PEOPLE AND POLITICS BY MOHAMMED HARUNA

Banking Consolidation and the December Deadline

At the beginning of this month, a little known financial organisation, Muregi Associates based in Abuja., published a one-page appeal in a number of newspapers, including The Guardian of November 1, asking the Central Bank Governor, Professor Charles Soludo, to rethink his threat to revoke the license of any bank that fails to meet his December 31 deadline of a minimum of 25 billion Naira capitalization.

Muregi Associates, which described itself as a company “with expertise in banking, finance and financial regulation”, said it was concerned not with the idea of consolidation as such but with the ultimatum which it considered as “arbitrary ”. The company pointed out that with less than two months to the deadline “no bank or group of banks have successfully consolidated, except perhaps, UBA/Standard/Trust Bank Plc”. Even this, it said, was more of a takeover than a genuine merger.

Muregi Associates is not the first organisation to express concern over Soludo’s consolidation policy. His July 6, 2004 announcement of the measures provoked a huge howl in the banking sector for at least one perfectly understandable reason; the consolidation policy was a contradiction in terms in an economy that was supposed to be deregulating. To make matters worse, the governor’s announcement which he said at the time was merely “preliminary thoughts” – his own words – soon took on the status of a divine law when President Obasanjo followed up with his own announcement that the December 31 deadline was irrevocable.

That announcement appeared to have frightened everyone in the banking sector into submission – well at least almost everyone. A little over a month after Soludo’s announcement, a group calling itself Concerned Bankers of Nigeria did place a one-page advertisement in the Sunday PUNCH of July 19, 2004, cautioning against Soludo’s quantum leap in equity and also against the deadline. Of the 89 banks the group said existed in the country, not more than nine, it added, were capable of meeting the deadline. This, the group said, was clearly unhealthy for the country’s economy.

Apart of the Concerned Bankers of Nigeria, a similar warning came from Mr. Atedo Peterside, the Chief executive of Investment Banking and Trust Company, IBTC. Indeed, Peterside stood out alone as a banker who was prepared to spend his or his organisation's money to make his case; he published a very persuasive four-page advertisement against the policy in The Guardian of July 21, 2004.

Other than the protests from the Concerned Bankers of Nigeria and Peterside, the bankers appeared to have submitted themselves meekly to a policy that very few Nigerians knew anything about, never mind having a serious debate on it. In typical Nigerian fashion the bankers, following the president’s reading of the riots act, started running helter skelter to implement something that virtually all of them said was unwise and almost impossible.

And you didn’t even have to be a banker or an economist to see that the policy was unwise and impossible. First, as I said earlier, it is a contradiction in terms for those who claim to be liberalizing that economy to do things by fiat. Second, the efficiency of an institution has nothing to do with its size.

Not surprisingly less than two months to the government’s December 31 deadline, few banks, if any, have been in a position to meet it. Hence the significance of the advertisement put out by Muregi Associates pleading with the authorities to at least rethink its threat to revoke the license of any bank that fails to meet next month’s deadline. Instead of revoking their licenses, said the company, the CBN should simply disqualify any bank that it unable to meet the deadline from participating in “lucrative” financial activities like foreign exchange transactions and holding public sector deposits.

Muregi’s suggestion is probably the least damaging of all possible options to the revocation of a bank’s license, but even that suggestion is no substitute for doing what is right and proper. And .the right and proper policy is for our leadership to rethink the so-called “Washington Consensus” about economic reform that they seem to have swallowed hook, line and sinker. And there is nothing impossible about this. At least Mr. Mahathir Mohammed, erstwhile Prime Minister of Malaysia, has demonstrated that it is possible to reject Washington and still survive. Indeed he has shown that such a rejection is a necessary, albeit not sufficient, condition for national economic survival.

For those unfamiliar with the phrase, the Washington Consensus is the agreement among what is called the “Unholy Trinity” of the IMF, the World Bank and the U.S. Treasury – all of them located in Washington DC, America’s capital – on how to cure ailing Third World economies. Their one-drug-for-all-ailments includes the shock therapy of removal of subsidies, devaluing local currencies, axing social spending and charging high interest rates on loans. Its long term elements include privatization of parastatals, abolishing the control of capital movement and of foreign exchange, eliminating tariffs and custom barriers, developing exports at the expense of local needs and imposing iniquitous tax reforms that protect capital revenue at the expense of wages.

Time and again this one-drug cure has proved a failure, indeed worse than a failure. Here in Nigeria the fruits of this failure have been decidedly bitter. The clearest evidence of this is the insecurity which has become so pervasive in the land; the present himself recently had to read the riots act to the country’s Inspector-General of Police to shape up or…

Banking reform may be only one element in this Washington’s cure-all for all the world, but it is a critical element in the sense that the financial sector is an, if not the, engine of development of any economy. The significance of Soludo’s 25 billion Naira minimum bank capitalization lies in the fact, as I said in these pages more than a year ago, that, far from eliminating financial speculation, as the authorities claim, the amount merely raises the stakes for speculation by limiting it to outsiders with even modest amounts of hard currencies as well as to Nigerians who have stolen Nigeria blind and have stashed away their loot abroad.

Now that nearly 16 months have lapsed since Soludo’s announcement of the December 2005 deadline and the prospects of the banking consolidation remain bleak, it is only wise for the authorities to rethink not just the deadline but the entire reform package itself. Our leaders who are hell-bent on imposing the Washington Consensus on us must realize that the first consideration of the so-called Unholy Trinity is not the territorial integrity of Nigeria or the welfare of Nigerians. Otherwise they will not preach one set of economic policies for others and practice another set for themselves. They will not, for example, preach lean government to the rest of the world but intervene massively anytime their own personal or class interests are threatened.

Two cases suffice to expose the double standards of the Western Establishment in economics as in everything else. The cases also are proof positive that the efficiency of an institution has nothing to do with its size.

The first case, which I once mentioned on these pages, involved the Long-Term Capital Management, a hedge fund only those with at least one million dollar to spare need apply to invest in. The fund had on its boards at least one Nobel economics laureate and several movers and shakers of America’s business and economics. In late 1998, the LTCM gambled, as it was wont to, on interest-rate movements in the global economy. However, instead of hitting jack-pot as it had done on previous occasions, it bit the dust; it lost $3.2 billion.

You would expect that the American financial authorities, in particular Alan Greenspan, the celebrated American Central Banker, would stick to their own advice that those who live by speculation should be allowed to die by speculation. In other words that free market forces would have been allowed to take their course. If that was your guess, you guessed wrong. Far from allowing LTCM to go under, Greenspan and a consortium of banks went to its rescue.

The second case is somewhat similar. This one too involved a hedge fund called Tiger Management. At 18, Tiger, fittingly one would say, recruited the free market tigress Margaret Thatcher into its advisory board. According to Francis Wheen in his 2004 book, How Mumbo Jumbo Conquered the World, for a salary of 1 million Thatcher was expected to attend Tiger’s board meetings five times a year and hold regular telephone discussions with its management about the world markets, “‘using her political insight and experience to help inform investment decisions’” .

Within two years of joining the board of the huge hedge fund, it went under. For some inexplicable reason, there was no attempt to rescue it as happened in the case of LTCM. The point here, however, was that efficiency is not necessarily a function of size.

The even greater point is that the size of government is not by definition vice or virtue. What makes its size bad or good is what it does with its size. If it intervenes in the political-economy only on behalf of the rich it is obviously bad. Ditto if it does so on behalf of the poor only. It is good only if it intervenes in an evenhanded manner between the rich and the poor.

Soludo's banking consolidation is clearly an intervention on behalf of the rich and outsider “investors”. This is why President Obasanjo should re-examine that policy not merely to shift the December deadline but to rescind it all together.