In recent decades, the received central banking model has come under severe criticism, especially from the modern monetary theory (MMT) prism, which prioritizes using monetary policies for growth promotion over the neo-liberal preoccupation with central bank independence and financial stabilization. The ‘neo-liberal’ approach to central banking, as widely canvassed by the World Bank and IMF and popularized by the Monetarist School of economic thought, emphasizes three main principles, namely, central bank independence, prioritizing inflation control (including formal ‘inflation targeting’), and employing indirect monetary policy tools such as adjusting short-term interest rates rather than direct methods like credit ceilings. This approach, while effective in some aspects, has been criticized for its lack of focus on economic development, particularly in developing countries.
Firstly, “central bank independence,” meant that the central bank should operate as an external ‘participant observer’ of the fiscal operations of the government and should at no time be compelled to finance public deficits. Secondly, a central bank should primarily control inflation and indirectly promote full employment or real sector growth via selective interventions. Thirdly, a central bank should not intervene directly in managing exchange rates or resort to capital flow controls. Also, a central bank should refrain from using methods like subsidized interest rates or credit ceilings to influence the quantity or distribution of credit.
Central Banks as Drivers of Development in Developing Countries
Historical accounts indicate that central banks have financed governments, sectoral policies, and foreign exchange management. Contrary to current orthodoxy, the central banking history emphasizes a developmental role, particularly in late-developing nations. The challenge lies not in abandoning developmental policies but in determining their nature and scope. Historically, central banks have been most effective when integrated into the government’s industrial policy frameworks instead of exercising independence. While tension exists between developmental and stabilization roles, evidence suggests that entirely forsaking the developmental role is not optimal, worse still, focusing solely on inflation targeting and exchange rate management as recommended by the IMF and World Bank. Thus, a balanced approach that leverages central banks’ developmental potential within a broader growth and development strategy is essential for sustainable economic growth and stability in developing countries.
A CASE FOR UNBUNDLING OF THE CENTRAL BANK OF NIGERIA
Recognizing the pivotal role of central banks for economic growth, exchange rate management, financial sector supervision, and payment system management, a case is made here for unbundling the Central Bank of Nigeria (CBN) into a group of institutions to manage the current functions of the CBN for better efficiency and effectiveness. In consideration of this, we propose the unbundling of the CBN into a conglomerate with four (4) sets of institutions, namely, a Nigerian Financial Regulatory Authority (NFRA), a set of Nigerian Reserve Banks (NRBs), and a set of Nigerian Investment Facilitation Corporations (NIFCs)
A Nigerian Financial Regulatory Authority (NFRA)
This entity should oversee all the banking and non-banking financial institutions and the payment systems in the country and be responsible for monetary/financial policies in liaison with the fiscal authorities. The NFRA would also set operational/prudential guidelines for the other members of the Central Banking Group and ensure compliance with the enabling legislation. The NFRA would equally oversee the capital market, the Debt Management Office (DMO), the Nigerian Deposit Insurance Corporation (NDIC), the Asset Management Company of Nigeria (AMCON), insurance, fintech, and big-tech companies, and other financial services providers. The NFRA would be headed by the Governor, who doubles equally as the Central Banking Group’s CEO and head of the Monetary Policy Committee. The research and training units of the present CBN would be domiciled in the NFRA. The NFRA keeps micro- and macroprudential policies in sync with fiscal authority and ensures value-for-money inspection of financed projects.
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With the fintech and digital revolutions and globalization of finance, the CBN, as currently structured, cannot scrupulously provide the necessary regulation services alongside the other core activities of central banking. Having an overarching specialized financial regulatory authority for all bank and non-bank financial institutions will go a long way to strengthening the CBN’s regulatory and supervisory capacities. Specializing in this function will give the NFRA enough scope and depth to do regular system and policy evaluation of implementation outcomes to help chart future policies appropriately for achieving the desired goals.
A set of Nigerian Reserve Banks (NRBs)
The Nigerian Reserve Banks (NRBs) would be bankers of all financial institutions (bank and non-bank), all government ministries, departments, agencies, parastatals, and projects, and bankers of all large corporations with significant economic stakes (such as the Dangote Group, mobile communication providers, motor vehicle manufacturers, and other significant conglomerates). We recommend the creation of 10 distinct profit-making distinct NRBs at the first instance for competitiveness. Each NRB is expected to operate as a wholesale profit-making banking institution, able to establish branches within and outside Nigeria. Switching from one NRB to a more preferred one would be possible. The NRBs should be publicly quoted corporations, with the federal government retaining the majority shares (about 10-20 percent). States and local councils, individuals, and institutional investors can invest in the NRBs. The NFRA supervises the NRBs like other financial institutions and can sanction them for non-compliance.
A Set of Specialized Nigerian Investment Facilitation Corporations (NIFCs)
These specialized institutions are designed to serve as profit-making one-stop shops for investment facilitation, connecting funding, research findings/discoveries/inventions, financing, markets, and indigenous enterprises/startups. In particular, there should be NIFCs for renewable energy, recycling, crop cultivation, livestock, entertainment (music and film-making), tourism development, real estate, overseas job placement, etc. The NIFCs would support startup emergence growth and market-making for individuals, firms, and governments in Nigeria.
The specialized NIFCs would build and update databases on funding sources, inventions, innovative technologies, and market opportunities for use by prospective entrepreneurs. They would also have competencies for fundraising, project proposal writing, and arranging SPVs for project funding for their clients. The infrastructure of information and competencies they have should put them in a position to support prospective entrepreneurs/investors for stipulated charges. This approach deviates from the current approach, which assumes that prospective investors know what to do and that all they require is finance.
The proposed NIFCs compare with the Small and Medium Industries Development Corporation (SMIDEC) of Malaysia, the Small and Medium Industry Promotion Corporation (SMIPC) of South Korea, and the Ntsika Enterprise Promotion Agency of South Africa. The NIFCs should provide information, linkages, innovations, facilitation, and market-making necessary for indigenous firms’ growth, sustainability, and international competitiveness. The growth of indigenous businesses is essential for poverty alleviation and balanced industrial growth and development. Having the specialized NIFCs play the one-stop shop roles for accessing the required financial, logistic, training, and market-making support is a vital plus, as no such institutionalized investment facilitation institution exists in Nigeria.
By unbundling the CBN into these three specialized monetary and financing institutions, the reformed central banking group would productively align monetary regulation, financing, and investment facilitation with the country’s developmental goals, achieving optimal utilization of the vast resources and reserves at the disposal of the present central bank.
