Money, Money Everywhere ..


Nasir Ahmad 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.