making process is fraught with inconsistencies and a lack of stakeholder understanding.
The need for regulation
The financial sector has an important role to play in developing the Nigerian economy due to its critical intermediation role, thus ensuring that savings are distributed to productive sectors of the economy. At the same time, financial institutions pose significant risks to society given the negative externalities that the actions of financial institutions (due to information asymmetries) and financial sector stress (as a result of imprudence in their decisions) can have on the public and on the wider economy. Therefore, the need for financial regulation is self-evident, that is, to ensure that: (a) proper prudential standards are adhered to by financial institutions; and (b) adequate protection is secured for consumers.
Regulation risk in Nigeria’s financial sector
The regulation risk that we address in this piece is that of uncertainty, i.e., lack of predictability of the policy-making process thereby denting confidence in the whole regulatory system. The lack of continuity is detrimental to the growth of the system.
Policy-making: Nigeria’s financial sector as a whole suffers from inadequate regulatory oversight. This inadequacy itself stems from something even more tangible: the absence of a coherent policy framework with a transparent and accountable philosophy.
This policy-making mechanism is, of course, present and active in Nigeria but there are major risks inherent in its current formulation. These risks must be addressed if Nigeria is to attain its stated goal of becoming one of the 20 largest economies in the world and its financial sector the most significant in Africa and a major global player.
Suggestions for an improved regulatory process
The role of the presidency and the federal government: As is the case with many areas of the Nigerian economy, the whims of individuals have been the chief determinant of positive or negative regulation and reform. Given lack of a robust regulatory process in Nigeria, we recommend that the presidency, working with the Ministry of Finance, develops a financial regulatory process that will ensure standard, institutionalised procedures for financial regulation, rather than the current system which relies heavily on the whims of individual personalities who are charged with running particular regulatory authorities at any point in time. This will encourage continuity in the regulatory process. To entrench this process, the federal government has a key role to play in proposing draft legislation to the National Assembly for scrutiny and passage into law.
The role of the Ministry of Finance: The effectiveness of the regulatory process depends in large measure on the policy-making discipline of the Ministry of Finance and on its effectiveness in monitoring the sector regulators. It should work closely with the presidency to develop a robust set of tools that can be enshrined into law, for the effective regulation and supervision of financial services generally.
Major tools identified by the OECD to improve the efficiency and effectiveness of regulation include the use of regulatory impact analysis (incorporating competition assessments), the systematic consideration of alternatives, wide public consultation, and improved accountability arrangements in the review of existing regulations and development of new ones.
Ingredients for an effective regulatory framework
A comprehensive regulatory framework is required in Nigeria’s financial sector; and as part of that, a holistic approach to banking regulation is required. The experts at ACM-Insight! are of the view that regulatory governance should be based on the following five elements:
(1) Regulatory objectives – Every regulator should have a clear set of (preferably statutory) regulatory objectives. This aids accountability as well as acts as a measure against which the performance of regulators can be assessed.
(2) Transparency – When the policy-making process is transparent with proper consultation, it usually results in a more balanced approach to problem-solving. More importantly, however, it lends legitimacy to the resulting rules and regulations.
(3) Accountability – Just as it is imperative that governments are accountable to the public, regulators must be accountable. A way to achieve this is to give regulators statutory powers which in turn come with parliamentary accountability.
OLU OMOYELE ET AL
The writers Olu Omoyele, Tunde Akodu and Ola Omoyele are of Applied Capital Markets Ltd (ACM) – risk management consultants and publishers of ACM-Insight!
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