Soludo’s First Mistake

By

 Madaki O. Ameh

madakiameh@hotmail.com

INTRODUCTION

To many informed watchers of the Nigerian economy, there have been a number of interesting developments in recent times, suggesting that at last, the country may be coming to grips with its developmental challenges and moving in the right direction.  After a lack lustre first term in office where words were hardly matched with action on any of the campaign promises, the constitution of an economic team, made up of brilliant and focused professionals at the beginning of the current term of President Obasanjo’s administration rekindled hope that maybe, the stage was set for some enduring changes to occur on the economic front, which holds the key to any other positive changes that can be expected in other sectors.

The fear however has been the sustainability of those efforts, especially in the face of extreme cynicism by a weary Nigerian public, who have sadly watched successive governments tinker with their collective future through a process of experimentation that leaves no room for sanctions in the event of woeful failure, even at colossal costs in taxpayers’ money.  And such fears are not entirely unfounded, as the nation’s experience is replete with examples of half hearted and ill thought out policies, the wisdom of which is mostly lost on even the pedestrian thinkers and beer parlour economic analysts, who abound in their numbers in every part of Nigeria.  The truth is that most of the problems with the Nigerian economy do not require sophisticated analysis, and many of the conclusions arrived at during such light hearted sessions may well provide an insight and offer some wisdom in the solution of the many problems bedevilling Nigeria, especially in the economic and political front.

Without claiming to be an expert in this area, this writer subjects some recent policy pronouncements and decisions of the apex bank under Professor Charles Soludo to common sense scrutiny and argues that at least one of them may portend a frightening sign of inconsistency, which could derail the entire efforts being currently made to achieve consolidation in the nation’s banking sector.

BANKING REFORMS

When Professor Soludo was named the Central Bank Governor in 2004 by President Obasanjo, the decision was hailed as a fantastic choice by those who have followed the rise of the brilliant and energetic young man in economic circles, starting from his first visible role as Chief Economic Adviser to the President.  Professor Soludo represents, for the Nigerian younger generation, an acknowledgement of the confidence of President Obasanjo in the ability of young people to contribute to the future of this country, given the right opportunities and empowerment.  Without meaning any disrespect for the elderly, this assurance became very critical at a time of extreme despondency by the young generation at President Obasanjo’s style, especially in his first tenure, of surrounding himself with old and expired people, as if wisdom and knowledge is their exclusive preserve.  Many were worried that, if as a military man, General Obasanjo could preside over the affairs of Nigeria in his early 40s, why has he suddenly realised that only people about his current age and above have anything to offer to Nigeria? 

The way and manner Prof. Soludo approached his new role as CBN Governor went further to galvanise support for his appointment and rekindle hope in the future of Nigeria’s economy, under the capable hands of the current Finance Minister, Mrs. Ngozi Okonjo-Iweala, the Minister of State for Finance, Mrs. Esther Nenadi Usman, and the CBN Governor, among other brilliant members of the economic team.  Parallels were already being drawn in certain circles between Prof. Soludo and the youthful and brilliant Gordon Brown, the current British Chancellor of the Exchequer, whose economic wizardry has been acknowledged widely around the world, and whose firm grip of the British economy has created the strongest economy the country has witnessed in the last 100 years.

Soludo’s announcement of his vision for the Nigerian banking sector where mega banks would emerge through a consolidation process was welcomed by many, both within and outside the banking sector, as the limited services rendered by the sector had become a source of grave concern.  The stipulation of a minimum of N25 billion as share capital for banks and the discouragement of family and individual banks was seen as the future for a sector which had, over the years, been fragmented by proliferation and many underhand deals bothering on fraud and corruption, leading to easy money by a few, while the support for industry required to see the economy grow, was lacking.  The strict time frame within which the banks were to comply and the clear guidelines and clarifications made by the apex bank from time to time, also created a lot of confidence in the banking public, who were at last happy that some measure of discipline was emerging in the hitherto largely ill regulated banking sector in Nigeria.

FROM RELUCTANCE TO COMPLIANCE

From an initial situation of reluctance and negative analysis on how the new policies were too ambitious and would not work, coming largely from bankers who were afraid of losing out in the consolidation exercise, the emerging trend has been that of enthusiasm and a frenzied effort to comply, when it became obvious that the new policies had come to stay, and apparently had the blessing of the powers that be.  Not even the danger signal of a policy reversal by the passage of the Bill, which sought to create categories of banks, has provided a reprieve, as the status of a mega bank appears to now be what all surviving banks in Nigeria consciously aspire to assume at the conclusion of the exercise in December 2005.

It is against this backdrop of a growing confidence that recent pronouncements by the apex bank has created huge concerns of an apparent slip into the vestiges of our uncertain past, where government policies were manipulated and adjusted to suit the interests of seemingly powerful people. 

DANGER SIGNS

After a much publicised meeting between the CBN Governor and the Governors of the 19 Northern States (by the way, they are all Governors!) at which the State Governors were reported to have requested the release of their allocation of the excess crude oil revenue to enable them recapitalise the ailing and poorly managed Bank of the North, the usually sure-footed and smart talking CBN Governor, in a rare show of capitulation, announced that the CBN was going to bail out some banks by writing off their debts with the apex bank.  There have been conflicting accounts of the total amount of this bail out exercise, but authoritative sources have reported about N82 billion, and the beneficiaries have been named as: Bank of the North (N41billion), Africa International Bank (N7 billion), Societe Generale Bank (N13 billion), Fortune Bank (N2 billion), City Express (N2.5 billion) and Afex Bank (N5 billion). (Vanguard online – 2/5/2005). In a recent interview, the CBN Governor said that there are 13 beneficiaries, without naming them.

An analysis of the list of beneficiaries and the proportion of their benefits makes it easy, even for the wary analyst, that there is a direct correlation between the meeting of the Governors and this bail out exercise, as the Bank of the North came off with the Lion (or is it Elephant?) share of N41 billion.  Even more worrisome are the reasons provided by the often convincing CBN Governor on why the apex bank decided to embark on this exercise.

In a press statement, Prof. Soludo is reported to have said that  “.…The CBN is also mindful of the fact that the issue of granting loans to banks and writing them off in the future would no longer arise in the light of the new settlement system. This is a special one-off concession, which would not re-occur in the future."  He said further that "…. the board of the CBN was very mindful of the need to avoid rewarding the past mismanagement of the institutions by ensuring that the forbearance was contingent on the recovery of the owner/insider non-performing facilities."  Finally, Soludo explained that "….if the CBN does not write-off the loans and the banks remain unattractive to potential acquirers/investors, they would eventually be liquidated and the system would lose more, including the deposits, bank employees as well as debt to the CBN."`

Apparently under pressure to justify the unjustifiable, Soludo’s additional excuse of drawing a comparison between the ultimate cost of Nigeria’s consolidation exercise, which he put at N173 Billion or 2% of Nigeria’s GDP with Malaysia, which he stated to be 4% of their GDP, completely begs the question, and is another attempt to thread the well worn path of silencing genuine concerns by reeling out usually questionable statistics.  What he should address is what the Malaysian costs were applied to, which was definitely not debt forgiveness to ailing and poorly managed institutions.  After the consolidation of Malaysia’s 54 domestic Banks into 11, there are currently 11 domestic and 14 foreign banks operating in Malaysia, with a national network of 1,710 branches.  Rather than write off their debts as is being proposed by Prof. Soludo, all the non performing loans and debts were transferred to Danaharta, an asset management company, which has to date recovered over 56% of such debts, with efforts still on-going. 

With all due respect to the CBN Governor, the reasons he has given fall far short of what one would expect from a reform-minded and ebullient Professor of Economics of Soludo’s standing.  This writer believes that, it is exactly for the reasons advanced by Prof. Soludo that the banks should not be bailed out, as he has acknowledged the fact that those debts were accumulated largely due to insider dealings and mismanagement, which should land most of the owners and directors of such banks in the net of the EFCC and ICPC.  What credible excuse can Soludo possibly give for using public funds to salvage privately owned banks, in an economy where there are also several well managed banks who are not requesting for the same bail out from the CBN?  What ever happened to all the theories of a level playing field, fairness and firmness which underscore any successful scheme of the magnitude being embarked upon by the CBN in the banking sector? 

There is no other name to call it than a reward for poor corporate governance, for the CBN under Soludo to announce such largesse at this time, when there are several other sectors of the nation’s economy yearning for attention due to inadequate funding.  If the CBN has excess funds, as appears to pleasantly be the case, it should explore ways of channelling such funds to the productive sectors of the economy, instead of feeding the already over bloated owners of these banks and their directors from hard earned public funds, when we all know that most of the banks became distressed due to questionable and often fraudulent activities of their owners and directors.

WHAT IS GOOD FOR THE GOOSE…

Not unexpectedly, some other banks are beginning to question the rationale for CBN’s selective largesse, and are legitimately asking for their own share of what appears now to be the proverbial “National Cake”.  At the last count, banks like Liberty Bank Plc, Assurance Bank, Midas Bank, Trust Bank of Africa, IMB International Bank Plc and ACB International Bank Plc, have reportedly made such requests and are awaiting a response from Prof. Soludo’s CBN.  And it will be interesting to see what that response will be.

For private sector enterprise to thrive anywhere, subsidies in any form must be eliminated, unless it is inevitable for the strategic growth of that sector, such as agriculture and education, which are still heavily subsidised by even the most developed and private sector driven economies of the world.  The amount Soludo is proposing to reward poor performing banks with can create a revolution in agriculture or education in Nigeria, if properly applied.  These sectors are however still sadly neglected in Nigeria. 

Prof. Soludo cannot claim ignorance of the recent events leading to the collapse of the Rover vehicle manufacturing company in the UK, and the manner in which it was handled by the duo of Tony Blair and Gordon Brown.  Faced with the challenge of the imminent collapse of the company, which for Britain is a matter of national pride, given the long history of the company and its association with the best of British technology in vehicle manufacturing, the British Government did not offer to write of its debts and save its workers’ jobs, even in an election month when it would have been very convenient to do so.  Rather, Tony Blair and Gordon Brown made frantic efforts to get the Chinese interested in the company and make a take over bid, in the knowledge that only the private sector can effectively salvage private enterprise.  When those efforts failed, the company was allowed to fail, and its employees, running into thousands, who lost their jobs in the process, have been paid off with the support of funds provided by government.

The lesson in the above is that sound business sense dictates that government must not salvage private industry, but rather deal with the issues and fallouts from failure of those companies which must fail, if they are poorly managed.  It is indeed a good thing to allow the weak and poorly managed banks which are not attractive for acquisition to fail because their survival in any form will have a leprous effect on the banking sector and create credibility problems, even after the recapitalisation and consolidation exercise is concluded.  This analysis is so common place and mundane that it is really shocking that an Economist of Prof. Soludo’s standing will throw away all his efforts in moving the Nigerian banking sector forward by one act of seeming recklessness which defies any rational thinking.

The onslaught by the NLC against this obviously ill thought out decision of the CBN is clearly justified and deserving of the support of all well meaning Nigerians.  It also gives a lot of kudos to the well informed and purposeful labour leadership in Nigeria under Comrade Adams Oshiomole, as he has demonstrated that the vigilance of organised labour transcends bread and butter issues, and encompasses other larger issues in the Nigerian economy.

The time to back track that decision is now, if Prof. Soludo is not to lose his growing army of fans, who are largely satisfied with his bold intervention in the Nigerian economy.  It will be shameful indeed for all the optimism associated with Prof. Soludo’s efforts so far to be dismissed as a mere fluke, as that will be the ultimate triumph of his detractors, who are still apparently smarting from the pains of his emergence into such a powerful position, when they would have preferred an ‘older and more seasoned’ technocrat.  Soludo should realise that the job he is currently doing as CBN Governor is not just for himself, but on behalf of the entire generation of younger Nigerians who believe that they have a lot to offer, and so he cannot afford the luxury of annoying errors and mistakes of this nature, which will be a source of scorn, even for beer parlour and pepper soup economic analysts.

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**Madaki Ameh, a Lawyer, is currently a Chevening Scholar at the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland, U.K.