The financial system is one of the major ‘engines’ which drives the economy towards achieving its growth potential.
It is broadly segmented into the capital market and money market which consists of financial institutions, financial markets and products, operators and regulatory agencies.
The capital market segment of the financial system mobilises long- term funds from surplus ends to deficit ends for production, entrepreneurship, innovations and job creation and the Securities and Exchange Commission( SEC) is the apex regulatory agency.
The money market segment provides short-term funds and banks are central in the market as both suppliers and users of funds, and the Central Bank of Nigeria( CBN) is the apex regulatory institution in the market.
The financial system needs to be robust and resilient and properly regulated in order for it to contribute effectively in driving the economy.
A robust financial system ensures macroeconomic stability which enables planning by businesses, attracts both local and foreign investments and leads to growth and peace in the polity.
Financial system regulation aims to limit risk, improve governance, reduce corruption, improve market discipline, achieve systemic stability and protect consumers.
Underregulation can result in unethical behaviours, lack of capital adequacy, systemic risks, financial crisis and bank failures.
Overregulation can create excessive barriers, increase compliance burden, reduce efficiency and credit availability and hinder financial inclusion among other negative impacts.
Financial system regulation demands balance in order to maximise the benefits and minimise the negative impacts.
After the 2008- 2009 financial crisis which created domino effects in financial markets and economies across the world, central banks became more proactive in their regulatory functions to ensure financial system stability and prevent future occurrence.
Causes of financial system instability include global disruptions, underregulation, undercapitalisation of banks, non- performing loans( NPLs), poor corporate governance and moral harzards.
Others include interest rate risk, exchange rate risk, liquidity mismatch, powerful interest groups exploiting the financial system, insufficient transparency, etc.
The Central Bank of Nigeria(CBN) has maintained regulatory balance and put in place a robust regulatory framework to promote financial system stability.
The focus is on managing factors that create liquidity shocks and with zero tolerance on practices that undermine the health of financial institutions, enhancing the quality of banks and protecting banking consumers.
Consumer protection is a key aspect of CBN’s mandate to promote a sound financial system and advocate good banking habits that promotes efficiency, sincerity and transparency between banks and consumers in the delivery of financial services.
The consumer protection framework is guided by nine principles; namely, legal, regulatory and supervisory structures, responsible business conduct, disclosure and transparency, consumer financial education and fair treatment.
Others include protection of consumer assets, data and privacy, complaints handling and redress, competition and enforcement.
CBN uphold that giving proper attention to the welfare of banking consumers will instill investor confidence and promote a strong and stable economy.
There are some other notable regulatory policies and initiatives by CBN which aims to strengthen the banking sector.
They include bank’s dividend policy which is targeted at banks with high non- performing loans and low Capital Adequacy Ratio( CAR).
Non- performing loans(NPLs) are a major cause of financial system instability.
They disrupt bank earnings and reduce available capital and ability to make profit , thereby leading to low capital base, which in turn hamper lending which is a major function of banks.
The dividend policy forbids banks from paying dividend on shares “until all its preliminary expenses, organisational expenses, shares selling commission, brokerage, amount of losses incurred and other capitalised expenses not represented by tangible assets have been completely written off and adequate provisions have been made to the satisfaction of the bank for actual and contingency losses on the risk assets, liabilities, off balance sheet and such other unearned income are deductible therefrom.”
Other regulatory initiatives include the forebearance policy, payment system regulation, regular and targeted examinations of financial institutions, enforcement of strict corporate governance standards, banking sector recapitalisation and others.
The forbearance policy aims to strengthen capital buffers and balance sheet to enhance resilience and stability in the banking sector.
And the recapitalisation policy is to further strengthen banks’ capacity to support economic growth and towards attaining the target USD1trillion economy.
CBN has been consistent and effective in ensuring financial system stability through indepth and balanced regulatory policies and initiatives.
Nwobu, a Chartered Stockbroker and Business Journalist wrote via arizenwobu@yahoo.com Tel 08033021230.
