Banks in Crisis over Public Funds Withdrawal
CBN vows to sustain policy _Soludo satisfied with support for consolidation
By Ayodele Aminu in Lagos and Kunle Aderinokun in Abuja
A near systemic crisis may soon hit the banking sector as some banks continue to default in meeting the financial obligations of their depositors following the partial recall of N74.5 billion public sector deposits three weeks ago. But the Central Bank of Nigeria (CBN) yesterday maintained that it would continue to recall such funds from banks.
Mostly affected are small and medium sized banks, especially those that have used such funds to finance various housing projects that have long gestation period.
THISDAY checks in Lagos revealed that one of the embattled banks had to charter a flight to its Port Harcourt branch before it could pay N30 million out of the N250 million taxes and duties payment it collected on behalf of one of the state governments.
A depositor was said to have spent the whole day in one of the branches of another embattled bank where his account is domiciled yesterday before his N45 million draft could sail through. Also, the draft of another bank was returned from the clearing, indicating that its account had been overdrawn. `
Public sector funds accounted for over 80 per cent of the total deposit base of most of the small amd medium sized banks. The sudden withdrawal of the funds by the CBN in the early 90s was responsible for the distress of several banks at the time.
The situation was further compounded last week when the big banks which account for over 70 per cent of funds in the inter-bank market recalled their matured placements and refused to roll-over or grant new ones.
In addition to this was the flight to safety by customers through panic withdrawal of their funds from banks perceived as not having the financial muscle to meet the N25 billion new capital base announced last month by CBN Governor, Prof. Charles Soludo.
However, the CBN through its Monetary Policy Committee (MPC) has reiterated its intention to continue recalling public sector deposits from banks.
"The Monetary Policy Committee (MPC) at the end of its 18th meeting in July 2004, decided to keep unchanged the recall of public sector funds lodged with deposit money banks," the CBN stated in a one - page communiqu� signed by the Secretary of the committee, Mr. James K.A Olekah.
At the end of its previous meeting (June, 2004), the MPC approved the withdrawal of public sector deposits amounting to N74.5 billion from the banks to the CBN.
This, according to the committee, represents 75.6 per cent of the total public sector deposits from only four parastatals.
The MPC in its communiqu� dated July 29, 2004 maintained that the recall of these funds would help to sustain the tightening of monetary policy stance agreed to at the previous meeting, in order to stem the rising inflationary pressure and the high demand for foreign exchange.
"Available information since the last meeting indicates that the pressure on prices has continued. The daily average demand for foreign exchange dropped, but remained unsustainably high.
"The gross official external reserves increased and the naira exchange rate in the Dutch Auction System (DAS) segment of the market owing to the increased supply of foreign exchange by the CBN. The exchange rate depreciated in the Bureaux de Change (BDC) market, thereby widening the spread between the DAS and the BDC exchange rates," the MPC explained.
The committee also observed that the growth in monetary aggregates remained within the programme targets, as bank credit to the Federal Government continued to fall.
It however, "recognized the threat to monetary stability posed by the anticipated bunched government spending on capital projects in the rest of the year."
"It also noted the risk of further pressure on prices if the monetary policy stance should be relaxed so soon. In this regard, the committee agreed to sustain the phased recall of public sector funds with the deposit money banks until further notice," the MPC added.
The MPC is made up of the CBN Governor, his deputies; Directors of Research; Foreign Operations; Banking Operations; Banking Supervision; Trade and Exchange; Other Financial Institutions; Governor's Office; Special Adviser to the Governor; a member of the CBN board, including the Permanent Secretary of the Ministry of Finance. The committee meets once or twice monthly to review developments in the economy.
Meanwhile Soludo said yesterday that the CBN envisaged, right from the onset that there would be "war" against the consolidation of the banking sector.
The CBN governor, however, expressed "pleasant surprise" that the "well-organised opposition" narrowed as support for the programme continued to be "overwhelming, with more than 98 per cent of Nigerians pledging their support."
Soludo, who was speaking at the opening of an interactive session with foreign missions, donor and multilateral agencies in Abuja, said "we recognized from the onset that this was going to be war because there has grown very powerful group for whom this is the easiest rent available and trying to change or alter the playing field was tantamount to pulling the hog, and they weren't going to just give up without a major fight.
"But the good news, I must say, we are pleasantly surprised from the outpouring of support for the programme itself. Since it was announced, the opposition even though well-organised, very small clique as it were, that pace has considerably narrowed because even within the banking sector, the people who are engaged in real banking came out to support it."
According to him, "The senior staff association of banks came out in support. Their argument was that we not only need jobs, we need sustainable jobs. Because they reckon that the system was on the verge of a crisis and they weren't sure of what would happen the day after. The Nigerian Labour Congress came out in support of the programme, so also the manufacturers' association, many professional associations, the Nigeria Economic Society and National Association of Small and Medium Enterprises, Institute of Chartered Accountants of Nigeria, Association of Maritime
Operators, Shippers, the man and woman in the street, survey, and opinion polls.
"More than 98 per cent of Nigerians voted for the programme itself. Even members of the House of Representatives pledged 100 per cent support and also members of the Senate also. All around the country, the support has been overwhelming, I must say and this emboldens and encourages us that this is the idea which time has come."
Soludo pointed out that the CBN discovered that 95 per cent of the problems the banking system was having related to the governance issue, the ownership, which made the revolution a very difficult one.
He asked for the cooperation of the diplomats and the donor agencies in the reform of the banking sector while assuring them that now is the golden opportunities for their banks to come in and operate.
"I'm sure many people must have been calling you to ask about what opportunities are available. I would say you do not
have better opportunities than now. If you want to come in this is the time to come in. I'm sure several banks are up for acquisition and this is a golden moment to bring the capital also," he said.
The CBN governor explained that the reform programme was designed to put an end to the boom and bust cycle, which hitherto characterized the Nigerian banking system.
He said, "We didn't want the boom and bust cycle. The programme is designed to stop the boom and bust cycle that we have had in the history of Nigerian banking system. If we read our history into the sixties, many banks, more than 60 or 70 percent of them collapsed.
"The latest one was in the late 80s, 90s, when 32 banks collapsed and we thought we needed to take a fundamental step to strengthen the system and also become part of the global change.
He recalled that as at the end of June, the banking system was on the verge of collapse. "If we hadn't taken proactive action, the system would probably have been thrown into a major crisis. For example, we've talked about the 25 banks described as unsound cum marginal and if we did what was necessary in terms of revoking licences of such large number, we would probably have thrown the system into a major panic and a major run on the system and that would have created a major banking collapse," he added.
While pointing out that evidence all over the world showed that after post consolidation, the number of branches as well as employment grew, Soludo said stronger banks would be able to fund development.
For instance, he cited "a particular sugar cane farm that employs 11,000 workers. I imagine that if we really have strong banking system that could fund 50 of such farms in Nigeria, we are talking about half a million people employed. And the total employment in the banking system is barely 50,000."
He explained that the aim of the consolidation was not to have bigger banks but stronger ones, adding, "there will still be very small banks by any definition of bigness or size. So the objective is not size, the objective is strength, the objective is to encourage competition."
The CBN had July 6, directed banks to increase their capital base from N2 billion to N25 billion by December 2005. It further noted that it would embark on phased withdrawal of public sector funds from banks.
The banks that would not be able to meet the capitalisation requirement were advised to merge.
Bank chiefs opposed to the new capital have at various times suggested other measures like a downward review of the capital base, stratification of banks and deadline extension.
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