By OMOH GABRIEL Business Editor
THE Nigerian Banking system today is a shadow of what it was before the August 14 pronouncement of the Central Bank governor, Sanusi Lamido Sanusi. Nigerian bankers who in recent times held their heads high in local and international arena no longer exude the confidence they once have. The entire industry is gripped with fear, disenchantment and panic. No one is sure of what will happen next.
The financial sector that was booming has become comatose. Already bankers are calculating their losses as none is lending. Banks derived 70 to 80 per cent of their inco
me from lending activities. In the last two months they have all stopped lending. Many, if not all, are only basing their stream of income from non interest incomes such as commission, charges on turnover, etc., realising that they are bearing fixed cost, many are already cutting cost. The natural way to look is labour. Retrenchment is ongoing silently in the industry as panic and loss of confidence in the banking system in Nigeria begins to take its toll.
Unknown to those who were appointed as managing directors of the troubled five banks is the real intention of those who appointed them and the situation on ground. Having spent two, three or four weeks on the job, the Sanusi appointed managing directors are learning the hard way. They have found out that the banks that were once bubbling with life are now mere shadows as customers as well as other banks stay away from them. It is for these banks not business as usual.
The chief executives are lamenting the situation in their closets. To their confidants they openly confess that if they knew the situation was as they have found out they would not have dressed near the jobs.
One said he thought the appointment was a mark of recognition and a call to national duty, but as it stands it is a mess of a thing. The managing directors are not allowed to express the glory of the past of these banks. One of them as narrated by a capital market operator who attended the governorâ€™s briefing of the capital market community was hushed up when he attempted to express the legacy of a particular bank.
While trying to convince operators that the bank was in good shape with dedicated staff, large network of branches and a strong brand, the governor stopped him mid way to the surprise of those who were listening and said you can see the quality of people we brought in to manage the troubled banks.
They must stick to the fact that these banks were poorly managed and had to be rescued.
All over the world as minority group opinion puts it, financial system is built on the trust between lenders and borrowers. Once this foundation is shaken, it takes time to resume a normal functioning of the financial system. As a result of the banking reform of the CBN the trust between banks and borrowers have fractured with the loan recovery effort of the EFCC and SSS, deployed by the Federal Government to assist Sanusi in his reform effort.
During the heat of the global financial crisis and even now the global financial system is still afflicted by a loss of confidence. In order to allay widespread fears over financial instability, the authorities around the world have taken numerous steps such as capital injections, public guarantees for banksâ€™ debts, separation of toxic exposures and the like.
It is at such a timeÂ that Nigeria Central Bank governor will choose to create panic and confusion and loss of confidence in the Nigerian financial system. No where in the worldÂ is it a crime to borrow or owe. It would have been challenging and a mirage for Nigeria industrialists to set up the various factories and industries employing thousands of people today if they did not borrow.
The economies of many
survive on credit. More than 70 per cent of citizens of Great Britain, America and South Africa are on one form of credit or the other. Companies need to leverage to grow. No one is yet in a position to fashion out why the CBN governor had to muddle issues up and create a situation where people feel it is now a sin or criminal offence to borrow. For every debtor that is compelled to pay before term a number of jobs will be lost and every job lost there is a potential increase in crime rate. The public pronouncement of the CBN governor on the five troubled banks and the publication of the list of debtors was needless and reveals the immaturity Lamido has brought into the office of the CBN governor. There are more civilÂ way to approach the issue of bad bank debtors.
Sanusi had said he was willing to sell the banks to foreign investors. But the reality confronting him is that no genuine foreign investor will put his money in any of the banks after the loss of public confidence in them more so when the action of the CBN governor and the EFCC has clearly shown the outside world that Nigeria has no respect for property rights and sanctity of contracts. How then will any analytical mind expect foreign investors to bring their hard earned money into Nigeria that is perceived as a high political risk. Except Sanusi intends to sell these banks for peanuts with complete disregard for the sweat, equity and goodwill the founders of the business have injected over time. It will be curious to see the value that will be placed on the banks after the audit he said would precede the sale. The key issues being pursued by Sanusi are non performing loans. They are loans that have been given to business men to expand their businesses, create jobs and improve the GDP of Nigeria. Regrettably, some of these business men have diverted the funds to buy houses in Dubai and other choice areas of the world and blame it on recession. These are clearly dubious individuals who must be brought to book for money laundering.
Their assets, both domesti
c and international,
must be confiscated and sold to recover whatever can be recovered. Such unscrupulous elements must also be sent to jail if found guilty. There are also loans that have been given to both informed and uninformed Nigerians to buy shares in mind boggling proportions.
In civilized world, whatever is left of the asset under finance is sold because it is expected that the borrower would have made a form of contribution or the other. The crude method adopted by CBN and the EFCC cannot be appreciated. It is very normal in banks worldwide to see risk assets go bad. There is a measure of risk attached to lending money and it has never been a criminal offence to lend or borrow money. It is what banks live on. It is this lending activity that ensures that the economy is growing, people are employed and the standard of living is improving. That is why the US government as governments in other developed economies feel concerned when banks stop lending. It can be likened to stopping the flow of blood in the system. Banks in Nigeria have stopped lending and the government is looking the other way. Foreign credit line have dried up and the economy is suffocating. It is, however, the dimension of these bad loans that have given the governor a lot of concern just as it should to any discerning mind. When a loan goes bad the implication is that a bank has to write it off from the profit the bank has made and if the profit is not sufficient then it is charged to the capital of the bank. This literarily means the shareholders will bear the loss.
From the statistics that have been released so far, some of the banks have such huge bad loans that may have completely eroded their capital. This does not, however, mean that the depositors of the banks have lost their money. Proactive regulators make efforts to protect the depositors as the deposits are insured even though there is a lot of room for improvement in the amount insured in Nigeria. It is speculated that huge bad loans is an industry-wide problem. To borrow from Minority Group Opinion in their write up â€œOne of Lamidoâ€™s concerns, therefore, is the heavy credit losses CBN has identified in the banks which have impaired on their capital. Typically, when banks or any going concern are found to be capital-deficient, the natural thing to do is for the authorities to encourage them to carry out re-structuring and raise additional capital from private investors.Â This is exactly what is being done today in many countries. In the peak of the global financial crisis in the United States, the Federal Reserve System released a vague summary of the results of the so-called stress test that was placed on the 19 largest banks. There were a few details released to the public about which banks are in what degree of trouble, but the FED stated clearly and unequivocally the banks that must be recapitalised by private investors. The FED did not tell everybody how badly these banks need this recapitalisation; for fear that the money will not be forthcoming, the banks will be priced cheap and depositors will move their hard earned monies from such banks. This is a US economy where the average level of public enlightenment can be assumed to be higher than that in Nigeria. The FED identified the need to protect the confidence the banking and investing public have in the system.
â€œThe first and credible option open to CBN in a situation like this is for the CBN to have given the existing shareholders and management of the banks the opportunity to recapitalise their institutions. In an extreme case where CBN has doubts on the quality of management it can compel the board of directors to restructure and effect a management change. There are different instruments that can be used to recapitalise the banks and bring them to an acceptable capital ratio. It is not clear how Lamido expects the capital markets both domestic and international, to supply enough capital to recapitalise a banking system that has been badly ridiculed and sensationalised as ours in recent times.â€ In a situation of bad loans of unimaginable proportion as we have seen, a credible and transparent option open to a proactive Central Bank desirous of protecting the industry would be the separation of the bad assets and creation of an asset management company or what can be called the â€œbad bankâ€. Nobody else has enough money to fund it but the government. It can also be funded through the issuance of a debt instrument like bond guaranteed by the CBN.
With the availability of EFCC the
government can buy
these bad assets from banks at a discount and get the law enforcement agents who will be expected to recover the full value of the debts to go after the bad debtors. This could be another avenue for the government through the CBN to make additional revenue with which it can use to fund its budget deficit. This is a better approach than injecting capital into the banks without the tax payers, whose money has been injected, deriving any direct benefit from it. Nobody knows whether the infusion of capital by CBN will solve the additional problem it has created for the banks. A creative central banker would, however, use the injection of state funds to create value for the state without destroying the basic existence of the banks or creating unnecessary panic and distraction. To further buttress this possibility, the US government recently reported about $4billion in profit from large banks that have repaid their obligations from last yearâ€™s bail out. It will be recalled that at the peak of the financial crisis, Ben Bernanke the US Federal Reserve Chairman, pressed the congress to approve a $700billion financial bailout of some of USâ€™ financial institutions which were in danger of collapsing if not recapitalised. These institutions include Goldman Sachs, Morgan Stanley, American Express, Citibank and Bank Of America. It is worthy to note that some of these institutions represent the cherished American entrepreneurial spirit. It would have been disastrous if they were allowed to go under when all that was required was the injection of capital for them to survive.
In the history of banking there are three major reasons why individual banks fail. The reasons are credit risk, interest rate risk, and foreign exchange risk. Two other potential sources of failure are bank runs and fraud. Bank runs occur when depositors or other creditors fear for the safety of their funds and try to withdraw them. During the financial debacle in Russia in August 1998 and recently in Northern Rock in Britain, CNN and other television stations showed long lines of Russians and Britons respectively trying to withdraw their funds from local banks. Most banks do not keep sufficient funds on hand to meet unanticipated large-scale withdrawals. Under these circumstances, the banks cannot pay off all depositors, words go round and the long lines become longer. A â€œsilent runâ€ occurs when large creditors withdraw their funds especially through the clearing system. If the run is on an illiquid but solvent institution, that institution may be able to borrow from the lender of last resort, the CBN. Insolvent institutions may fail but illiquid institutions may survive if well handled.
â€œThere are much more compelling restructuring of the banking system that Lamido should sit down to tackle. A situation where a company that has a paid up capital of N10 million is borrowing N1billion is ridiculous and laughable. Successive CBN regimes have ignored this landmine and relied on what is called Single Obligor Limit for banks. This is the maximum amount that a bank can lend to a single entity and it is a function of the shareholdersâ€™ funds that the bank has. This requirement is archaic and does not address the peculiarity of the Nigeria situation. A more tolerable risk management framework will be to index the amount a company can borrow from banks to the companyâ€™s paid up capital. This will ensure that companies retain profit in the business if they must grow. It also opens up a lot of companies to the opportunities of raising funds from the capital market. The CBN needs to address the issue of corporate governance which is non-existent in most banks in Nigeria and the amount insured of depositors with banks. These are in addition to the huge challenge CBN is facing in Nigeriaâ€™s macroeconomic model. Sanusi score card after his tenor should be marked against the inflation rate, exchange rate and convertibility of the naira..
Clearly, Lamido and his advisers were not thorough. They did not consider the consequences of their actions. Just a week ago, Lamido vowed to resign if his decisions were fundamentally wrong. The question is what is the significance of Lamidoâ€™s resignation to the irreparable damage he has done to individuals, to the institution of banking, to the nationâ€™s image and to the economy? Even when the dust settles the scar will always be there.