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Economy & Politics

On Nigerian Banks, Loans and the Economic Recession By @teniakeju

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CBN Gov Godiwn Emefiele

I watched the movie, The Big Short, a while ago. The movie piqued my interest in Finance particularly in how the unorthodox manoeuvers in the American financial sector brought the “Most Powerful Country” in the world to a recession.

So when Nigeria plunged into an economic recession, I was quite curious to understand the interplay between banks, financial institutions and the regulators in the financial sector leading up to the recession and after.

It was interesting to me that much of the narrative directed responsibility for recession at the Government and the CBN, and very little at the key Players in the Financial sector – the Banks.

Banks in trouble?

Our financial services sector has, for the past year, teetered on the cusp of a monumental breakdown.  Banks call in loans; borrowers don’t have the money to pay – and one by one the dominoes fall. Skye Bank fell (Financial Services), Etisalat (Telecommunications) followed, Oando (Oil and Gas) is on the brink and let’s not forget about Arik Air (Transport). As one economic mess is patched up, another one crawls out – all inexplicably tied to one Bank or many Banks at a time and entrenched within them all is a recurring factor – loans; non-performing loans (NPLs) and bad Loans. A non-performing loan is a loan either in default or close to being in default – the borrower has not made scheduled payments on the loan for at least a period of 90 days.

9mobile Saga

The Etisalat saga gives a look-in to how a lending transaction could go badly and have a devastating impact. Etisalat (now 9Mobile) at the time of the saga was indebted in a syndicated loan transaction to a syndicate of thirteen Nigerian banks (the Etisalat 13) to the tune of $1.2 billion. A syndicated loan is one in which a borrower obtains a credit facility from a group of lenders to facilitate a particular project. This occurs in a situation where the project requires a huge capital influx and the bank cannot afford to be exposed to such a large amount to a single borrower. The facility is usually made available to borrowers who require long-term and large amount loans who have a high reputation in the industry and whose financial and technical acumen are recognised by most banks.

Specta

Emphasis should be placed on “high reputation in the industry” and “financial and technical acumen”. At the time this deal was made, a huge degree of reliance would have been placed on the fact that the company is largely owned by the Middle Eastern telecommunications giant, Etisalat Group and Mubadala, another middle-eastern company –  this is where high reputation and financial acumen come into play. There would have been a degree of confidence amongst the 9Mobile 13 that should the deal fail, the Middle-Eastern investors would jump to the rescue of its Nigerian investment. A factor relied on to their detriment. They played their cards but did not expect that the Arabs would abandon the game entirely.

When Mubadala decided that they had reaped returns off their investment enough to divest their stake in the company, the banks were left holding on to the collar of a man with empty pockets. Stocks of Nigerian banks reportedly lost a whopping N106 billion naira in value as a result of the debacle.

9Mobile alone, defaulting on the loans is not – by itself – enough to bring any of the thirteen banks to its knees. However, the bigger picture is an image of a dire situation. 9Mobile is the fourth largest telecommunications operator in the country. The banks would also be exposed to larger amounts in similar deals with bigger companies.

High non-performing loan ratios

To put this into perspective, non-performing loan ratios for Nigerian banks are reported to have reached 14% as at June 2017 – that is almost three times above the 5% limit imposed by the CBN. These loans are taken out of depositors’ funds and shareholders’ funds. Skye Bank was already a victim of a major bank falling to bad debt and non-performing loans. Arik Air reportedly owes almost N40 billion to two Nigerian banks and counting.

A very important consideration in the recession is how the banks reacted to rising ratios of non-performing loans. To reduce their ratios, they have begun reducing the amount of loans granted to the private sector. Another reaction is in reduced lending to the private sector with bank lending favouring the public sector.

Thus, we are stuck in a catch-22 situation where Banks have reduced the amount of new loans granted, and the public still have to repay debts already taken out. Taking out a new loan creates money, and repayment of bank loans destroys money – that is, the money is not recycled into the economy, creating and deepening the recession.

As it affects companies, they are earning less but they still have to repay the Bank loans taken out. They are dissuaded from making investments since earnings would go into repaying debts. A greater proportion of revenues goes to servicing loans and reduces spending on investments which grow the business. This leads to a downward spiral that culminates in the economic recession.

How the CBN handles failed or endangered banks

The solution lies in the response of the regulators to the situation. There are two major responses so far. The CBN protects and bails-out companies that are deemed systematically important, that is “too big to fail” – a similar strategy was adopted by the American government in the American financial crisis of 2007. The term is currently extended to eight Nigerian commercial banks and even more unconventionally was extended to 9 Mobile in resolving the debacle.

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A company is too big to fail if it is so large that the failure of such company would result in disastrous outcomes. Thus, when such companies face potential breakdown, the government finds schemes to support them to prevent an economic disaster.

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The CBN had to step down from the hard-line approach it had taken in respect to Banks in the past few years and was forced to pivot from its role as a regulator and overseer of the industry to negotiate a scheme of restructuring in order to protect the interests of employees, shareholders and overall the Nigerian financial system.

The system is good but it poses several disadvantages. Corporations become more assured of a bailout by the government and become more careless in granting loans and take higher risks. This is referred to as a moral hazard. They are assured of an intervention by the Central Bank and/or AMCON should the situation worsen. The Skye Bank situation is one that particularly boggles the mind – within two years after the bank had of its own accord acquired Mainstreet Bank for N100 billion, the bank is the recipient of a N100 billion bailout from the CBN because it is “too big to fail”. This is after the bank’s books clearly revealed a portfolio of irregular loan deals.

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Another response is AMCON (Asset Management Corporation of Nigeria). AMCON was set up in 2010 to take over non-performing loan assets of Nigerian banks. It could be described as a sort of cleaner in this regard. It comes in and takes over responsibility for non-performing loans on the bank’s books, taking the burden off the banks and freeing them up to conduct business.  However, AMCON is increasingly unwilling to engage in another round of non-performing loan purchases in the banking system soon or take up toxic assets. It is speculated that AMCON currently has cumulative losses of N4.5 Trillion. They are also feeling the pinch.

The regulatory authorities and the government are working hard to pull the country out of the recession and their efforts must be applauded. But even they cannot continue to posture for longer that everything is fine. The rise in the price of crude oil was enough to marginally pull the country out of the recession and if it is sustained, the country will be fine. But once we do get out, stricter and closely monitored regulatory mechanisms need to be put in place. Investing a N100 billion to save a bank is not feasible in a country with severe infrastructure problems and an alarming rate of poverty and unemployment.

What the CBN should do

The first of such regulatory mechanisms would be to diligently pursue stricter monitoring of bank loans. More specifically, measures in the form of incentives and penal sanctions should be taken to ensure that bank loans are not concentrated in a particular sector – a particular bank had 40% of its loan portfolio in the Oil and Gas sector, and this is a trend amongst several banks. A diversified loan portfolio reduces the risk should a particular sector fail. It goes without saying that when 40% of a bank’s loans are to companies in Oil and Gas, the bank is in a load of trouble should there be a downward shift in the price of crude oil.

The practice of loaning funds by Nigerian banks to Nigerian companies in foreign currency also needs to be reviewed. It is not sustainable to continue to do this as frequent upward fluctuations in the exchange rate makes it nigh on impossible for companies to meet up and repay the loans. Similarly, a downward fluctuation, would result in a loss for the bank.

With the 10 year life-span of AMCON drawing to a close, the CBN and NDIC are planning to launch a private sector controlled version of AMCON to manage non-performing loans after 2020. This eradicates the monopoly AMCON has over the field and frees up public funds for better use.

There is light at the end of tunnel. With bolder regulator mechanisms put in place and ever more creative solutions being thought up by Banks and regulators, the argument might even be made that the recession was a good thing. Too soon?

 This article was contributed by Teniola Akeju. Teniola is a legal practitioner and sends this article in from Abuja. Think you can take a stab at writing economic, business and financial articles? Send us a piece via [email protected] 

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Economy & Politics

FG says Excess Crude Account balance now stands at $72.4 million

The Federal Ministry of Finance has told the NEC that the Excess Crude Account (ECA) now stands at $72.4 million as at January 20, 2021.

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The Federal Government has announced that Nigeria’s Excess Crude Account (ECA) balance as at 20th January 2021 is $72,411,197.80.

This was disclosed by the Minister of Finance, Budget and National Planning, Zainab Ahmed at the first National Economic Council meeting of the year presided over by Vice President Yemi Osinbajo, SAN, with State Governors, Federal Capital Territory Minister, Central Bank Governor and other senior government officials in attendance.

READ: Nigeria’s growing current account deficit fans devaluation flames 

The FG said, “the ECA balance as at 20th January, 2021, $72,411,197.80; Stabilization Account, balance as at 19th January, 2021, N28, 800, 711,295.37; Natural Resources Development Fund Account, balance as at 19th January 2021, N95, 830,729,470.82.”

READ: Nigerians spend $9.01 billion on foreign travels in 2019 

Specta

What you should know

  • In August 2015, during the early days of the Buhari administration, the ECA stood at $2.2 billion. It was $3.6 billion in February 2014, one of the highest balances on record.
  • According to the Central Bank of Nigeria’s annual report for 2018, Nigeria’s excess crude account fell from $2.45 billion in 2017 to $480 million as of December 2018.
  • In 2019, Nairametrics reported Nigeria’s Excess Crude Account had dropped to $480 million. This is as controversy continued to trail the $1 billion military spendings which was withdrawn from Nigeria’s Excess Crude Account.
  • Nairametrics reported in July 2020 that the  ECA had fallen by about 98% within the last 5 years to $72 million.
  • Nigeria has two Sovereign Wealth Funds: the Excess Crude Account and the Nigeria Sovereign Investment Authority (NSIA). Note that these two are funded by the savings earned when oil prices are at their peak.

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Economy & Politics

We look forward to a Biden presidency with great hope and optimism – Buhari

President Buhari has expressed optimism in Nigeria’s relations with a Joe Biden administration.

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Biden's election is a reminder that democracy is the best form of government - Buhari

President Muhammadu Buhari announced that Nigeria looks forward to the Presidency of Joe Biden with great hope and optimism for the strengthening of existing cordial relationships.

This was disclosed by an aide to the President, Garba Shehu after Joe Biden was inaugurated as the 46th president of the United States on Wednesday.

President Muhammadu Buhari warmly welcomes the inauguration of Vice President Joe Biden and Kamala Harris as President and Vice President of the United States of America on Wednesday, expressing hope that their presidency will mark a strong point of cooperation and support for Nigeria as well as the African continent,” Shehu said.

President Buhari congratulated the United States on a successful transition, citing it as an important historical inflection point for democracy as a system of government and for the global community as a whole.

Buhari added that Nigeria looks forward to working with Biden in areas of terrorism, poverty, climate change, and others.

Specta

“We look forward to the Biden presidency with great hope and optimism for the strengthening of existing cordial relationships, working together to tackle global terrorism, climate change, poverty and improvement of economic ties and expansion of trade,” he said.

What you should know 

  • After the election results were released in November 2018, Buhari said Biden’s election is a reminder that democracy is the best form of government.
  • “In a democracy, the most powerful group are not the politicians, but voters who can decide the fate of the politicians at the polling booth. The main fascination of democracy is the freedom of choice and the supremacy of the will of the people,” Buhari said.
  • Nairametrics reported yesterday that Joe Biden had been sworn in as the 46th President of the United States.
  • Dapo-Thomas Opeoluwa, a Global Markets analyst and an Energy trader said Nigeria’s Oil, would be dependent on the future outlook of the oil market and Biden’s policies, as it would be interesting to see if Biden would allow OPEC to seize market share from American oil.

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Economy & Politics

Productivity-enhancing reforms are required for quick economic recovery – World Bank

Productivity-enhancing structural reforms key to quick economic recovery.

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World Bank, Focus on lifting people out of poverty - World Bank tells FG , World Bank, IFC to assist in solving Nigeria’s infrastructure deficit , EXCLUSIVE: World Bank tasks developing nations to tap opportunities in GVCs, Warning signs: Nigerians living in extreme poverty might increase by 30 million – World Bank, US, China and UK’s protectionism ambition to affect Nigeria’s export, FDI , Terrorism bane to Nigeria's Agric development - World Bank

The World Bank has revealed that a slow recovery of the global economy is not an inevitability and can be avoided through productivity-enhancing structural reforms.

This is contained in the Bank’s flagship report – Global Economic Prospects.

The Bank believes structural reforms are capable of offsetting the pandemic’s scarring effects and lay the foundations for higher long-run growth. It agrees that the global economy appears to be emerging from one of its deepest recessions and beginning a subdued recovery, beyond the short term economic outlook, following the devastating health and economic crisis caused by COVID-19.

According to the report, policymakers face formidable challenges — in public health, debt management, budget policies, central banking, and structural reforms, as they try to ensure that this still-fragile global recovery gains traction and sets a foundation for robust growth and development.

Highlights

  • Growth in Nigeria is expected to resume at 1.1% in 2021 – markedly weaker than previous projections – and edge up to 1.8% in 2022, as the economy faces severe challenges.
  • Investment is projected to shrink again this year in more than a quarter of economies – primarily in Sub-Saharan Africa (SSA), where investment gaps were already large prior to the pandemic.
  • Growth in Sub-Saharan Africa is expected to rebound only moderately to 2.7% in 2021 – 0.4% point weaker than previously projected, before firming to 3.3% in 2022.
  • Relative to advanced economies, disruptions to schooling have, on average, been more prolonged in emerging market and developing economies (EMDEs), including in low-income countries.

What the World Bank is saying

  • “In the longer run, a concerted push toward productivity-enhancing structural reforms will be required to offset the pandemic’s scarring effects.
  • “The intended productivity-enhancing structural reforms encompass promoting education, effective public investment, sectoral reallocation, and improved governance. Investment in green infrastructure projects can provide further support to sustainable long-run growth while also contributing to climate change mitigation.”

Are we ready to adjust structurally?

The World Bank has identified key areas that could trigger quick economic recovery. A close look at events in the country appears to suggest that we may be far from ready in terms of adjusting structurally.

Specta

A cursory look at the structural adjustment areas suggested by the Bank indicates that in Nigeria, for example, and maybe elsewhere, the single most important factor is improved governance.

All other factors appear to be contingent on this, as the Bank admits that improved governance and reduced corruption can lay the foundations for higher long-run growth. Policymakers and politicians in the country are therefore advised to pay close attention to activities geared towards reduced corruption and improved governance.

Another key area is public investment. Even though most public enterprises and related establishments are usually plagued with corporate governance problems, there are several ways by which the problems could be curtailed.

The issue of education, especially tertiary education, has been problematic with governments failing to meet the demands of university unions, resulting in strikes, almost on a yearly basis. It is hoped that a lasting solution to this springs forth soon.

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