Bank failures in Nigeria have taken a certain reoccurring pattern. They mostly occur after dramatic change in the financial and economic landscape of Nigeria and accompanied by weak and over ambitious regulation and/or regulatory authority. Also preceding it is a lack of enabling environment for industries to thrive and widespread corruption. In the 90’s Babangida liberalized the Banking sector and we suddenly had a flurry of new generation banks with flashy offices, breath taking commercials, gorgeous looking marketers all aimed at getting you to move your hard earned money from the ill perceived Older Generation Banks to their “new and progressive generation banks”.
Looking back at that period you can easily draw a similarity to what we had in the aftermath of the Banking consolidation followed by the recent banking crisis that may have lead to the collapse of at least 5 Banks.
We may be tempted to put the blame on the exorbitant lifestyles of these Bank executives who lived like movie stars and gangsters owning such luxuries like bullet proof cars worth over N40m each, flew premium class and even jostled for sits in the first class cabin. They even owned yachts and some of them private jets. They owned lands in the most expensive slums in Lagos financed by the Bank funds. It’s probably easier to put the blame on their lack of strict adherence to Prudential Guidelines or the reckless way they gave out credit to their cohorts.
You may even attribute the problem to the stock market bubble that we all so praised and reaped from. Some say its oil and the downstream sector that they financed without hedging effectively. They financed the downstream sector that we needed to appease our huge thirst for fuel and its fellow by products. You may even be tempted to put the blame on the real estate market that their loans help fuel the bubble. Yes they all played a huge part but that’s not why we are where we are today. I will attempt to explain the major causes.
Government – Since Independence Nigeria has been looking to get the Government that will steer us to sustainable economic development. However, we have had the misfortune to have a succession of corrupt and dysfunctional Governance be it Military or Civilian. Why do I say Government?
To have a sustainable economic development, the Government will have to provide enabling environment for businesses to thrive. They must ensure macro- economic policies are well articulated, practicable and peculiar environment compliments. They must also identify what key determinants they believe should drive the economy. They should then marry this with palatable microeconomic policies which should best fit our environmental peculiarity.
I will briefly use the example of the Asian Tigers to explain how Government plays a big role in economic development.The Asian Tigers comprise of Hongkong, South Korea, Taiwan and Singapore. These countries where predominantly underdeveloped in the 60’s which is about the same period Nigeria had its independence. Right now they are among the most developed economies in the world with an annual growth rate of about 10%. The Asian Tigers believed the Key determinants at driving their economy was Education, Land reforms and agricultural development. They also concentrated heavily on industrial output by ensuring that infrastructural development is at par with and can feed the appetite of a growing real sector.
In Nigeria, the Obasanjo Government adopted most of these measures in the well crafted NEEDS authored by Charles Soludo. The problem with NEEDS however, is its implementation and timing. The Government believed that the private sector should drive economic development through the creation of “mega banks” and the very healthy external reserves. In trying to achieve this they artificially merged these banks and rather than create money they ended up increasing our private debt as most of the funds used for the recapitalization were funded through shareholder deposits rather than private equity.
They gravely forgot that the economy was lacking private capital as the manufacturing sector had seen all their equity eroded in high energy cost and sky high interest rates. They also didn’t remember that the Banks jostled more for Government allocation to fund their deposits base coupled with a few major accounts from rich oil companies and some super rich entrepreneurs who had a lot of leverage from Government through favouritism and monopoly. Even these oil companies had their cash fixed at high interest rates (to hedge against the risk of keeping it in Naira rather than in foreign currency) and still had the cash transferred abroad in a time so short it isn’t enough for the banks to even lend to the real sector. The Few Nigerian companies doing well were also trade based businesses that required that constant movement of the cash and conversion to foreign exchange further devaluing our Naira.
The Nigerian economy was in dire need of Government spending. Not money spent on democratic institutions that add little or no value but money spent on decayed infrastructures. They needed to reform our educational sector and ensure human capital is enhanced and position to drive our country into technological and industrial revolution. They didn’t realise our factories needed constant electricity to meet their targeted capacity utilization. They didn’t build rails, roads and bridges that would enable farmers transport rice from the North to the South. Allow coal to be transported from the east to the steel manufacturing plants in the West. They also didn’t consider what impact this will make on the employment as more job will be created as roads are been constructed and industries thrive. They also didn’t remember the enormous amount of tax revenue this would have contributed to Government coffers.
The Government received all kinds of loans from all international financial institution you can think of in the World for the same purpose mentioned above but they off course looted it with reckless abandon. Now we pursue Bank Chiefs with the entire crime control apparatus available to the Government with the potential of creating more corruption in Governance. We forget that the main looters are still alive and dictating policies that shape our future and the future of our kids. As we typically do we leave substance for half measures.
The lesson in all of this is no matter how good the intentions of the Government is to reform our banking industry we will always face this crisis provided we don’t create the enabling environment. Therefore for the Banks to contribute its quota to economic development the following must be in place.
A.Government driven spending in infrastructural development such as constant electricity, good roads and transportation system etc.
B.They also need to curtail corruption, reform the judiciary system, sanitize the taxation system and eliminate waste in democratic institution.
C.We need to decide what should drive economic development in Nigeria. In China its cheap labour and an export oriented model, India its rural farming and technological development, in Japan it’s also an export oriented economy to name a few. I believe the Government should invest more on Education and Farming as we are a resourceful people.
D. The Government may also need to borrow again to fund all of this. I know we are afraid of the Paris Clubs of this world but the only what we can ensure that these debts won’t harm us is through transparent and focused fiscal policy. The private sector just doesn’t have what it takes to drive economic development. Our ability to pay back those loans will be dependent on our ability to eliminate or drastically reduce corruption in Nigeria. With a reformed and more effective tax regime we will also be able to generate enough tax receipts to pay back these loans and our industries would have started to enjoy steady growth.
E. Nigeria has a lot of unutilized industrial capacity and with our population whatever it is we produce we will consume. Thus creating huge opportunities for export.
F. We also need to tighten our borders and fight head strong with smuggling and illegal importation. We may have a tough battle with the World Trade Organisation as our policy may be viewed as protectionist in nature. However, with creative diplomacy we can always get what we want.
With all of the above in Place our banks we will gradually move from illusive banking reforms we think we are doing into a more sustainable economic development that we will in itself give birth to stronger, viable and reliable banks who will be there for us and not us being there for them.
