Lagos — Capital (shareholders funds) is the backbone of banks everywhere in the world. Inadequacy of it attracts grave sanctions from regulatory and supervisory authorities. It is in recognition of the critical role of capital in fostering sound banking industry world wide that the Basel Committee for International banking supervision agreement was introduced in 1988. This international banking protocol known as Basel 1 (so-called because the meeting was held in Basel, Switzerland) classifies the risk of different types of credit by imposing minimum amounts of capitals to be set against the risks of each. The spirit of Basel 1 is further encapsulated in the universally acknowledged banking solvency test widely referred to in banking circles as CAMEL which is an acronym for, Capital adequacy, Asset quality, Management ability, Earning ratio and Liquidity. It is usually a dream come true for banks and welcome relief for regulatory and supervisory authorities when banks pass through the CAMEL crucible and come out spick and span. But because it is mere wishful thinking for all banks in Nigeria to scale the CAMEL huddle at all times, regulatory and supervisory authorities have nightmares trying to keep most, if not all banks under the ambit of the Basel committee agreement. If it is on account of the foregoing that the Central Bank of Nigeria (CBN) recently revoked the operating licence of Savannah Bank, then Nigerians should discountenance the insinuations that the action was politically motivated and be assured of the fact that it is an altruistic measure aimed at putting the sector that impacts on the economy the most on even keel. The above assertion which is purely from a neutral perspective only paints one side of the picture. Since opinion is divided on the matter, it is imperative that the fears and facts arising there from are put in their various context. To achieve this, the steps and missteps of customers, bankers and regulatory/supervisory authorities that have precipitated the unwholesome situation in the nation’s financial services sector are chronicled below.
Expectedly, Savannah Bank’s licence revocation has triggered off a frenzy in the economy as bank customers are now agitated over the safety of their funds in bank vaults. Alternatively, they have been investing in landed properties, gold (bullion), stocks as well as burying money or hiding it under pillows. Those who are gusty enough to continue to maintain relationships with banks have adopted an innovative approach of spreading their funds in as many banks as possible in N50,000 batches to hedge against the N50,000 maximum cover provided by Nigeria to Deposit Insurance Corporation (NDIC).
Smarting from the pains of banks failure of the 1990s, the public opinion that Nigerian banks are exploiting rather than supporting the society may not be farfetched. Citing the prevailing high interest charges and the current distress panic within the sector as evidence, they propose hara-kiri for bank managers adjudged guilty of mismanaging depositors funds. Given the peril which customers suffer in the sad event of liquidation, such public opprobrium is apropos. But a counter view is that it takes two to tango. Proponents of this view contend that condemning banks for high interest rates without castigating fund owners and their brokers for traversing banks canvassing for unrealistic high premium for their deposits or chiding banks shareholders for expecting astronomically high returns on their investment as well as not reprimanding regulatory authorities for persistently increasing Minimum Rediscount Rate (MRR) is nothing short of selective bashing.
Understandably, the critical role of banks as growth catalysts and live wire of business sticks them out like a sore thumb for knocking whenever things go wrong in the economy. And things have gone sour in the banking industry quite a lot. Apart from the systemic failure of the early 1990s in Nigeria, a recent bank of England research indicates that banking crises in the past 25 years have on average – cumulative output losses equivalent to 15 – 20% of Gross Domestic Product (GDP). The 1996 Barings Bank collapse orchestrated by the famous rogue trader Nick Leeson and the recent ALFIRST bank, a subsidiary of Allied Irish Bank $750m fraud perpetuated by John Rusnak, (Leeson’s incarnate?) are ugly legacies that reinforce the loathing of bankers.
Remarkably, the banking sector is the most regulated worldwide. Which is perhaps an excuse for bankers expressing concem that policy shocks by regulatory authorities is the key factor for the perceived distress crisis in the system. In their view, the recent deluge of monetary guidelines and policies constitute a snag on the smooth operation of banks. Admittedly, working under the tightrope of regulation, such as playing host to the CBN and NDIC on a regular basis only adds to the public perception of distress in the system. This is more so as banking is also about perception. Once customers look beyond the ornate facade that banks are usually adomed with and start perceiving banks as cesspools and bankers as nefarious ambassadors the damage to the industry would be devastating.
Ordinarily, it is in the nature of banks to take deposits at a reasonable premium from those who have it in excess and give it to those who need it for productive use also at a fair premium. But it is not always so as situations sometimes arise whereby funds owners seek abnormally high interest rates for their deposits and borrowers desperately accept to pay exorbitant cost for it just to move their enterprise forward. In such circumstances, it will be unfair to hold banks solely culpable for the resultant heating up of the economy, as banks do not in any manner influence the interplay of the forces in the scenario described above but merely play inter mediating roles. In addition to accepting deposits with a promise to return same to depositors when demanded, banks also give out the funds to entrepreneurs who also promise to return same when due. But more often than not, borrowers fail to meet their obligations thereby jeopardising banks ability to honour their promise to depositors. It is the fear of such a situation arising that compels bankers to subject every credit request to rigorous analysis that customers detest. Even at that loan defaults are still common features in banks. The preponderance of such delinquent loans in the system contribute to distress. As a mitigate, banks often make huge provisions in their annual report for bad and doubtful debts. To have enough to accommodate overhead costs in banks, profit margin from performing loans are used to make up for the losses incurred from ones and in the process, interest rates are further pushed up. A vicious circle of sorts.
For banks, the alliterative to remaining in business rather than engaging in some of these customer induced nefarious and dodgy transactions, will be to close shop in which case, shareholders, depositors, bank workers, their families and society at large will suffer as investments, deposits and jobs will be lost by all the parties. That banks still manage to remain in business inspite of the treacherous operating environment is something to be admired, not reviled.
In defence of their actions, monetary authorities argue that the continuous review of guidelines is actually indicative of dynamic management of the financial system. This should be a welcome development when viewed against the backdrop of the old regime, which was characterised by lethargy. To be frank in the past thirty or so months of taking the saddle, the new helmsmen in CBN and NDIC, have obviously by omission or commission enacted a parading shift in the management of the nation’s financial resources. Apart from sanctions imposed on a couple of banks for foreign exchange infractions, about two years ago and the withdrawal of a finance house licence late last year, the swiftness with which it revoked Savannah Bank’s licence is going against the grain of past regulatory authority norm of barring an ailing bank from clearing house thereby causing cheques issued against it to be returned unpaid. (Manifestation of distress). Now that the apex regulatory and supervisory bodies tend to prefer “zapping” of an ailing bank like a virus to prevent it from spreading, Nigerians who are used to the old procedures are aghast about the change of rules. Given that at least three of the “top shots” at CBN were bank Chief Executives before being invited to serve in government, their proactive actions are to be expected as they have been on both sides of the divide and can therefore guess the action of their former colleagues even before they make the move. This is perhaps the reason the troika of Joseph Sanusi, Shamsudeen Usman and Emest Ebi, Governor and Deputy Governors respectively appear not to be relenting in their effort to revolutionaries the sector as their actions so far clearly indicates that they are bold enough to show that no bank is too big to fail. Aside from the recent indictment handed to First Bank for exceeding its single obligor limit in its loan to Intemational Investors London Limited (IILL), for their bid to purchase NITEL and the current suspension of 14 banks from FOREX market for alleged breach of foreign exchange dealership rules, the recent directive that banks should shore up their capital base to the minimum one billion naira requirement appears to be follow up action to the Savannah Bank event and warning to other banks that have been gaming the system (playing tricks with their books) that uneasy times lie ahead. So also is the recent decision to suspend the hand over of Assurance Bank to Pharamex, the preferred core investor until the N2.2 billion recapitalisation agreements is injected, and competence of its management team established. This is obviously the sort of caution that should have been applied in the sale of Savannah Bank three years ago.
With all divergent views considered, it is clear that the distress syndrome in the financial services sector is actually a symptom of the malaise in the economy of which every stakeholder is accountable and therefore a case of collective guilt. So passing guilty verdict on banks and bankers alone is immoral. This is why; the view that the CBN sanctions against banks and bankers have not been severe enough to compel bankers to commit suicide is considered uncharitable.
In any case social science is yet to prove that capital punishment is enough deterrent against criminality. Otherwise, the obnoxious failed banks decree of the 1 900s, which sent many, a bank manager to their early graves could have seen to it that the words – bank distress are eliminated from the lexicon of Nigerians.
So rather than be narrow minded and wish more bankers dead, a broader and common sense approach would be to address the issues afflicting the economy wholly. And the truth is that the problem in the banking sector, albeit the economy, is so fundamental that it would take not only private sector initiative but the whole gamut of government comprising the executive and the legislative arms to remedy. To this end, the interest elicited from government quarters as evidenced by the regular dialogues between Mr. President and bank Chief Executives, as well as the concerns of the National Assembly reflected in their invitation of Finance Minister, Alhaji Adamu Ciroma and Central Bank Governor, Chief Joseph Sanusi to the floor of the legislative house to clarify issues pertaining to the sector are progressive steps in the right direction.