‘Regulatory capture’ cause of mutilated naira notes in circulation, other malfeasance by banks, says Owoh

Commercial banks in the country may be having dominion over the Central Bank of Nigeria (CBN), resulting in the apex bank losing the regulatory grip over them, thus paving way for a free reign of malfeasances, including the illegal re-issuance into circulation of several volumes of torn and mutilated naira currencies already consigned for destruction by the CBN.

According to Prof Godwin Owoh, Chairman of Society for Analytical Economics, a global think-tank consulting firm and one of key policy advisors to Prof Chukwuma Soludo during his term as the CBN governor, the development, which he described as ‘Regulatory Capture,’ is a phenomenon whereby the commercial banks have become too powerful to be controlled by the CBN, their regulator, owing to compromise by the chief regulator (the CBN governor), now being Mr. Godwin Emefiele, because he was one of the banking sector operators (like his predecessor), being a former managing director of Zenith Bank Plc, from where he was appointed to head the CBN.

Owoh insisted that it is misnomer for an operator in the banking industry to be appointed to regulate an industry in which he/she has a lot of interest, adding that there would be a lot of conflict of interest that would be tilted towards narrow and selfish interest, against national interest.

He explained that the scenario is what has given way to so many infractions by banks, because the regulatory authorities are looking the other way, including the issue of mutilated naira currencies in circulation, among other monetary challenges being faced by the economy today.

Owoh, who spoke to The Guardian exclusively on the disturbing mutilated currencies in circulation and disappearing lower naira denominations, gave more insight into the development: “For me, those are the empirical justification for the trend we are facing. But that does not explain why dirty notes should be everywhere.  

“There is a clear case of regulatory inaction and perhaps a clear indication of a regulatory capture. The commercial banks have grown so powerful that the monetary authorities can no longer exercise direct disciplinary control on them.

“Rather, what happens today is a matter of compromise between the commercial banks and the CBN. What it means that the CBN has been overpowered by the commercial banks. That is one signal you get when you appoint a CBN governor from among the commercial banks. Once you do that, you face a regulatory capture, because you have just taken one of their colleagues who perhaps may not be as competent, reputable or transparent or perhaps may have been seen as a master-dribbler in the game of making money.”

He continued: “Of course, if you are coming from a commercial bank, you must have baggage of infraction with the same monetary authorities. When you come in, you now boss those who have your track and have been regulating you, the first thing you do is to counter-balance a force by creating a force within the commercial banks to give you support, to suppress the legacy authorities for which you are now their boss.

“When that happens, you see a regulatory capture by the commercial banks of the CBN. That is the philosophy all over the world and that is what is in place in Nigeria today. I am not afraid of being quoted on that; whoever is involved knows it.

“Therefore, going forward, government should not make that mistake again. If it does, it will suffer permanent casualty. It is not done anywhere. Any economy that wants to survive, no matter what, does not try that.

“Let me give you a simple analogy, even though there are not exactly the same. If, for instance, you have had an encounter with a Police officer, say a DPO, as an infractor, for committing a certain offence and the officer goes ahead to punish you, and latter, suddenly, by a dint of providence, you automatically become a more senior Police officer yourself and that DPO becomes a junior officer you are now controlling, how do you think you are going to achieve any result? It is not because of the character of anybody; it is just natural, just a matter of principles.

“If you want to survive as an economy, don’t appoint a player as a CBN governor. If you do that, the first thing you see is a regulatory capture,” he reiterated.

On the absence of lower naira bills, the economic experts pointed out that the development was a clear indication of inflation, adding: “It is an empirical evidence of an inflationary economic system. When there is high level of inflation, it means that most prices for goods and services are so high that the actual natural impulse to demand lower goods would be tending towards zero.

“This is because if a piece of Tom Tom, which ordinarily would cost 10 kobo in those days would now cost N20, it means the whole pack will start talking about N1, 000 or thereabout. By natural impulse, therefore, you would require higher denomination currency. So, the pull would not be there from the demand space for lower currencies.”

“But I must confess to you that I cannot remember when last I bought something under N500. Even now in village, during the Easter and all that, if a child tells you Happy Easter, anything you give that child below N500, believe you me, you won’t feel you have done any good thing for that child. But in those days, we get kobo and something less and if you are able to get N1 from the beginning, it was a whole lot of money.

“So, people demand impulse determines the pressure on the monetary authorities to supply lower currencies. Even beggars, if give them less than N100, your conscience would tell you that you have not done anything for them. That is the thing that is indirectly affecting the mechanics of money supply psychology and in that area, the monetary authorities would naturally not be rushing to produce those lower currencies.”

He added: “Another major economic reason is that it costs you the same amount of money to print out N50 notes as well as N1000 notes. So, it is more expensive to produce N50, N20 and N10 notes than to print N1000 bills. You can see it from the economic side, particularly if they want to drive towards cost efficiency consideration.

“It would, therefore, not be economically viable to go towards producing more lower currencies.

“But more importantly, the reason is also the growth in e-money banking and transfers. People can easily now transfer N5, 000 to friends without necessarily sending any cash. The recipient can equally use the money and buy something online without spending any cash.

“So, traditionally, from the Kenyan example, you will see that the more there is growth in e-money, the less the demand for cash, particularly in lower bills.”

Attempts to get CBN’s reaction to Owoh’s assertion were not successful, as several calls and SMS made to its spokesman, Mr. Isaac Okorafor, remained unanswered or returned at press time.

The dearth of smaller denominations and tattered notes in the circulation is taking a toll on both traders and customers.

Mrs. Mobola Abdullahi, a tomatoes seller in Iyana-Iba Ojo Market in Lagos, said this has reduced small quantity sales of tomatoes and pepper, as most times, buyers bring high denominations, for which balance she rarely has; hence they leave without buying from her.

“The truth is, loss of small quantities of sales we experience because of the shortage of smaller denominations make up a whole lot when put together. But there is barely anything we can do about it.

“Most of the time, I have to tell my customers before I sell that there is no change to balance them if they come with higher denominations.

“As for tattered notes, unless you are not in this country, people barely reject tattered money any more, because everyone is aware of the fact that government has refused to remove the bad ones to bring into circulations new notes,” she said.

Also, Mr. Fatai Ikupayiti, a meat seller, said the challenge not really affect meat sellers, as they don’t really sell at low rates.

He, however, added: “Sometimes, if customers request, we sell small quantity for them, like N300 meat, but before we sell, we insist they pay with the exact amount to avoid hustling for their balance.

“For tattered notes, customers often reject them as change, but I usually insist there is no better one, after all, I don’t print money.”

Mrs. Chizaraepere Anioma, a seller of fairly-used clothes, said, because of shortage of smaller naira denominations, she auctions her wares cheaply, but insists that buyers must have the exact amount, which most times forces them to buy more quantities.

“I sell as low as N100 and because most buyers don’t usually have the small denomination with them, they pick about five pieces and pay N500.

“The low price is a business strategy to take advantage of the shortage of smaller denominations to attract and force buyers to buy more,” she said.

On her part, Mary Nwankwo, a 100 -Level Political Science undergraduate of Lagos State University (LASU), said she had planned to buy only two pieces of the fairly-used ladies top from Mrs. Anioma, but had N1, 000 note and had to buy five pieces to make up a round figure for easy balance.

“This issue of buying more than you budget for because of the shortage in smaller denomination is peculiar to almost every other item you need in the market. You are practically forced to buy other things by the seller to have a wholesome figure or leave your balance behind.

“I really think it is about time government looked into the shortage of smaller denominations in country.

“Then, there is the issue of tattered notes too. Only yesterday, I was forced to buy two bottles of soft drinks, because the seller gave me a bad N100 note as balance and insisted she didn’t have a better one, so I had to buy an extra bottle to make up the N200 note I gave her,” she explained.

Kelechi Mowete said: “Imagine paying for something, in clean N500 notes and you are given change in dirty and disfigured N200 and N100 naira notes. You would definitely feel a sense of anger, because this dirty currency poses a big threat to our health.”

Uchenna Osuji, an engineer, said traders have taken advantage of the situation to raise prices of commodities.

“If a trader knows that he/she is to give you change of N5 or N10 and that change would never be available, he/she would simply raise their prices to the next round figure. That would, in the long term, drive up prices in the economy,” he said.

Fatai Adewunmi traced the problem to alleged treasury looters, saying: “The reason for the scarcity is as a result of politicians, public servants, treasury looters, particularly former and serving governors and National Assembly members stockpiling the naira notes in their private homes.

“As a matter of fact, the money, which is kept away from the system and from circulation is far bigger than the amount of money in the economy. Too much money had been stolen and kept away, leaving the nation with stroke. Remember the Judges and what was recovered in their homes.”