Lagos — Now that the Nigerian economy seems perpetually mired in the labyrinth of stagnation, is the banking sub-sector about to become comatose, like its cousin, the manufacturing sector? This is the question agitating the minds of watchers of the economy. If the unsavoury news emanating from banks about major staff downsizing and slash in salaries (at the last count, over 20 banks have relieved hundreds of staff of their jobs) is anything to go by, the once vibrant banking sub-sector, the catalyst for economic development may be gradually going into recession. No thanks to recent government policies.
Incidentally, the direct consequence of a decline in the banking sub sector, a veritable employer of labour will increase unemployment in the country which will invariably worsen the horrific rate of crime in the society attributable to the desperation of the burgeoning army of the unemployed.
At the risk of sounding like an alarmist, it would appear that the slow but steady demise of the banking sub-sector in Nigeria prompted by the tough new conditionalities on banking being churned out by regulatory and supervisory authorities, won’t take long in manifesting if the current asphyxiating grip on the sub-sector is not relaxed. Already, the signs are showing at the Nigerian Stock Exchange (NSE) where the results for 2002 show remarkable decline in profit by banks which hitherto dominated trading.
As all would agree, the searchlight beamed on banks in the past three years has been so harsh that it could be compared to the intensity with which the United States of America and its allies went after Al-Qaeda and Taliban terrorists in Afghanistan, after 9/11. Premised on the grounds that the regulatory actions are aimed at ensuring that sanity reigns in the banking sub-sector in Nigeria, the measures are unassailable but given the fragility of banking with its tendency to reverberate in other sectors of the nation’s economy, there is need for handling with care.
Perhaps conscious of bank’s sensitivity to shocks, the Central Bank of Nigeria (CBN) recently started applying some restraints in its management of the sub-sector. Take the reduction in the Minimum Rediscount Rate (MRR) for a record two times last year for instance. This measure has been largely credited for the downward trend of interest rate during the last quarter of last year. Recent indications suggesting that the apex financial institution might further reduce the MRR from the current 16.5% is a clear indication of the CBN’s determination to put the nation’s economy on an even keel.
The cumulative effect of these welcome developments have been the relatively moderate interest rates now being charged by the sub-sector thereby rubbishing the assumption that only a reduction in staff salaries and a slash in service delivery costs by banks could bring down interest rates. Put succinctly, the notion that the high interest rates in banks is driven by excessive costs of banks administration has been proven to be a fallacy.
Before the introduction of these palliatives by the CBN, critics had been vociferous in pushing the erroneous impression that bank workers’ perks are to blame.
Sadly, such erroneous views tend not to take into cognisance the fact that banking in Nigeria has remained the last bastion of hope for indigenous entrepreneurs since foreign banks hardly find local businessmen as recently confirmed by Citibank which admitted to having lost about N2 billion naira to Asian businessmen whom it has been favouring in loan disbursement to the detriment of Nigerian businessmen.
As recent developments in the market have demonstrated perks in banking are not the problems, but symptoms of the malaise in the larger economy.
To put the above assertion into context let’s quickly identify the origin of the so-called fabulous pay packets in banks. Available records indicate that the introduction of competitive pay packets in the banking sub-sector is traceable to the advent of the Structural Adjustment Programme (SAP), of the mid 1980s which culminated in the deregulation of the banking sub-sector around 1990 through the issuance of new banking licenses to private investors. Owing to this fundamental shift in policy, the banking sub-sector witnessed a phenomenal growth from less than twenty to over fifty in a relatively short period. This precipitated a demand for skilled bankers to man the newly established ones. And in response to the demand and supply pull, the asking price of bank staff rose astronomically. With another wave of banking licences issued about five years after the second generation licences, the demand for experienced bankers increased again and with it the price of bank workers.
Before the CBN demonstrated its commitment towards strengthening the economy by reducing MRR, banks had earlier conceded 10% of their profit before tax (PBT) towards the development of small and medium scale enterprises (SMEs), a major employer of labour and provider of support services to major industries.
In spite of the good intentions of these initiatives’ it has become fashionable for the various stake holders in the economy to blame banks for their woes hence banks are now at a crossroad with the probable scenarios of continuing to remain the pedestal on which the economy rests by being competitive or capitulating to the inclement operating environment and becoming another sick baby like the manufacturing sector.
With the dire consequence of the later option making it very unattractive, the choice of correcting the existing structural imbalances in the larger economy of which high interest rates in banks is a mere proxy has now become more urgent in ever. And apart from the CBN and banks who have already contributed their quota, other stakeholders like civil servants, manufacturers, the oil and gas sector and the Federal Government as well as legislators, have major parts to play in reducing interest rates in the economy. For instance, about 95% of funds in the banking system is sourced from the public sector (government departments and parastatals). And these funds come at a high premium in banks making it impossible for them to charge interest lower than the cost at which they obtain the funds which usually entails the unwholesome passing of about 5 – 10% under the table to the officials in the departments and parastatals who facilitate the transactions. In the light of this, corruption, not banks is responsible for the high cost of funds in Nigeria. Thus the Independent Corrupt Practices Commission ICPC may have a role to play in reducing interest rates.
Another cause of the structural imbalance in the economy which is impacting negatively on the economy goes back to the pre-SAP era, when government budgets were basically designed to suit multinational manufacturing firms who were allocated import licences to purchase raw materials abroad in line with government import substitution policy.
As the SAP-induced deregulation of the economy unfolded, the sector couldn’t adapt to the new realise which demanded that it matched its dollar purchase of equipment with its income in naira to determine its profit while embarking on backward integration as a means of sourcing raw materials locally. Rather than buckle up to the new reality, the real sector remained stuck in its old ways which is why a policy which should have seen the nation’s vast arable land being dominated by maize, cotton, palm oil or kernel and cocoa farms founded by the multinational manufacturing outfits to replace their foreign inputs with local contents in the light of the new reality has remained largely a dream. A thriving agricultural sector feeding manufacturers with raw materials locally could have reduced the pressure on forex demand which indirectly affects interest rates in banks. In the light of this, manufacturers have a role to play in reducing interest rates.
Avoidable leakages in the nation’s oil and gas sector is another critical cause of imbalance in the economy which manifests as high cost of funds. Take the huge revenues accruable to ship owners for transporting petroleum products from Nigeria overseas for instance; only a marginal part of the huge sums is earned by indigenous entrepreneurs. Reason being that very few Nigerian companies have the capacity to own ocean-going vessels designed for oil and gas transportation. The truth is that foreign ship owners, oil and gas firms and foreign banks have formed a cartel or unholy alliances that enable them keep Nigerians out of the lucrative trade. Government could provide local capacity by offering guarantees for partnership with foreign freight companies just as it has entered into joint venture relationships with oil exploration companies like ExxonMobil, TotalElfinaElf or ChevronTexaco in the upstream sector. A counter argument to this may be that a previous government guaranteed ship acquisition fund failed. That may be true but you don’t throw away a baby and the bath water. In other words, the implementation may have failed but the idea is still sound and therefore could be fine-tuned and resuscitated. Under such arrangements, Nigerian banks can actively be involved by providing funding as has been the case when a consortium for Nigerian banks recently funded the third train of Nigerian Liquefied Natural Gas, NLNG project. This will mean expanding their market frontier and in the process providing employment for more Nigerians and earning income in the same vein. In this regard the oil and gas sector is critical to what becomes of interest rates in banks.
Another pragmatic way in which the nation can plug the leakage of income from oil and gas resources currently being lost to capital flights, is for it to negotiate with the foreign buyers of its oil and gas to pay for the products through Nigerian banks which can register their branches in the finance capitals of the world like London, New York, Paris and Hong Kong. The leakage is so substantial that out of the estimated $80 billion said to have been earned by the nation from oil and gas export since the commodity was discovered in commercial quantity in 1958, it is believed that over $15 billion has been lost to capital flight arising from our banks not being custodians of OUI wealth. No wonder we still owe about $32 billion to foreign creditors and are still ranked by the World Bank as the 13th poorest country in the world. Apart from the loss of float, the conversion from foreign exchange to naira of the payment for oil and gas also induces inflation.
The erstwhile excuse that Nigerian banks and indeed Nigerian people are incapable of handling such transactions is untenable because Nigerians have proven to be highly competent people in banking as exemplified by the likes of Bayo Ogunlesi, a Nigerian that is managing the global arm of CreditSuisse -First Boston Bank – the second largest financial conglomerate in the world. If poor capitalisation of Nigerian banks is a problem, then our banks could be made to register offshore and meet the banking licensing criteria applicable in their host countries. The expansion of Nigerian banks into the West African region is a testimony to the astuteness of our bankers, which has by implication debunked the negative stereotype of non-performance hitherto ascribed to Nigerians.
Against this backdrop, the recent pronouncement by President Olusegun Obasanjo during the commissioning of an oil spill removing vessel that henceforth only oil companies that encourage indigenous participants will be allocated new oil wells is a silver lining in the nation’s oil and gas horizon.
Onyibe writes from Lagos