By Dele Sobowale
“The Central Bank of Nigeria, on Wednesday began the implementation of its new 50 per cent Cash Reserve Requirement policy, which requires Deposit Money Banks to keep 50 per cent of all public sector funds with the Central Bank”.
THE PUNCH, Thursday, August 8, 2013 p 31).
The first major withdrawal of public funds from banks in recent memory took place during the Babangida administration in 1989. The country’s Economic Management Team and the Presidential Advisory Committee (Babangida was the only military ruler to give himself the title PRESIDENT) included Professor Oje Aboyade, Dr Kalu Idika Kalu, Dr Chu Okongwu – all former World Bank economists. The Governor of Central Bank was Alhaji Ahmed and the Minister for Budget was Alhaji Abubakar Alhaji.
By the time IBB became President, the price of crude oil had plummeted from a record price of $28 per barrel to less than $12 per barrel. Under Babangida, as the global economy went into a recession, it actually went down to $9.95 per barrel. Then, as now, the banking sector was heavily dependent on public funds for its deposit base and little effort was made to mobilise funds from individuals.
That meant that government funds were deposited with the banks at zero per cent interest and the same government turned around to borrow its own funds from the banks at 35 to 40 per cent. That was not permissible even when Nigeria had more money than sense to manage it. Interest rates became an unbearable burden for governments by 1989. Commonsense prevailed. Government withdrew its funds from the banks and a banking crisis was underway which ended with the collapse of several banks in the early 1990s.
With the withdrawal of government funds from banks, a fierce cutthroat competition developed among the banks. Unsustainably high interest rates were offered for fixed deposits – sometimes with the interest paid up-front. It made no economic sense and the collapse of the banks was predictable. In fact, one of my first predictions about banking crisis was made in a column titled FUNNY MONEY, which warned that a crisis was inevitable. It happened as foretold. All the 17 banks I said would collapse did – including COMMERCE BANK headed by two former heads of the Nigerian Institute of Bankers.
When Frederick the Great, 1712-1786, wrote that, “Whoever reads history, with application, will perceive that the same scenes are often repeated and that we need only change the names of the actors”. (VANGUARD BOOK OF QUOTATIONS), he must have had Nigeria in mind.
Another bank crisis is on the way – what is not clear is whether it will be short or long and the ultimate impact on the banking sector. But, the withdrawal of large quantum of public funds from the banking system has always inevitably resulted in problems for Nigerian banks and for the economy as a whole.
Already, the bond market is feeling the pinch as many banks have started reducing their exposure to the fixed income financial instruments and inter-bank lending rates are also on the rise. That invariably means that borrowers will pay higher interest rates, even if they can access funds at all, and it also implies that businesses will face credit crunch.
And as Emperor Frederick had remarked, the only thing that has changed are the names of the actors. Unlike 1989, we now have President Jonathan, Dr Ngozi Okonjo-Iweala and Malam Sanusi Lamido. They mean no harm to anyone; they don’t even enjoy inflicting more pain on Nigerians – who are already crushed by economic, social and political burdens. But, this measure, inescapable as it is, will do just that. Nigeria, in 2013, is having to learn again the lessons which changing fortune taught us in the 1980s, but which we seem to have forgotten.
My co-columnist in the VANGUARD, and a good Old Igbobian, Henry Boyo, had been warning governments that it made no sense for governments to hand over public funds to banks at no interest only for the same government to turn around and borrow at 14 per cent or more from the same banks. That amounted to borrowing your own money at 14 per cent. The lesson Henry had tried to knock into block heads at the federal and state levels, without success until now, was already taught in 1989-1992. But, we operate a public sector in Nigeria, where the managers in one generation don’t have a sense of history about what had happened in the past.
But, if government is bad about remembering history, the banks are even worse. Most of the Managing Directors and Executive Directors of banks today were either not born, or, were still learning to put on their pants when the 1989-1992 banking crisis took place. It swept away many high-flying banks. This one too will at least shake the banks to their foundations and might even sweep away three or four.
The first question is: how did we get into this mess once again? Part of the answer lies in our unstated public policy of illusions and hidden corruption. One of the greatest illusions underpinning our economic policy rests on the notion that we can continue indefinitely to place public money in banks at zero interest and borrow them back at 14 per cent. “The most obstinate illusions are ultimately broken by facts”, said Trevor-Rooper. (VANGUARD BOOK OF QUOTATIONS p 100). One day, the purveyors of that fallacy of public funds management will realise that what they have been doing amounts to gradually giving public money to the banks for nothing; no services, no benefits to government or the people.
The corruption involves the undisclosed interest the banks actually pay for the deposits. It is a fact that the officials of government who make the decisions to deposit huge funds in selected banks are paid commissions for so doing. Those commissions, which are destined for private pockets, and are undeclared to the public, represent the lies government officials tell the rest of us. And, they run into billions every month. So, the public loses two ways. We will lose even more now that the party is over. Revenue this year is running way behind budget and governments are cash strapped. Commonsense will prevail again for a while; but at a cost to Nigerians.
The next question is: will the new measure work and what will it do to the Nigerian economy? The answers can partly be found in a glance at our history again. Almost immediately after IBB’s government removed public funds from the banks, the queues at banks for cash withdrawal got longer; people spent hours at banks to cash their own cheques even though they had money in their accounts. Banks started cutting back on overdraft facilities to companies and easy credit to good deposits stopped. Individuals cut back on non-essential items and retail trade nose-dived nationwide. To attract more deposits, banks paid increasing interest rates and lent at Shylock rates to the few fortunate to obtain credit – they were the people engaged in capital flight and money-laundering. A backlash was underway.
Unfortunately, the backlash leads to unintended consequences. Now more than ever, the banks need deposits because over 70 per cent of the money in circulation is still outside of the banking system. But, “free” money has lulled the banks into a sense of complacency. They forget that “the only free food is found on mouse-traps.” When they start again to scramble for deposits, the long queues in banking hall would have discouraged depositors from bringing money to banks. As in 1989-92, people learn quickly that hoarding money is the beginning of wisdom when cash in banks have been depleted by CBN.
NEXT: IS YOUR BANK IN TROUBLE? ACT BEFORE IT GOES DOWN.