Mr. Soludu And The N25billion Minimum Capitalization

By

Abdullahi U. Bello

abdubel@yahoo.com

 

 

It did not come as surprise to keen observers of the unfolding political economics of the country. I have said it before that the economy has now been handed to the World Bank and its surrogates to do as they like, because one of the condition of IMF is modernization of the banking system to be in line with globalization.  Globalization as Mr. Soludo wants us to believe is suppose to be for our own benefit, but as we all know it is the method of capturing emerging markets for the big players. United State and Europe have limited market for the increasing number of their good and services so they are trying to break the boundaries and export their commodities and services to places where there is demand but because of lack of technological capabilities among others might have little or no source of supply.

 

Let us come to the issue of minimum capitalization of N25 billion in an economy that is as poor as that of Nigeria with market capitilsation on the stock exchange of less than $15 billion compared with market capitilisation in Malaysian stock exchange of over $180billion, export per capita of less than $300 compared to that of US, Malaysia and U.K. that he compared us with of over $2,700, $4,500 and $4,800 respectively.

 

Given the above scenario, banks would find it difficult to be able to capitalize from the economy and foreign investors would find it difficult to come and invest in the sector because of the capitalization of the stock exchange. A country whose manufacturing sector is in comatose, agricultural sector in tatters and a small scale industry that is disorganized is not the type of economy that such radical reforms would be applied to in isolation without considering other aggregates. What conditions are in place that would ensure that the economy is vibrant and free of uncertainties? How can a banks lend to a sector, like manufacturing, whose functioning depend so much on government that is not responsive.

 

Take Malaysia for example, about 27 per cent of Malaysia’s labour force is employed in manufacturing contributing about 33 per cent of GDP in 2000 and about 80 per cent of export revenues. The economy was almost exclusively driven by exports with export in 2002 estimated at about $95billion compared to $17.3billion of Nigeria in the same period. What of the per capita? Malaysia ’s per capita is about $8591.37 per person compared Nigeria ’s $840.3. If you add to the figure of people living below poverty line (8% in Malaysia ; 60% in Nigeria ) you would understand the futility of formulating our policies with their benchmarks as guide without necessarily following the process the follow to become what they are now.

 

Malaysia transformation started in 1971 through the late nineties when Nigeria is busy changing government and policies at the whims and caprices of the leaders. The growth in the economy was centered through the promotion of export as a state policy. It started as a producer of raw materials to become a multisector economy dealing with electronic equipment, petroleum and liquefied natural gases, wood and wood products palm oil textile and chemicals. Healthy foreign exchange reserves and relatively small debt profile was the hallmark of their greatness

 

Added to all this is the strong political will exhibited b their leaders in telling the World Bank and the IMF that its recipe is not acceptable to the people of that country. The country has also been trying to adopted an economic system that accommodate the Islamic concept of economics where interest based transactions are gradually being replace by participatory form of business dealings. Malaysia banking industry has developed into a formidable and strong alternative to the conventional ways of banking by emphasizing the financing of real activities not speculative businesses. Channeling funds to sectors that impact directly to the growth of the economy and building strong and vibrant stock markets by genuinely providing incentive for the flow of direct foreign investments. Improving on other sector like tourism and natural resources with the full backing of the government not through lip service like is the case in Nigeria . Couple with a citizenry that are relatively honest, Malaysian economy is a case study of how to build an economy from the scratch.

 

In as much as I am not against the increase in capital for banks in Nigeria , I strongly believe that a phase introduction of the policy should be adopted in line with the general growth of our economy. Instead of the governor looking at the real problem of the economy he is busy chasing shadows trying to impress his masters. The weakness of some of the banks is not as a result of their capital base as he would like us to believe but because the CBN has shrink from its responsibility of monitoring and enforcing compliance, or else how can you explain a situation where a bank will overdraw its account with CBN consistently and for large amount far exceeding the required limit and be left alone because of some political consideration. Or how can the government blame banks for high incidence of non performing loans when the same government refuses to pay its obligation to local debtors who source their funds from banks to finance their activities.

 

Whether we like it or not, government is the main business in this country, the private sector is not developed enough to be independent because the necessary support needed to have a vibrant economy is not there. Infrastructure is absent, power is not constant and the purchasing power of the citizen is nearer zero (over 60 percent of the populace live below poverty line with 70.2 living under $1 a day and 90.8% under $ 2 a day.). How can you have a good economy that can support the kind of idea the Governor has with this kind of statistics.

 

It is the fault of the banks that they get public sector funds or a situation where we have more than N400billion as currency outside the banking sector? Which bank would not gladly have this amount as part of its deposit liability? Especially since the money would not come with high interest expenses like the public sector funds that are laced with layers of interest upon interest

 

Of all the problems he identified with banks, I cannot see any that this increment would address sufficiently. It is the weak corporate government which is not only restricted to the banks or late and non-publication of annual returns. What of gross insider abuse. These are all endemic problems with Nigerians whether in the banks, private or public sector. From his own assessment of banks, 62 out of the 89 banks as sound/satisfactory is a commendable figure considering that only 11 are classified as unsound. So the problem mainly is from the CBN as regards its monitoring and supervisory policies not the issue of inadequate capital base.

 

What this policy hopes to achieve, in my view, is further strengthen the big bank and companies, underlining the core essence of capitalism i.e. to make the rich richer and poor poorer. The policy would enable the big companies to have access to cheap funds for their operation declaring huge profit from other peoples money and giving them little in return in form of interest payment that is far below the expected profit that would be realized from the use of the fund. On the other hand the big banks would be satisfied to collect their commissions secured in the knowledge that the big companies are capable of repaying their obligation as at when due, since the money is not theirs as they are only acting as agent of the depositors.

 

It is the smaller companies and individuals whose savings it is the banks use that would face problem of securing loan to finance their activities. Imagine a customer with a requirement of one million naira approaches a First Bank with a capital base of over N25billion and with central risk management department at the head office and line of command that extend to the various branches whose only responsibility is to mobilize funds but not to grant credit. It would be difficult for the customer to fulfill all the condition because first he is most likely to be rated low in the hierarchy , which means that even if he is granted the loan, the interest rate applicable would be higher because he is considered riskier. This is apart from the process of going through the head office to obtain approval for a credit that they will feel is not worth the trouble considering the amount and the risk involved.

 

In conclusion, let the smaller banks be.  Market condition will determine who survives and who stays. A situation where strange bed fellows would be merged together will only bring confusion and would alienate the very people that he wants to protect. What I am saying in essence is that I am particularly concerned with the status of the proposed Islamic bank which many people have pinned their hopes on, but with this policy it means that our dream is farther from being fulfilled.

 

Abdullahi U. Bello

abdubel@yahoo.com