The Truth About Nigeria’s Banking Sector

by Gabriel Nwanze

Events that have recently unfolded in the banking sector of Nigeria has truly lived up to the sector’s rating as the Nation’s most vibrant. The replacement of five bank CEOs and their executive boards was the climax. This was the first blow by the apex body, the CBN, albeit, a blow in the opposite direction against expectations that the rumoured sanitization of the sector will start from a street cop-like hunt for debtors, and this expectation was heightened few days before through an open letter written by the legal counsel to one of the affected banks, urging the President to wade into the crisis and bring debtors to book.

From inception, the new CBN governor, Sanusi Lamido Sanusi cut the image of a radical reformer, even to some extent, a radical one. Critics, thus, are not entirely surprised by his boldness in taking the step of laying off high profile managers.

Naturally, many questions arise from this latest action, but some very important issues must be critically looked at, considering that the banking sector is at the fulcrum of Nigeria’s economy. Certainly, the quest for the actualization of the seven-point agenda will not be possible if the banks in the country are not sound. Internally, the banking sector is the back-bone of Nigeria’s survival, while the oil sector is the back bone of the nations external survival. Such is the importance of the banking industry to the giant of Africa. Once beaten, they say, is twice shy, so allowing banks to fail for the second time will be a shame to the entire nation. This inherent fear must have haunted the CBN governor and propelled his seemingly high handed reaction.

Looking at things critically, one is tempted to ask if sufficient time was given to these CEOs to clean up their acts before the hammer fell. A counter question arises from this, in the form of “was there ( and is there still ) any hope of recovering the toxic debts which was the reason the bank chiefs were sacked? Was the action too early, in the face of possible upturn in the nations capital market or was it a timely action as money matters must be nipped at the bud very early? Who really is to blame for the loss faced by the banks? The defaulting customers/debtors, the approving bank board, the decision making initiative of the CEOs, the CBN, government policy , the Nigerian stock market, the erratic oil prices in the international market, lack of innovation in the oil and banking industry or something else?

No doubt, the banks fell off at certain times in their pursuit of greater capital base and profitability, but to what extent?

An observer stated that these banks merely responded to the call of the federal government to support the domestic economy through giving loans for construction and to strategic investments key to national growth, but again, the issue of how many people benefited from these loan largesse comes into question. Did these loans create jobs and raise people from poverty to middle income status, or did it simply target an increase in wealth for the already wealthy?

For the mere fact that after capitalization, the banks employed many unemployed youths, expanded their operations and subsequently, the economy, then after a few years, started to lay off these workers was deplorable. This meant that the gains of capitalization was miscued and perhaps, after all, not for the middle and low income earners to enjoy, but rather for the high income earners. It also meant that the application of proceeds was not evenly distributed among the various components of the economy, thus , risk was not evenly spread.

Any economist knows that once risk is concentrated on singular, dual or very limited sectors of an economy, any shock to that system will lead to the collapse of such an investment. What if loan risk was spread to the lower ebbs of the economy to touch the lives of lower income earners in form of small and medium scale business owners. It’s sad that a lot of small scale business persons rejoiced on hearing the extent of negative exposure our banks were experiencing, giving reasons for their joy as retribution from God for the neglect of the poor. As true as this may seem, many of the so-called poor have been chronic defaulters themselves in handling very small loans, and one can imagine what would have happened if the “poor” were bestowed with such huge amount of shareholder’s funds as the banks bestowed upon their “high net worth” customers. While there is no established theory which proves that rich people are better money managers than poor ones, does this all-round misadventure in the use of borrowed funds imply that Nigerians cannot manage money ? The term “Nigerians” cuts across the banks, the customers, the policy makers and everyone else. The shadow of doubt that is now being cast on Nigerians and their ability to manage wealth is further darkened when one considers the statement made by a source linked to one of the affected banks, who lamented that their fellow banks who are facing very minimal level of bad performing loans were fortunate they had invested in foreign-owned and foreign managed companies ( in the oil sector ). Where then is the “yes we can “ ability in the Nigerian entrepreneur ?

Basically, the root of the problem is multi-faceted. There is no sole cause for the illiquidity in the banking sector, but certainly, a set of causes have played simultaneously to mitigate against the progress of the once-celebrated banks.

To start with the banks themselves, they are all guilty of a loss of focus, right from the most affected banks to the unaffected ones. Indeed, the main economic development-based focus of a bank is to create and sustain wealth. None of our banks seem to remember this, but rather scramble for the few “high net worth “ members of society and stampede them with loans. Contrary to what they are accused of, which is poor risk management in identifying risky investments and being cautious with it, I’ll rather say that when viewed from another perspective, the banks are on the opposite side, guilty of not wanting to take risks at all. The term “risk” can be viewed from different perspectives. “Risk” as the banks are currently battling with, means not performing sufficient due diligence on the right amount of loans to be tied to particular projects, but again, “risk” can also means shying away from more demanding responsibilities in preference to less burdensome ones.

The truth is that once the focus of any venture shifts away from what the mass majority can access and benefit from, the profit making potential of that venture is limited from the onset. Banks have had a track record of putting all their eggs in few baskets. Agreed, that doing business with start-ups or early stage business persons are where angels fear to thread, but then, a local proverb says that : “ money is found in the midst of thorns.” I guess this is one proverb Nigerian banks don’t want hear. The money that lies in the midst or roses is the only desirable one. A sympathizer may say that the job of handling the early stage category lies with the micro-finance banks and not the “bigger” banks, but this is an argument that is not very sound. What is the liquidity level of our micro-finance banks and how able are they to cater for over one hundred and fifty million Nigerians ? I’m sure the liquidity level of all the over 750 licensed micro-finance banks in Nigeria do not equate the liquidity level of one of the big commercial banks. Besides, the micro-finance banking sector is already being bastardized. The authorities must move quickly to stabilize this sub-sector, so that financial loss to customers will forever remain a thing of the past in Nigeria.

The customers on their own, have a fair share of the blame too. Why will a business have the once in a lifetime opportunity to access larger than life fund

s and then start “telling stories” afterwards? Yes, the fall in oil prices is one factor while the fall in share prices on the Nigerian Stock Exchange is another. But does this mean that such business never made their projections with any risk factor in mind? What was the provision for unexpected circumstances, and how did such businesses plan to respond to any shock or hazards? Perhaps, the banks would have helped their clients a lot better if they had carried out an all-night grilling to get sound answers to this prior to the naira rain, but then, an individual may always come up with great answers in theory but falter when the reality and opportunity to put words into practice emerges. My verdict here is that there needs to be a much higher level of human capital tied to physical capital in our local companies.

Business is all about money, and in another sense, it’s not all about money. Going on the road less traveled by other entrepreneurs also matters a lot. One bug that has beclouded the innovativeness of our business men is the copy-cat mentality. “ Follow-follow”, if you choose to put it in street-wise terms. Once a person starts something and it seems to be working, others jump in with little or no further questions asked or verifications made. The result is often titanic loss. In our globalized world of today, information is easily accessible to even the least member of society, so the likelihood of financial gluts is now more evident than ever, as there will almost always be too many people chasing same thing at the same time. This is where innovation comes in. If I may ask, how many businesses in Nigeria have creeds which they live by, and how many base their practices and decision making on certain schools of thought, drawn from verified process, but not taken wholly, rather, customized to meet their peculiar wants and needs? The innovativeness for this is either not there or is not being used, so long as profit is coming in. But a focus on sustenance is even more important than profit because sustenance has a long run platform while profits can fluctuate. Besides, the right level of sustenance always guarantees profit, but not necessarily in the instant period, as demanded by our banks. To our banks, anything that doesn’t yield five times its invested capital within one month is not worth investing in !

The government has its own fair share of blame too. Policies must be made with all round involvement of stakeholders in any industry. The last main furore with the oil marketers was when the price of petrol was brought down to N65 per litre and the oil marketers cried out that their existence was being threatened. As strange as this may sound, the cry could hold a lot of water. It’s always the impression that oil is money and importers of petroleum products make ten times the amount of money invested, but in practical terms, such is very far from it, especially when negative factors like price down turn beset them.

While I am not campaigning for increase in the price of products without any meaningful reason, it’s always very important to know where the importers are hurting and how to respond to such hurts, because what they basically trade with is borrowed funds; borrowed from us, the investing public, through our custodians, the commercial banks. This means that if their cries are not taken seriously, or taken for applications to exploit, then everyone bears the brunt in the end, as we’re currently witnessing. The latest and perhaps, biggest drama will soon unfold when the deregulation exercise commences, as being proposed by the government. If I may ask now, before it’s too late, have all the relevant unions and stakeholders in the petroleum marketing sector been invited to indepth meetings to discuss this? I’ve not heard of any conference or retreat organized for , by or with the oil marketers to discuss the timing or need or design of the deregulation exercise, neither have I heard of any interactive forum between this group, he government and the lending banks over this. In other words, we are preparing for yet another haphazard approach to policy implementation, where one will wake up on a given day and realize he may no longer be able to continue business due to no fault of his, but just as a result of decisions made on his behalf without any or with limited consensus.

How has the public been enlightened on deregulation? Will the strikes and protest from the people mean nothing if deregulation completely favours the oil marketers? On the other hand, do the masses need to even protest deregulation if they are made to see that it doesn’t mean only an increase in fuel price, but rather, as a way to safe guard public expenditure? Is the target of deregulation simply to off load expenditure burden on the part of the government, or a means of sustaining the oil industry in the long run and not just seeing the oil subsidy payments as unnecessary burdens on the ruling powers? Will the loans issued to oil marketers by banks be at risk through deregulation, or will it enable the banks to easily recover their funds? Many important questions that only few people know all the answers. This sort of scenario is likely to lead to more psychological and financial crisis if answers; meaningful answers, are not made available to a mass majority of the populace and investing firms.

Finally, we must not misinterpret the actions of the CBN to mean the displaced bank CEOs are not competent. The action was carried out simply in response to a particular incident, isolated from all their other excellent performances over the years. We can say the CBN took a painful step towards what it felt was the guranteed existence of the affected banks, and perhaps, more still to follow when the audit exercise is completed by mid-September. I for one, will always admire someone like Cecilia Ibru, who is an amazon and will always be one, in or out the banking sector. With her Oceanic bank has become a truly great and socially-conscious bank. In my opinion, Oceanic Bank was the market leader in social responsibility, an early sign that the bank was going to spread its endowment and finally be the first in the Nigerian banking sector to rediscover its primary duty and calling, which is to create and sustain wealth.

Intercontinental bank as well, caught a lot of people’s positive imagination under the leadership of Erastus Akingbola. Though the bank had one or two misfortunes in invested businesses, they still continued to strive towards client satisfaction and making their numerous and valued customers happy.

Besides, who says displaced CEOs and sacked executive boards cannot regain their jobs and positions even if it will be a mountain climb? There’s always joy and benefit for everyone, the banks, CBN and the customers alike, at the top of the mountain.

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