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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.

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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.

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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.

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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.

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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.

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.

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 articles@nairametrics.com 

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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Business News

FG seizes Dan Etete’s luxury private jet linked to Malabu oil deal

Dan Etete is alleged to have paid a total of $57 million for the jet in 2011, which was part of the spending spree that the former petroleum minister was alleged to have embarked on after allegedly receiving $336 million from the OPL 245 deal. 

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The Federal Government has tracked down and grounded a luxury private jet which is owned by the country’s former Petroleum Minister, Dan Etete, over his alleged involvement in the $1.1 billion Malabu oil scam. The luxury private jet was alleged to have been purchased with proceeds from that oil deal. 

This seizure was confirmed to Finance Uncovered by the legal counsel to Nigeria, Babatunde Olabode Johnson, who was appointed by the Nigerian government in 2016 to recover assets from the OPL 245 deal. 

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Johnson said that the order was served on the jet’s owner, a company called Tibit Ltd, which has until Tuesday next week (June 9) to file court papers opposing the seizure. Tibit is an anonymously owned company incorporated in the British Virgin Island. 

The asset recovery lawyers acting on behalf of the Nigerian government swooped last week, after the Bombardier 6000 jet, tail number M-MYNA, touched down at Montreal Trudeau International Airport in Canada on Friday May 29. 

A Quebec judge is understood to have granted a seizure order for the aircraft in the early hours of Saturday morning. 

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Giuseppina Russa, who was named on the Montreal court order, is Tibit’s sole director according to records of the British Virgin Island firm. 

Dan Etete is alleged to have paid a total of $57 million for the jet in 2011, which was part of the spending spree that the former petroleum minister was alleged to have embarked on after allegedly receiving $336 million from the OPL 245 deal. 

Etete, during his days as the petroleum minister, awarded the prospecting rights to the huge OPL 245 block to Malabu Oil and Gas, a company he secretly controlled. After the death of the then head of state, Sani Abacha, he retained the rights to the oil block as a private citizen until he offloaded them to oil giants, Shell and Eni in 2011, who both paid $1.3 billion to the Nigerian government. 

The entire OPL 245 deal is now subject to a corruption trial in an Italian court, where Etete is an accused, together with alleged middlemen and some top executives from Shell and Eni. All parties in the Milan trial have denied the charges against them. 

The Nigerian government has also charged Etete and several others linked to Malabu with money laundering in connection with the onward flow of funds from the OPL 245 deal. However, they have denied any wrongdoing, dismissing the allegations as political propaganda. 

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It was uncovered that Johnson had made a deal with an American litigation funder, Drumcliffe Partners, to help fund the recovery of OPL 245 assets. They are to receive 5% of any funds successfully recovered and returned to Nigeria.   

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Economy & Politics

NNPC diversifies into housing, power; plans to beat crude production cost to $10 per barrel

The Nigerian National Petroleum Corporation (NNPC) has announced that it is building up business portfolios in the housing, power, and medical sectors.  

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To cushion against the volatility in the global crude market and strengthen profitability, the Nigerian National Petroleum Corporation (NNPC) has announced that it is building up business portfolios in the housing, power, and medical sectors.

This is one of several measures the corporation is taking to sustain revenue generation for Nigeria, and cope with the boom and bust cycles which are gradually becoming a feature of the global crude oil market.

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NAN reports that this was contained in a statement from the Corporation Chief Operating Officer, Ventures and Business Development, Mr. Roland Ewubare, and signed by NNPC Spokesman, Kennie Obateru.

According to Ewubare, the NNPC will establish Independent Power Plants using the Ajaokuta-Kaduna-Kano (AKK) pipeline network, and consolidate its presence in the power sector.

(READ MORE: COVID-19: Nigerians react as CBN partners NNPC to feed, accommodate Nigerian returnees)

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The statement reads in part; “NNPC is creating an energy company that would have portfolios in renewable energy; we have initiatives on solar that is ongoing.

“We have got biofuels agreements with some state governments that would soon be activated. We do have a lot of non-core businesses that are aggregated under the Ventures and Business Development Autonomous Business Unit of the NNPC. 

“This would be expanded through effective collaboration and partnership with the private sectors,” 

NNPC diversifies into housing, power; plans to beat crude production cost to $10 per barrel

Lower costs, more profits

As part of moves to improve profitability, the NNPC also announced plans to drive crude oil production cost down to 10 dollar per barrel by Q4 2021,

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This according to the statement would be done by systematically and gradually beating down logistics costs.

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The Corporation’s revenue took a major hit in 2020 due to the slump in global oil prices, and this in turn affected the Nigerian budget given that oil proceeds account for a significant fraction of her income.

“When you have a low commodity price regime, as the case now, the only way we are able to squeeze out some reasonable cash and financial gain to the nation is by curtailing and constraining our costs in line with the GMD’s aspiration to push for a 10 dollar per barrel cost of production,” Ebuware said.

(READ MORE: NNPC pipeline vandalism up by 50% in January, may suspend crude oil production)

There is also an ongoing collaboration with selected partners to commercialise flared gas in order to preserve the flora and fauna of the country.

This would be done by converting it to Compressed Natural Gas (CNG) and Liquefied Natural Gas, for sale to consumers.

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The NNPC is partnering with private developers to reduce the housing deficit in the country and also partnering with medical centres to provide innovative healthcare for Nigeria.

 

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Business News

The conundrum in the retail pricing of PMS

Considering the landing cost of petrol is largely influenced by the prices of crude oil in the international market, we think prospects of continued recovery in crude oil prices is likely to put upward pressure on the cost of importing petrol.

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PPPRA, NNPC, Reduce funding oil subsidy - IMF to Nigeria , Oil marketers, PENGASSAN call for subsidy removal 

The decision of the Petroleum Products Pricing Regulatory Agency (PPPRA) to reduce the pump price of Premium Motor Spirit (PMS), also known as petrol, to N121.50 per litre from N123.50 per litre has been met with stiff resistance from oil marketing companies (OMCs). The Independent Petroleum Marketers Association of Nigeria (IPMAN) have also stated that it impossible for its members to sell petrol at the new price floor of N121.5 per litre.

We recall that on 18 March 2020, the Federal Government (FG) reduced the retail price of Premium Motor Spirit (PMS) by c.14% to N125/litre from N145/litre, following the global pandemic which led to an unprecedented decline in oil prices and by extension a reduction in the landing cost of petrol. Subsequently, the FG announced a further reduction to N123.50 which took effect on April 1, 2020. Earlier this month, the FG directed a reduction in the pump price of Premium Motor Spirit (PMS) for the third time to N121.50 per litre. We note that the adjustments in the retail price is in line with the directive from PPPRA on a monthly review of the pump price, depending on prevailing market realities.

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READ MORE: The good, bad and ugly of low oil prices for Nigeria

In our view, considering the landing cost of petrol is largely influenced by the prices of crude oil in the international market, we think prospects of continued recovery in crude oil prices is likely to put upward pressure on the cost of importing petrol. With the gradual relaxation of lockdown measures by countries who are starting to reopen their economies alongside the historic production cuts of OPEC+ which took effect last month (a 9.7mb/d oil production cut for May and June), we think the risks to oil prices are tilted to the upside in the near term.

Since hitting a two-decade low of US$19.33 on 21 April when the retail price of petrol was pegged at N123.50, brent crude prices have gained c.105% to close at US$39.54 on 3 June. Against this backdrop, we expect that the retail price of petrol should rather be adjusted upwards to reflect current market realities. The current situation appears no different from historical trends where the FG becomes reluctant to effect an upward adjustment in the retail price of petrol during periods of rising crude prices. This has often resulted in the renewed payments of the age-long fuel subsidy. We also think oil marketing companies (OMCs) who have only recently begun to import petrol alongside the Nigerian National Petroleum Corporation (NNPC) due to more favourable pricing could halt importation once again if domestic retail prices become unfavourable.

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