ECONOMICS RECESSION AND CHALLENGES OF FINANCIAL REGULATION.

It is no longer in dispute that poor financial system practices is the fundamental cause of the current global economic crisis, which has manifested in the reduction of new investments to almost zero level, the collapse of the stock market, increasing unemployment with attendant lack of effective demand. There is hardly any aspect of the economy that has been adversely affected be it financial, real estate, manufacturing or service sectors. Indeed like a fast spreading virus, the financial meltdown which originated from America has permeated every economy to the extent of their interconnectedness to the international financial system.
When the crucial role of the financial system in the development of any economy and in particular function as mobilizer of savings and promoter of investment and in helping in the preservation of the overall balance in the economy is appreciated, the necessity for effective regulation of the operations of the financial institutions becomes imperative.
The challenges before the financial system regulations in Nigeria was one of the core themes of the National Policy Dialogue organized by the Prestigious African Institute for Applied Economics with Prof Eric Eboh as the Executive Director, in collaboration with the National Assembly Policy Analysis and Research Project (PARP) at the Transcorp Hilton Hotel, Abuja on June 18,2009.
The financial system is the key to any economy. It is hub that drives all other sectors of the economy.Accordingly, any adverse effect on the system has the propensity to grid the economy in its totality. That is why the issue of the regulation of the financial system is a matter of serious concern to any nation.
It is the legitimate expectation of every rational man that in the challenging time of economic recession, financial institution particularly, banks should come to the rescue and to prop up citizen’s effective demand. But the problem becomes hydra-headed where financial institutions on which the hope of economic salvation liers runs into coma even before the difficult moment begins just as we are witnessing in Nigeria today.
In Nigeria, financialsystem regulation/supervision is shared by the Central Bank of Nigeria, Federal Ministry of Finance, Nigeria Deposit Insurance Corporation, Security and Exchange Commission and the Federal Mortgage Bank of Nigeria. And the regulation seeks to ensure the safety of the country’s financial system, to protect banks against undue risks and to give support through lending to the priority areas of the economy such as Agriculture, Solid Mineral Manufacturing, Export and Small and Medium scale enterprises (SME).
It is therefore of great importance for the regulatory authorities in the financial system to ensure that financial institutions play their role as a bastion of economic growth and development by providing capital needed to energize the economy and the real sector in particular. The recent Tsunami in the nation’s banking sector leading to the sack of the boards of Afribank, Union bank, Oceanic bank, Intercontinental bank and Fin bank has revealed that financial facilities by banks are skewed in favour of volatile petroleum sector to the neglect of the real sector. And that was what the stakeholders at the National Policy Symposium noted and called for greater vigilance on the part of the regulatory agencies in the financial system. While commending the Central Bank for the consolidation policy which has strengthened the capacity of the banking sector for project financing, the stakeholders further urged all the financial system regulators to ensure that the financial institutions lend to the real sector and avoid undue credit risk which ultimately leads to bad loans and possible collapse of the banking sector a strategy we can ill-afford at this point in time.
One thing certain, namely, that bank lending in Nigeria today is skewed on high risk enterprises with quick return to the neglect of growth-driving sectors of the economic such high credit risk has the propensity for bank failure. Effective regulation/supervision of the financial system is therefore a sine qua non for the provision of early warning signal of imminent danger to economic stability; it also has the prospect of exposing the window-dressing of bank records, the phenomenon of “bubble” capital, paper profit and the false picture of wonderful performances.
Many of the banks gave out huge sums of money to customers to buy shares which should not be.Now, with the collapse of stock marking arising from the global economic crisis; many of the banks have become weakened akin to a fish thrown out of water. The recent sack of the Chief Executives of five leading banks in Nigeria by the Central Bank on account of their poor lending practices resulting in huge bad debts is instructive and should serve as a lesson to other bank executives.
The path to sustainable development is the growth in the real sector and regulatory authorities should therefore compel financial institutions to focus their lending activities that direction. It is finally submitted that effective financial system surveillance should go beyond audit report and dubious reports of rating agency is what is needed for meaningful supervision.