Economic management is hinged on choices and economic cost.Â Economists are expected to do a cost benefit analysis of policy before embarking on it.Â How much of that was considered before the recent clampdown on Union Bank, Intercontinental, Oceanic, Afribank and Finbank by the CBN.Â That is the question Group Business Editor, Gabriel Omoh attempts to examine in this report
Economic decisions areÂ made on the basis of trade policy options and trade offs. How much of a given thing do we need to give up in order to achieve a given objective. It is not certain if the implication for the whole economy was considered before the action of the Central Bank (CBN) governor, Mallam Sanusi Lamido.
Mallam Sanusi and his team are currently in London to explain to foreign investors the action of CBN in removing five bank managing directors and possibly convince them to come into the country and invest. On Friday, he told the world that he was prepared to sell the five banks 100 per cent to foreign investors.
If this policy were well thought out , would Sanusi need to explain to foreign investors his decision? When the same foreign investors were asked by CBN to establish bank of their own if they were interested in Nigeria banking, what was their response?
Today, his clampdown has sent the wrong signal to foreign banks which have cut off Nigeria from their credit line.
Many NigerianÂ letters of credit and guarantees are being turned down and that was why Sanusi said the CBN would guarantee all foreign loans and corresponding banks credit lines.
Just when the same foreign investors were building confidence in Nigeria banks by rating them high, granting foreign lines of credit Sanusi dropped the bomb shell. The biggest threat to Nigeriaâ€™s economy today is the question of policy reversal. During Professor Chukwuma Soludoâ€™s tenure he said he would not allow any foreign bank to take majority shareholding in the recapitalised banks.
Union Bank which is one of the affected banks had almost concluded a deal to sell about 40 per cent of its shares to a foreign bank, but was not allowed to do so on account of the existing policy and for a non performing loan of N74 billion the banks executives were sacked.
Assuming most of the Nigerian banks were owned 60 per cent by foreign banks what would have happened during the global financial crisis when foreign banks were recalling their capital back home to save their mother companies?Â The Nigeria capital market suffered a huge set back when foreign portfolio investors pulled out their funds from the system. Asking foreign investors to take over these banks is a signal to outsiders that the CBN has lost confidence in the ability of Nigerians to manage their banks.
One major problem the Nigeria economy is suffering from today is capital flight caused by governmentâ€™s policy inconsistency.
The capital flight that hit the Nigeria economy has continued unabated as Nigerians, corporate bodies keep moving funds massively out of the country, or converting the Naira to dollar. In the last four weeks, a total of $4.7 billion went out of the country. While about $30 million went out in the week ending 26th December 2008, the amount of foreign exchange flowing out of the country rose to $1.402 billion for the week ending 9th of January 2009.
The trend has not been reversed The foreign exchange outflow went further up to $2.019 billion on the 13thÂ of February 2009. This gives a total of $4.701 billion in four weeks for which data are available. Indications are that at this rate, the country will finish up the reserves and face acute shortage of foreign exchange for imports. This development has resulted in the crash of the naira exchange rate which was relatively stable before the global financial crisis.
The movement of funds out of the country comes by way of Nigerians buying up dollars with their naira and moving it off shore. The fact that the CBN has pronounced some banks problematic and that others are passing through its examination will heighten capital flight and make would be investors look elsewhere.
As a result, the Nigerian interbank lending will be restricted to banks that are considered safe. In fact, each bank will want to hold onto its money and the market for fund placement will suffer.
One major lesson from recent developments in the Nigeria economy is the need to strengthen the economy through proper diversification and an enhanced performance of the real sector of the economy.Â Unless investors in the real economy are strong, there will be limited investments for the banks to fund.Â The banks can only be as strong as the economy in which they operate. With the criminalisation of loan defaulters and bank executives who granted the loans the small scale industrialist will suffer more as banks are likely to impose stricter measures in their loan assessment.
Banks are at fault in sectoral concentration of credit in oil and gas, telecom, capital market and trading. This is certainly not in the interest of sustainable economic growth to have an enabling environment for businesses to thrive and support the financial system.
In any economy for what ever reason, when the agencies of government come out with a policy that will end up in the withdrawal of credit facilities to the business world, some shrinkage should be expectedÂ in terms of business activities and the rest of them because companies need this credit facility. It is also necessary to sanitise the system and get companies or individuals to pay up their debts so that the banks do not go under. If the banks are allowed to go under, it will impact negatively on the economy as well as on individuals and depositors of the various banks.
But there is every need to thread with caution to restore depositorsâ€™ confidence so that more people will be willing to keep money in the banks which the banks will in turn give to those who need it in the form of credit facilities. The CBN in its report has always complained that close to 40 per cent of money in circulation is outside the banking system.Â Further erosion of public confidence in the banking system more people will encourage people to keep money at home thus denying the economy access to funds for local investment. If there were enough local savings, Sanusi would not be in London pleading with foreign investors in the first place.
There is no way the present drive will not affect the supply of petroleum products. At present and with the Nigerian situation, anything that affects the availability of credit in the economy will definitely affect the ability to satisfy local products need.Â Precisely, if this issue is not well managed, it will impact negatively on petroleum products availability and supply in the country because Nigeria isÂ import dependent.
The issue most foreign investors have with the management of the Nigerian economy is that of sanctity of contract. Most investors have said openly that Nigeria is one country where property right is not respected. What the present situation of loan recovery portends is a confirmation that any thing goes.
Because loans entered into under a legal contract have gone bad, the CBN has called in EFCC to arrest, detain and prosecute offenders not minding the circumstances in which the loans have become non performing. Banks have long complained that the judicial system in the country has not encouraged loan recovery efforts. Long litigation and perpetual injunctions have conspired to hinder loan recovery efforts.
Commercial courts have long been called for yet no reform was carried out in the judiciary to encourage loan recovery. The present fire brigade effort will further damage the image of the country in the eyes of foreign investors.Â Â Nigerians are generally in full support of the strengthening of risk management practices in the banks.Â But this should not be interpreted to mean that the banks would not take any risk.Â Investment is about risk, and any institution that wants to partner with investors must be ready to take some risk. But the way the CBN and EFCC are going about the entire exercise is that banks and business should not take risk.
The drama that is playing out in the banks is an indictment of the CBN for as far back as 2007, the banking supervision department in its report said â€œData integrity and disclosure requirements remained a challenge. There were reported cases of misreporting and false rendition of returns in violation of not only the provisions of the Code but other regulatory guidelines. Such breaches, however, continued to attract appropriate sanctions/penalties and regularizations according to the law.
The greatest challenge to the nation is implementation of policies. Today it is Sanusi who is on the driverâ€™s seat dictating the tune. Tomorrow somebody else will come with his own agenda without any regard for tradition, culture and trends in the institution he is called to head. The CBN had asked banks to appoint independent directors who will have independent mind to help direct the affairs of the banks.
The CBN should conduct an internal audit of itself why those directors were not appointed and why the banking supervision department of the bank did not enforce it. Way back in 2007, the last available report of the department stated clearly that the banking industry was yet to comply with the requirements for the appointment of at least two independent directors on the board of each bank. The reason was largely due to the absence of a clear definition and the specifications of the qualifications for independent directors.
The CBN also by this action indicted itself for non performance because it failed woefully to implement its own rules of asking banks to submit appraisal of directors. CBN own report said that some banks submitted reports on their boardsâ€™ performance appraisal and even had them published in their annual statements of accounts. Majority of the banks were, however, yet to put in place the procedure for such appraisal. The main reason given by the banks was the difficulty of getting suitable consultants for the job.
The emergence of large-sized banks through mergers and acquisitions posed challenges of integration, acculturation, capacity building, service delivery, and boardroom and management squabbles.
In order to institute a strong corporate governance culture in the emerged banks, the CBN issued the code of corporate governance for banks and sustained its implementation through periodic monitoring.
The question is how far did the apex bank go with the monitoring.
Nigerian must not forget that Shareholdersâ€™ expectations following the conclusion of the consolidation programme imposed a grave challenge to both the operators and regulators. As a result of the forecasts in banksâ€™ prospectus for public issues during the reform period, banks created high shareholder expectations of bumper dividend payments and capital appreciation.
Profit and dividend payout motives, therefore, rose to uncomfortable heights that made some of the banks do what they are accused of. For the inability of some banks to meet these expectations in the short-run began to create shareholder disaffection while there was undue pressure on banks to out-perform one another and pay unsustainable dividends as promised during the consolidation period.
The CBN cannot claim ignorance of these factors as it said it monitored these developments and took appropriate measures just as the Nigerian Stock Exchange commenced investigation into the activities of some companies that were alleged to have manipulated their share prices. The banking sector reforms and the Pension Act 2004 opened several opportunities for banks to finance big ticket projects in the manufacturing, energy, oil and gas sectors as well as carry out developmental activities that would support the economic transformation of the country.
What has happened so far since August 14 is the announcement effect of the Sanusi banking reform policy.
The real effect will come when credit dries up for corporate bodies, higher level of capital flights, factory closures for lack of raw materials, increase in unemployment and nose diving of major economic indicators. Nigerians then will all wake up to the sark reality of what we have got ourselves into.
CBNâ€™s release of N400bn to 5 banks unconstitutional – Lawyers
By Ise-Oluwa Ige
What is the constitutionality of theÂ decision by CBN to give N400billion as bail out to five banks without the consent of the National Assembly?
Chief Adeniyi Akintola (SAN) is an Ibadan based member of the inner bar.
He said the CBN governor is empowered by the Banks and Other Financial Institutions Act (BOIFIA) to release the intervention fund without the consent of the National Assembly.
He said the Act did not say he should have a recourse to the National Assembly.
He however quickly added that the fact that the BOIFIA empowers him to release such fund does not make his action constitutional.
He said the 1999 constitution is the organic law of the land and is therefore supreme to other laws.
He said any law including the BOIFIA that is inconsistent with the provision of the 1999 constitution is to the extent of the inconsistency null and void.
He said the 1999 constitution provides that no public fund can be released or spent by anybody without same being appropriated by the National Assembly.
He said the questionable N400billion bail out released by the CBN governor is public fund which cannot be released without the consent of the National Assembly. .
He said the provision of the BOIFIA Act on the powers of CBN governor ultra vired the provision of the 1999 constitution and therefore null and void.
He said the release of the funds is therefore unconstitutional.
His words: â€œIt is illegal to release such huge funds without the appropriation of same by the National Assembly.
â€œThe CBN is only cashing in on the lacuna in the BOIFIA Act which says he can bail out banks.
â€œBut that law is subject to the provisions of the 1999 constitution because that money is a public fund
â€œOrdinarily that BOIFIA Act that empowers the CBN governor to bail out bank should have stated that before the funds is released, he should have a recourse to the National Assembly for appropriation of the funds.
â€œThe provision in the BOIFIA Act on the powers of CBN governor to release public funds to bail out banks without any recourse to the National Assembly is inconsistent with the provision of the 1999 constitution and it is null and void to the extent of its inconsistencyâ€.
For Mr. Alex Izinyon (SAN), the action of the CBN governor was wrong.
He said the fact that the CBN is the regulatory financial institution for banks in the country does not mean it can release public funds without the consent of the National Assembly.