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Money, money everywhere
…..
By
Nasir Ahmad El-Rufai
Newsdiaryonline Fri Nov 25,2011
El-Rufai
Mr. X worked for a Nigerian bank for nearly 20 years, rising to
a senior management level. Last year during his annual leave, he
received a message telling him not to bother returning to the
bank; he had been sacked. Ms. Y came to office one early morning
as she usually did, sat down on her desk and powered her
computer, only to find out that the password had been changed.
She had also lost her job.
Despite the marble buildings, glass cladding, sleek cars, glib
adverts and billions
of assets on paper, it may come as a surprise to many
that Nigeria's banking sector which employs only about 500,000
people
–
despite the nearly 1 trillion naira of public funds used to
stabilize several ailing banks last year, is still shedding
jobs. When a sector cannot hold on to its own jobs, how can it
possibly act as the catalyst for development, growth and job
creation?
The financial services sector of a country is comprised of the
banks, insurance companies, pension funds and the capital market
that are mostly privately-owned
but closely regulated by several government agencies. The
sector primarily
acts as financial intermediary - mobilizing savings from those
with surplus cash,
and lending it to those that need more cash to grow their
businesses, satisfy consumption and acquire durable assets. It
is therefore supposed to drive economic development,
provide credit for the economy and enable job creation
that bring both long and short-term benefit to the people
of the country through stimulation of real sector activities.
Cultivating a banking culture within a given society is usually
encouraged, induced and sustained by specific policy,
socio-economic conditions and political realities. It is usually
brought into existence by specific government legislation. It
does not come as an expression of mere wishful thinking. Rather,
a virile, sustainable, economy-boosting financial services
sector capable of generating appropriate employment
opportunities has to be properly designed, legislated and
regulated.
Before Independence the banks in Nigeria were virtually all
branches of foreign banks. Standard Bank came in 1892 predating
the amalgamation of 1914. In 1958, the first CBN Act was
legislated and the apex bank began operations in Lagos in 1959.
Then the Banking Decree 1969 was enacted by the Gowon
administration which stipulated that no shareholder can own more
than 5 percent of any commercial or merchant bank. This
socialistic law imposed on an essentially capitalist endeavor
led to many unintended consequences, and was repealed by the
Banks and Other Financial Institutions Decree in 1991 by the
Babangida administration. The CBN Decree 1991 was also enacted
granting the the apex instrument autonomy from political
interference. But the much-desired central bank independence was
not achieved until 2007 when the Obasanjo administration pushed
the current enabling law through the national assembly.
The 1970s witnessed the indigenization of our first
generation banks
–
Standard became First Bank, United Bank of Africa (UBA),
Barclays became Union Bank, and IBWA
(Afribank) and majority equity compulsorily acquired
by the Federal Government of Nigeria. During this era, in
the global banking rankings, a couple of Nigerian banks featured
in top 100 in the world, and all our banks were all considered
to be dependable. Today, Nigerian banks can only look up to
being among the bottom of the top 1000 banks in the world. Most
of them are not perceived to be strong, sound and capable of
discharging their primary functions.
As at end of 2010,
the Nigerian financial system consists of 24 deposit money
banks, 1 Non-Interest (Islamic) bank, 5 discount houses, 866
micro-finance banks, 106 finance companies, 101 mortgage banks,
5 development finance institutions, 1,959 bureaux de change, 690
stockbroking firms, 13 pension fund administrators, 5 pension
fund custodians, an asset management company, a stock exchange,
a commodities and securities exchange and 73 insurance
companies. These are all licensed and regulated by the CBN,
National Pensions Commission, Securities and Exchange
Commission, and the National Insurance Commission as appropriate
- as independent regulators ideally free from undue influence
and political interference.
One of the most important ways of measuring the health of an
economy is by gauging the strength of its banks. Just a few
years ago, former Central Bank Governor Charles Soludo embarked
on banking reforms including the consolidation of our banks to
the 25 that managed to put up the minimal capital of N25
billion. The stock market bubbled to the stratosphere.
Unfortunately most of the banks recapitalized by borrowing from
each other, or lending to customers to buy their share - and
little new money was mobilized from within or outside Nigeria to
finance the industry consolidation and the stock market growth
resulting therefrom.
Barely two years after the supposed miracle, the much touted
consolidation came crashing down. In the end, only about 10
banks got a clean bill of health. The new management at the CBN
under Sanusi L. Sanusi is still battling to restore sanity and
confidence in the financial system - a war with an exposure of
nearly 1 trillion Naira so far, and counting.
Today, only one out of five Nigerian adults has a bank account.
Only 15 percent of women have bank accounts. The North-West and
North-East zones are the least banked, and not surprisingly the
poorest in the country. Nearly 70 percent of currency in
circulation is outside the banking system. Banks lend more to
the government than the small, medium and large business that
truly create jobs. Nigeria is an intensely cash-upfront economy,
with virtually no loans available to buy homes, cars and other
durables. Bank branches are concentrated in Abuja and Lagos and
the urban areas where less than 40 per cent of the population
make a living. Our rural areas have been ignored and unbanked.
Even the micro finance banks that are supposed to fill that gap
are all located in the urban areas. All is not well with the
financial services sector particularly with our banking
industry.
What went wrong? Why are our banks neither aggressively
mobilizing savings nor lending for real sector growth? Why do we
seem to go through cycles of banking distress and failures every
ten years or so? Why are interest rates being raised
unreasonably high mainly to protect the exchange rate? Why do we
seem to rely on the CBN intervention to fund sectors at
affordable interest rates, while the deposit money banks are
doing little or nothing? How can banks declare all those
billions in profits yet are not able to provide affordable long
term credits?
The Nigeria financial sector must expand and evolve to a modern
one to facilitate desperately needed economic growth. Today, the
Nigerian financial sector falls far below that of the
performance of a country that has ambitions of becoming one of
the world biggest economies by 2020. Given its current
structure, the sector cannot be relied upon to finance the
activities that translate to abundant employment opportunities.
The sector serves mainly larger, well-connected entities and
individuals. Small and medium-sized enterprises (SMEs), though
generally have access to bank loans, try as hard as they can to
avoid them, because they cannot afford the high level of
interest rates compared to their mostly tight profit margins and
other poor operating condition
–
electricity, regulation etc.
The loans that Nigeria banks offer have high interest
rates
–
double digits, which may not be bearable and repayable by the
borrowers. A very reliable way of checking that loans of double
digits interest rates are not favorable to the borrowers is rule
72 - using this rule you will need to divide 72 by the
applicable interest rate to get the number of years it will take
for the principal to double; thereby creating a vicious cycle of
debt trap.
Indonesia was in very similar position to Nigeria fifty years
ago, and started out with about the same level of GDP and
broadly similar population sizes. Over the past five decades, we
have earned about equal revenues from oil exports, but the ratio
of bank deposits to GDP for Nigeria is only one-fifth that of
Indonesia. But besides the ratio of deposits, over sixty percent
of funds in the banking system belong to the government against
thirty percent in Indonesia and about ten percent in South
Africa. From these numbers, it can be seen that the contribution
of the financial sector to the GDP without government deposits
is below fifteen percent
–
far below what is obtainable in Indonesia and other countries of
similar standing with Nigeria.
The unavoidable conclusion from these facts is that the Nigerian
financial sector functions first and foremost as a channel for
capturing government deposits and recycling them to buy
government debt. It is only a marginal, complementary source of
finance to the private sector. This is of course in contrast to
what is necessary for vibrant economic growth.
An economy driven by self-financing widens stagnation and
poverty, because new investors can only come up when they are
able to save capital. Today, because of lack of access to
affordable credit, many potential entrepreneurs are forced into
low-capital activities like petty trading to earn a living. This
has caused excessive competition in such activities, and profit
margins that are so low and unstable that it is impossible for
most petty traders to earn much more than they need simply to
feed themselves and their families
–
much less to borrow money at high interest rates.
The failure to develop a vibrant credit system has not only
limited growth; it actually widens the incidence of poverty,
aggravates the inequality of income distribution, and creates
constant political pressure on government as the employer,
provider and financier of last resort.
The foregoing clearly reveals the issues that need to be
addressed to make our banking industry deliver on the
expectations of Nigerians. The first is to attract genuine new
capital into the banks, not the phantom injections we have seen
in the past. Second, the industry needs to attract long-term
deposits from untapped savings waiting to be mobilized from our
rural areas and bedrooms. Finally, the CBN must fix affordable
rates of borrowing that not only enable sustainable growth but
also reduce the incidence of non-performing loans. Applying the
rule of 72, it is clear why banks do not lend. They know that no
one can pay those usurious interest levels. Perhaps the only
non-interest bank we now have will show the way. The world over,
interest rates are in the single digits and near-zero, except in
Nigeria and other developing countries.
To conclude another tale of wasted opportunities, one cannot but
paraphrase the popular maxim
‘water,
water everywhere, but not a drop to drink’.
In this case, it is money, money everywhere, but no lending to
real sector, and therefore no jobs at all’.
Oil and Gas (6): PIB – Will It Ever
Be Enacted? By Nasir El-Rufai
Th
This is the document referred to in the Witness
Statement on Oath of Clifford O. Kokogho as
“Exhibit
COK.2”
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