People & Politics By Mohammed Haruna

25 Billion Naira Bank Equity: Why OBJ and Soludo should listen to Peterside

kudugana@yahoo.com

Last month Mr. Atedo Peterside, the boss of Investment Banking and Trust Company, IBTC, took out a four-page advert in The Guardian in the form of an open letter to the new Governor of our Central Bank, Professor Charles Soludo, to advise him on the need for caution in imposing a minimum of 25 billion Naira equity on banks.

I know Peterside only from a somewhat distant past, when both of us served as members of the Vision 2010 committee under former Head of State, Chief Ernest Shonekan. At that time the banker struck me as intelligent, articulate and someone with the courage of his convictions. Particularly striking was his courage in pushing for a statement in the Vision document urging General Sani Abacha to release all political detainees as a goodwill gesture that will create the right political atmosphere for economic growth and development.

Needless to say Peterside’s initiative did not go down well with the authorities and from his account of the episode in his letter to Soludo, he seemed to have paid a dearer price than some of us who supported him. I remember that at about that time I wrote an open letter to General Abacha which Thisday, among other papers, published on the back page of its edition of February 2, 1997. Titled “The Lesson of Power,” I said in the article that the General must resist those urging him to break his promise to hand over power to an elected government in October 1998. The worst punishment - if that is the right word - I suffered was a verbal rebuke from some people close to the general. For daring to suggest prisoner release, said Peterside, the Lagos State Government revoked the Certificate of Occupancy of his property in Lagos, a revocation which is yet to be reversed nearly seven years on.

Apparently this heavy price has not deterred the investment banker from speaking out against a government policy he believes is against the economic well-being of his country and countrymen. Hence, his four-page letter to the governor of Central Bank in The Guardian of July 21.

Peterside is, of course, not the only banker urging caution about the implementation of Soludo’s banking reform. Indeed there are bankers who, far from urging caution, are unequivocally opposed to the reform, in so far as its central element is the 25 billion Naira equity with an eighteen-month deadline. However, as far as I know, the merchant banker is the only one to have taken the trouble of taking out a four-page advertisement to make his point.

To be sure not all bankers are opposed to Soludo’s re-capitalization of banks. Mr. Akin Kekere-Ekun, the Managing Director of the medium-sized Habib Nigeria Bank Ltd., for example, thinks the 25 billion re-capitalization of the banks can be achieved within nine months (see his interview in New Age  of July 20). On balance, however, it seems there are more bankers in opposition to the reform than in support of it. An indication of this was a one-page advert placed by a group calling itself Concerned Bankers of Nigeria in the Sunday Punch of July 19 in which it pleaded with President Obasanjo to hasten slowly with his banking reform. It said that while it agreed that there was a need for consolidation in the sector, the quantum leap in equity and the deadline could only create more problems for the economy than it solves.

“Eighty nine banks exist in the system,” it said. “Not more than nine may have (or can immediately) attain N25b capitalization. At an average of N20b per bank, it follows that about 80 banks are being asked to merge or raise approximately N1.6 trillion from the economy within  18 months.” It is, said the group, doubtful if “10% of this amount, that is N160 billion, can be obtained in 18 months.”

The kernel of Peterside’s letter to Soludo is that the new Central Bank governor is trying to do “far too much and far too soon”. It is hard, if not impossible, to disagree. And it does not matter whether Kekere-Ekun is right that a 25 billion Naira equity is possible within nine months or the concerned bankers are right that it is impossible to raise even one-tenth of that in eighteen months.

There are several reasons why Peterside is right. First and foremost is the impression that Soludo created that what he presented to the bankers during his now famous--some would say infamous--first formal meeting with bankers were proposals, not decisions already cast in stone. “Let me,” he said, “share with you some of the PRELIMINARY THOUGHTS on the major elements of the reforms by the CBN in the first phase of the banking sector reforms” (emphasis added).

Perhaps the Central Banker did not, after-all, intend his thoughts to be “preliminary”. One definitive indication of this was his subsequent remarks that he will be glad to receive reactions and suggestions from his audience “FOR THE REFINEMENT AND IMPLEMENTATION of the above agenda (emphasis added).” To have talked of   “refinements and implementation” sounded more like a posture of take it or leave it than an invitation for substantive in-puts into the reform.

This contradiction between what he said and what he apparently meant betrays a less than transparent procedure in the formulation of his reform agenda which in turn raises questions about the transparency of the motives behind the reforms, especially considering the organic links between the new governor and external players in our economy, from his days of consulting for the likes of the IMF and the World Bank.

Soludo says his reform is meant to address a number of major flaws in the banking sector including (1) the insecurity of depositors’ funds, (2) neglect of the investment needs of the real sectors like agriculture and manufacturing and (3) the lack of competitiveness of our banks in the global market.

Nobody denies that these flaws exist, but even as a non-banker and someone who is barely literate in economics, I cannot see how the solution lies in a 25 billion Naira equity for all banks in 18 months. After-all what determines the success or failure of banks and other business and even the greater national economies are ratios not absolute size. This is why big banks collapse where small banks that satisfy these ratios sometimes succeed, just like some huge economies go bankrupt while small ones remain solvent.

When, for example, Soludo complains that banks neglect the real sectors of the economy that require long-term loans in preference to trading, surely, he knows all too well why this is so. He says that the banks have been giving only 3 to 5% of their loans to the real sectors. “The rest of it,” he says, “God knows where it goes.”

This easy resort to God is at the heart of the problems with our banks as it is with  the problems of our society at large. Of course God knows where banks misallocate their loans to but then so also should the Central Bank. After-all a central bank as Pocket Economist: The essentials of economics from A-Z, says, is “a guardian of the monetary system.” Therefore, it is a cope-out for any central banker to pass on his responsibility for knowing what bankers do with their clients’ deposits – and punishing the culprits instead of engaging in collective punishment -  to God alone.

The problem really is not that the Central Bank does not know what banks do. Rather it is essentially that it all too often lacks the will to do something about it. No amount of increases in the equity of banks is going to change that.

As Soludo knows too well, banks lend short, and in so doing neglect the real sectors, partly because their depositors place their monies short-term. Depositors in turn do so partly because of the flip-flop policies of our various governments.

Soludo’s approach to the banking reform is the classic case of why there are inconsistencies between governments, sometimes even within the same government, in policy making. Inconsistency is what results when policies are made without inputs from all the major players in the relevant sector: if you do not carry all the major players along by addressing their reasonable fears, you can be sure that they will try to sabotage your programmes and will reverse them at the first opportunity.

In raising bank equity to 25 billion Naira, Soludo has made copious references to Malaysia and South Africa. These may be Third World countries, but there are both quantitative and qualitative differences between these two and Nigeria. To begin with, Malaysia and South Africa have populations of only 22.7 million and 42.1 million respectively, compared to Nigeria’s estimated 125 million. Second, Malaysia’s and South Africa’s Gross Domestic Products are nearly 80 billion dollars and 131 billion dollars respectively, compared to Nigeria’s 35 billion dollars. Third, Malaysia’s and South Africa’s economies are mainly industrial and services driven while Nigeria’s is essentially agrarian. These differences dictate different approach to our economic problems from those of Malaysia and South Africa.

Even Soludo’s worst critic would agree with him that our banking sector, like the entire economy, needs reforms. Even then there are enough laws to check abuses of the system if only there is the will. In any case it bears repeating to say that any reform which is merely handed down from up on high rather than formulated from bottom up, is invariably guaranteed to fail. This is why the president and the CBN governor should listen to the cries of the bankers and the reservations of other major players in the economy before they  implement their “preliminary” blueprint for banking reform.