Monday, May 28, 2012

Beyond amending the CBN Act

Following the opening of a public debate on the autonomy of Nigeria’s Central Bank, I will like to do a follow up on my earlier blog post that touched on the autonomy of the Central Bank of Nigeria (CBN). 

You may read the earlier blog post here

In that blog post I had argued essentially that in the name of granting autonomy to the CBN, we may have inadvertently placed too many powers in the hands of governor.
Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria. 

Globally, there have been a lot of regulatory reforms in response to the global financial crisis. These reforms have been on how financial institutions operate and how financial regulators regulate. 

In Nigeria, there has been more of a reform of how financial institutions operate with little on how financial regulators regulate.
The current move by the house to amend the CBN act, if that is all it is about, then will fall far short of what the Nigerian financial system needs. The challenge with the Nigerian financial system goes beyond a cosmetic amendment of the CBN act.

There are critical questions about the Nigerian financial system that need to be addressed. These questions include asking if the current highly fragmented regulatory system is really working for the Nigerian financial system? Why is the Shadow banking system in coma despite the existence of several licensed operators in the sector? Why is the insurance sector in coma and why is it that the only time the insurance industry showed some promise was when banks went into the insurance business? Why are banks thriving why all other financial institutions are not? How do you harness the whole financial system, banks and non-banks for the benefit of the economy?

The single act of just amending the CBN Act will not deal with the bigger issues faced by the Nigerian financial system. What we need is complete approach to reforming the Nigerian financial sector. This would involve reforms that include transparency in financial services, accountability, consumer protection and efficient competition in the financial system.

In the raging debate over the proposed CBN amendment act, there has been the consistent argument that it would interfere with the independence of the CBN. However, if the purpose of the bill is to balance independence with accountability and transparency in the operations of the CBN, then the proposed amendment could actually enhance the capacity of the CBN to efficiently manage the Nigerian economy but not enough to make the Nigerian financial system work for the Nigerian economy. So far media reports have not revealed the full details of the reform other than argue that it is meant curtail the independence of the Central Bank of Nigeria.

But a look at the UK financial regulatory system shows that even the Bank of England (BoE) does not have complete autonomy.

The Governor of the Bank of England (BoE) which is equivalent of Nigeria’s Central Bank Governor reports to a supervisory body for the BoE called the Court of Directors (CoD) chaired by an independent chairman different from the governor of the BoE appointed by the Chancellor of the Exchequer, equivalent to Nigeria’s Finance Minister.  The CoD is responsible for managing the day to day activities of the BoE except the formulation of monetary policy. The CoD delegates its functions to  the Governor of the BoE which has to give account of its operations to the CoD.

The CoD is made of 12 members appointed by the HM Treasury, and includes the governor of the BoE, two deputy governors and nine non-executive directors appointed for three year tenure each. The nine executive directors are appointed from different sectors of the economy including the banking industry.  To ensure, the accountability of the board, they are subject to an effectiveness review by an independent external body on an annual basis.

The CoD operate through different committees one of which is the Committee of the court (Nedco) made mainly of the Chairman of CoD and the non-executive directors of the committee and its main role is to review the performance of the BoE against its objectives and strategy. The bank also has the Financial Stability Committee (FSC) made up of the Governor of the BoE, two deputy governors and four non-executive directors of the CoD and a representative of the HM treasury. The committee is saddled with considering and approving all actions that are needed to preserve financial stability.

Other committees of the CoD include the Financial Policy Committee (FPC), Remuneration Committee and the Audit and Risk Committee. The new Bank act 2009 and a proposed new Financial Services Bill put the BoE effectively in charge of ensuring financial stability of the UK Financial system.

However, there are still specific areas like bank resolution options that involve the use of public funds that the 2009 UK banking act ensures that BoE can only act with the express collaboration of the HM Treasury equivalent to Nigeria’s ministry of finance.

In terms of direct accountability to the parliament, the BoE annual reports are first presented to the UK parliament before they are presented to the public. Also BoE has to attend the UK House of Commons Committee on the Treasury, equivalent to Nigeria’s House Committee on Finance, regular hearings on its inflation and financial stability report. This helps the committee members to question the BoE rational for arriving at its monetary policy decisions.

The House Commons committee also organises hearings for new member appointment into the MPC and the FPC though it has no power to reject the appointments.

Most readers may ask if it is possible to replicate this elaborate system of controls and balances in Nigeria, monitored by politicians without it being abused for personal gains. The answer lies in a quotation from the UK House Treasury Committee report which states that “accountability processes for monetary policy, built around published minutes, individual votes, regular evidence sections at the Treasury committee and pre-appointment hearings show that it is possible to create effective accountability structures while at the same time removing politicians from day to day decisions”

In essence, it is possible as along as  the process is made  transparent through mandatory disclosures of all processes. 

However, amending just the CBN act is not enough. There need to be a debate on the regulation of the whole financial system and whether the current fragmented regulation is appropriate for the Nigerian economy. The amendment of the CBN act can be the trigger for such a debate. By the way, the UK financial services bill will put the regulation of the insurance sector and other financial services under the BoE. 

For more on the governance structure of the BoE click here

Saturday, May 19, 2012

The year of the hoodie

This is the year of the hoodie. At no time has a dress sense raised so much mixed emotions. It started when Geraldo Rivera, a Fox TV host said Trayvon Martin, a 17 year old teenager, killed while walking home with a Can of Ice Tea, was killed because of the hoodie he was wearing.  

He was killed by George Zimmerman, a 28 year old man who had earlier called the police to say that Martin was acting suspicious.

Watch Geraldo Rivera blaming the hoodie for Martin’s death.

This sparked a backlash in the US which led to the Million Hoodie Match in tribute to Trayvon Martin, with thousands of people walking the streets of New York wearing hoodies.

US Congressman Bobby Rush famously joined the push against the negative hoodie branding when he wore a hoodie to the floors of the US Congress.

Mark Zuckerberg’s appearance at an investor road show wearing a hoodie while planning for one of the biggest IPO’s in US history may however have crowned 2012 as the year the hoodie left the gangster street for the boardroom.

Mark Zuckerberg’s appearance at the investor road wearing a hoodie drew many criticisms.
“He’s actually showing investors he doesn't care that much; he's going to be him," analyst Michael Pachter told Bloomberg TV. "I think that's a mark of immaturity."

The Wall Street suit guys were obviously shocked that Mark did not care about their suit culture.
Interestingly, Mark Zuckerberg who walked to Wall Street, and raised $16 billion in the second biggest IPO in US history, putting his company's value at about  $104 billion, is the same age as 28 year old George Zimmerman, the man who pulled the trigger that killed 17 year old Trayvon Martin, allegedly because he was wearing a hoodie. 

The listing of the Facebook IPO was also the crowning of the hoodie. NASDAQ for the first time in its history presented a hoodie to a listing company’s Chief Executive. And guess what, Mark was still wearing his hoodie and so were good number of Facebook staff.

Facebook's success may have announced the arrival of the corporate hoodie fashion. The corporate three-piece suit may just be on its way out as the dominant fashion in the corporate world. 

The hoodie is the new business model represented by Facebook, Google, Zynga, Linkedln and many more, started by youths on their Laptops, Car boots and Garages. This is not the typical business environment for the suit wearing traditional business executive.Suit wearing may actually stifle the creativity that represents this new business model than promote it.

The knowledge economy is fast changing the traditional business models. The knowledge economy is driven by creativity. Hoodie  is synonymous with the creative music industry. It has shifted to the creative tech industry.
Those who understand this shift are already building a bridge across the fashion gap. Welcome to the world of the pinstripe hoodie. 

Perhaps, time to order your pinstripe hoodie. 

Friday, May 18, 2012

First few minutes of the Facebook listing

I am sitting in front of the TV watching as the airwaves and the social media stream get taken over with the Facebook mania. The Facebook IPO has turned out to be the biggest media event today May 18, 2012. I am watching Bloomberg TV now and the presenters are all Facebook as they wait for FB to start trading on NASDAQ.

Mark Zuckerberg

The pre-trading banter from the presenters are full of speculation on what the FB price will open at. A $70 price was mentioned based on the report that a trader in France was getting demand from retail investors that were ready to buy at that price. On retail stocks trading platforms like, FB quoted prices rose above $100 per share.

The touch of drama and tension were further intensified by delays experienced by NASDAQ in opening trade on the FB stock.

At 16.15 pm (London Time) Bloomberg announced that NASDAQ was experiencing delays in opening trade on FB stock.

This delay resulted in a fall in NASDAQ share price and added to the tension of investors waiting for FB stock to start trading.

The news was that the opening trading volume of about 72 million was what was stalling opening the trade on the FB shares. Bloomberg also announced that NASDAQ said the massive demand was coming from retail investors. 

Meanwhile, an analyst is speaking on Bloomberg TV on the FB stock and says that he gets sceptical when he hears of “frenzy” and “mania”, and advises that investors should be cautious.

Another analyst says he can justify a price target of $70 and price of $10 for FB based on the inputs into the forecast data. Basically, saying optimistic forecasts about FB share price should be taken with a pinch of salt.  Another notes that there was a lot of insider selling which should be of concern.

At 16.29pm Bloomberg finally announced that trade is expected to open at 11.30 am US time

At 16.30 pm FB starts trading at $42.05 at exactly 11.30 am US time

At 16.33 pm FB drops to $41.00

At 16.34 pm FB drops to $40.36

At 16.36 pm it drops to $40.06

An analyst speaking on Bloomberg TV says FB has made fantastic hires which can help it drive its business. That fact was not just driving stocks right now. 

At 16.37 pm   FB is selling at $40.02

At 16.39 pm FB drops to $40 and then briefly flirts with $39.99

At 16.44 pm Bloomberg announced that the share prices of technology stocks like Zynga, Linkedln, Groupon and the major underwriters of FB shares are also falling.

At 16.45 pm, FB shares seem to have settled at about $40 per share, flirts with $38.99 briefly then stays for a few more seconds at $39.95

At 16.48 Bloomberg informed viewers that global stock markets have lost $4 trillion this month

At 16.49 pm FB share price drops to $38.18

At 16.51 FB flirts with $37.96 dropping below the IPO offer price for the first time.

At 16.57 pm, Bloomberg TV live coverage of the opening trade of the historic FB IPO comes to an end and FB is selling at $38.40

In the opening few minutes, FB never neared the optimistic price of $70 per share. Rather, it has settled below its opening price. Would it ever go near the $70 price?

Watch this video of Mark Zukerberg meeting My Space founder

What do you think? 

Tuesday, May 8, 2012

Barrels for guns and dollars

-an inside look at the stolen crude oil trade in Nigeria’s Niger Delta

In the creeks of Nigeria’s Niger Delta, home to the world’s third largest wetland, more than two million barrels of crude oil are pumped and exported daily, but an estimated 30,000 to 300,000 barrels are also stolen. The Niger Delta is home to about 31 million people, belonging to 40 different ethnic groups, bound by fishing, farming and hunting.

Since 1958 however, the people of the Niger Delta have also been bound by the misery of crude oil exploration.  Farmlands have been destroyed and water ways overtaken by thick slicks of crude oil. Amnesty International estimates that nine million barrels of crude oil has been spilled in the region since the first oil well was dug.

An oil bunkering scene in the Niger Delta

The degradation of the Niger Delta environment was revealed in a 2011 study by the United Nation Environmental Programme (UNEP).

“In some areas of the Niger Delta, there was heavy contamination present, 40 years after an oil spill occurred”

Surface water throughout the Niger Delta creeks contain hydrocarbons with floating layers of crude oil varying from thick black oil to thin sheets, according to the UNEP study. It cites community actually drinking water from a well that is contaminated with benzene, “a known carcinogen, at levels 900 times above the World Health Organisation (WHO) guidelines.

Life in the Niger Delta is no longer the same.

Forced out of their traditional way of life, the people of the Niger Delta have found a new way to survive. Under the cover of darkness, in the midst of the forests, a trade is booming. Wooden Canoes once used for fishing have become transport vehicles for barrels of stolen crude oil. 

Crisscrossing the wetlands of the Niger Delta are long pipelines carrying millions of barrels of crude oil. These pipelines tap into a fraction of the 34 billion in proven crude oil reserves in the Niger Delta. The region also holds another 186 trillion cubic feet of gas reserves, the eight largest in the world.

The exposed pipelines are the source of stolen crude oil. A copy of a  report  obtained by this reporter, describes how crude oil is stolen from the exposed pipelines. Hacksaws are used to damage to pipelines. This forces the oil company to shut down oil flow on the affected pipeline to reduce the impact of any oil spill on the environment. As soon as this is done, the oil thieves install bunkering points on the hacked portion of the exposed pipes and attach hoses and suction instruments to the pipes. As soon as oil starts flowing on the pipelines again,  they siphon the flowing crude to waiting locally made barges; said to be able to store up to 40,000 barrels of crude oil at a time and large canoes called “Cotonu boats”. 

The oil thieves have two markets for their stolen oil, the local refineries in the creeks and offshore large tankers waiting patiently for such cargoes.  The  report confirms that the portion that is sold to the local refineries in the creeks is refined into diesel, transferred to a storage depot and then sold in the local Nigerian market.

A local journalist familiar with the Niger Delta says the stolen and locally refined diesel is sold at about N150 (59 pence) per litre compared to the official price of N190 (75 pence) per litre for the imported none locally refined diesel.

“In this region, if you want to be a small-time bunkering baron, you raise N10m (£39,000) and pay to a syndicate, then you get supplies as your share. Many people in the big dark jeeps you see here are in it. People introduce themselves as being in 'oil' business. That is it. It is no big deal here.”

Corrupt security agents are behind the trade, he says, explaining how large barges of stolen crude oil are able to move around the creeks unchallenged.

“If you go to Bonny Island, some soldiers lodge N3m (£12,000) daily in their accounts. My bank source tells me that some top brigade commanders get N25m (£98,000) lodgements at a time. There is piecemeal payment to security operatives and also one time pay-offs.  Has government agencies questioned the source of money?”

The exact number of barrels of crude oil stolen is not certain. But various reports put it between 30,000 to 300,000 barrels of crude oil every day. Ian Craig, Shell’s director for Sub Saharan Africa told an oil and gas conference in Abuja in December 2011 that Nigeria could be losing as much as 150,000 barrels of crude oil a day to the oil thieves.

Tony Attah, Vice President at Shell in Nigeria in an emailed response to this reporter’s enquiry disclosed that the “theft of equipment or leaks caused by crude oil thieves drilling into pipelines or opening up wellheads to steal oil, accounted for 74% of all oil spill incidents and 73% of all oil volume spilled from our facilities in the delta between 2007 and 2011.”

He puts the estimated cost of oil theft at “around $4.5bn a year to the Nigerian state and operators in lost revenue”

A special report by the United States Institute of Peace (USIP) titled “Blood Oil in the Niger Delta” estimates that the loss to the Nigerian economy from stolen crude oil between 2003 to 2008 could be as high as $100 billion.

Despite the significant loss of revenue to the Nigerian state, the government seem reluctant to deal with the massive theft of crude oil taking place in the creeks.

Andrew Walker explains the reason for the Nigerian government reluctance, in a report in 2009 for the BBC titled “Blood Oil dripping from Nigeria” quoting a source close to the Nigeria’s former president Olusegun Obasanjo as saying that “This is an industry that makes £30m ($60m) a day, they'd kill you, me, anyone, in order to protect it”

"If the president goes after them, they could destabilise the country, cause a coup, a civil war. They are that powerful, they could bring the state down."

Toyin Akinosho, a previous employee of Chevron and publisher of “Nigeria Oil and Gas” confirmed the fears expressed by the BBC source in a phone chat with this reporter.

“It is not unusual to hear militants in the Niger Delta boasts that they will make the government uncomfortable if they are prevented from stealing crude oil. They always threaten that they will blow up the pipelines.”

Nigeria earns 90% of its revenues from crude oil exports. So blowing up the pipelines could collapse the government.

But the inability of the government to deal with the situation could also be traced to top level political involvement in the oil theft trade.

Top level involvement in the stolen crude oil business may explain how in 2004 a detained Russian Ship carrying an estimated $2.6 million in stolen crude oil vanished. The Nigerian Navy detained the ship and claimed they handed it over to the Nigerian police. The Nigerian police claimed that they never received any ship from the Navy. The Nigerian legislature launched an investigation into the missing the ship. The report of the investigation was never made public.

Since then, several more ship detainments have been reported in the media. In 2011, security agencies are said to have arrested 145 people and seized among others 18 tankers, 22 vehicles, 16 barges, and 35 locally made boats. Sources familiar with the stolen crude oil trade however say these arrests target just the foot soldiers fronting for local and international financiers.  

There is evidence of well-established international syndicates facilitating the stolen crude oil trade in Nigeria. The route to the international markets for Nigeria’s stolen crude oil is a collaborative effort between the foot soldiers in the creeks, the communities hosting the oil wells and pipelines, the Nigerian Navy and security agencies, and an international syndicate of oil thieves that finance the whole process.

The international syndicate involves well established players in markets for stolen Nigeria crude oil in West African countries like Sao Tome, Liberia, Senegal, Cote d’Ivoir, Gambia supported by Moroccan, Venezuelan, Lebanese, French and Dutch Financiers.

The stolen oil is usually exchanged for cash, illegal drugs and weapons from the ships lurking out at seas waiting for the stolen oil to be delivered. The large tankers that buy the stolen crude oil take them directly to spot markets like Rotterdam or directly to refineries in places like Cote d’Ivoire a neighbouring West African country.

“There are large international syndicates involved in this operation, which also handle the money laundry for the international players” according to the USIP report mentioned earlier.

The report notes that the players in the creeks are just the front end of a complex international trade in stolen crude oil.

“While the Niger Delta youth may handle the local tapping and loading, international players from Eastern Europe, Russia, Australia, Lebanon, The Netherlands and France all play roles in financing, transporting, and laundering the money associated with blood oil. One money trail followed a path from Senegal and Cote d’Ivoir, through French banks and French credit agencies to Syria and Lebanon.” The USIP report revealed.

The report reveals deep involvement in the stolen oil trade of Nigerian Lebanese (those of Lebanese descent, born or naturalized in Nigeria) “especially those with good political connections”

Attah, Shell’s Vice President says only international collaboration can stop the booming trade in stolen crude oil from Nigeria.

“Nigeria needs the cooperation of the international community to checkmate the organised crime syndicates engaged in crude theft.  Buyers can demand assurance that the oil they buy comes from a legitimate source.”
The Nigerian state may be too compromised to stop the massive oil theft taking place, unless as Attah suggests, the international community intervenes.