Concerns about bank recapitalisation
By Kingsley Osadolor
ANYBODY who has studied public policy long enough in Nigeria knows that policy stability is not one of our strongest points. Besides, nobody who witnessed the disastrous consequences of the Structural Adjustment Programme (SAP) would swear by the unquestioned efficacy of any economic policy, no matter the fanciful projections underpinning such a thrust. Seven months ago, new banks were required to have a minimum capital base of N2 billion. On July 6, the new Governor of the Central Bank of Nigeria (CBN), Prof. Charles Soludo, announced a new capital base requirement of N25 billion, an increase of more than 1,100 per cent. The policy, for all practical purposes, has already taken effect with a deadline set for December 31, 2005. The policy instability inherent in this new measure does not require any genius to decipher a worrisome trend. It has further ingrained uncertainty about whether by 2007 or thereabout another whimsical increase in banks' capital base requirement would not climb to N50 billion. Yet, we want foreign investors to come and play in an environment of rapidly changing rules. Of course, they will come with their portfolios and be at the ready to hop off at the drop of a hat.
Another concern has to do with the fetish that is being made of public sector funds. The CBN argues, correctly, that the plenitude as well as ready availability of such funds has fertilized a generation of lazy but obese, rent-collecting banks. The latter, we are told, are no longer interested in the core functions of banking, namely, financing development. But there is a further point relating to how the scramble for public sector funds has been a boon to corruption and a contributory to high interest rates. The CBN has decided, therefore, to begin withdrawing public sector funds from banks, and only those that satisfy the new capital base minimum would be benefited by lodgements of such funds. I think public sector funds have been used rather loosely in this sense. The CBN should have been more definitive in referring to Federal Government funds, rather than the omnibus "public sector funds". It is a point of interest whether the CBN can direct state and local governments, together with their parastatals, not to lodge their funds with banks, including those in which such governments have equity. It is doubtful, having regard to the constitutional imperative of federalism. If that is so, exactly how much of the public sector funds will the CBN retrieve and then use as carrots It is to be expected that banks which fail to get Federal public sector funds could go after state and local government public sector funds. Will this not compromise the efficacy of the CBN measure
At any rate, because of its touted prognosis, it will be necessary for all stakeholders to monitor the efficiency in the subsequent management of public sector funds that the CBN intends to withdraw from banks. Will ministries and parastatals access their funds more readily Is the CBN bureaucracy bereft of red-tape as to facilitate transactions in such funds Will, say, the Ministry of Foreign Affairs promptly access its funds and wire same at e-speed to Nigeria's missions abroad On the other hand, merely withdrawing public sector funds from commercial/universal banks does not directly address the corruption that such funds breed. In other words, we are just trying to run away from the problem. Civil servants who supervise the lodgement of funds in banks are known to dictate at what per cent interest rate they would accept, that being the premium that goes into their pockets. The practice drives up the cost of funds. There has been no sanction so telling that bankers and civil servants will learn their lessons. What has happened now is that colluding civil servants are being shunted off the gravy train, which they had enjoyed without remorse. It is a safe bet that they will attempt to wangle their way back to the train. Without proper intelligence monitoring, apprehension, trial and punishment, it will be back to the same old order. What then will be the gain/loss in using public sector funds as a carrot
The view has been canvassed that withdrawing public sector funds will be an instigation for banks to deploy their marketers to mop up the funds that are currently circulating outside of the banking system. We have seen aggressive marketing already, often thinly veiled as prostitution. Perhaps we are about to witness another variant of it. Yet, more seriously, it is a credit to a good many of the new generation banks that they created an array of products to enable them mop us cash in the system. Several banks have opened branches in market places where a lot of cash transactions take place. Banks have also been collaborating in the introduction and use of smart cards. But we are still, predominantly, a cash-and-carry economy, which indexes the dominance of the informal sector. How does the N25 billion bank recapitalisation address this
However, one cannot but praise the CBN's desire to use banks as critical factors in financing development, which would oust the prevailing short-term lending transactions that are best suited to traders rather than producers. But it is doubtful whether the nexus between that goal of financing development and capitalisation of N25 billion has been fully disclosed. More importantly, little has been said of why development-oriented banks have not performed well in recent years. In particular, the Federal Government a couple of years ago created the Bank of Industry, which was a merger of Nigerian Industrial Development Bank, the Nigerian Bank for Commerce and Industry, and NERFUND. Has the CBN undertaken a study on the performance or short-comings of the Bank of Industry or of those institutions that were merged into one Will the envisaged mega-banks overcome these shortcomings and how Each year, banks post in their financial statements the funds they have allocated to agriculture and small-scale industries. But we remain import-dependent and without flourishing small-scale industries. Does bank recapitalisation provide a panacea
Perhaps the greatest worry about the recapitalisation policy is the deadline. Examples have been cited of how mergers and acquisitions were accomplished within 12 months in other economies. But because we are stampeding into the global financial market, banks must have N25 billion by December 2005 or close shop. I am not so certain about the locus of the globalisation argument in recapitalising our banks. This is because a few bankers have already begun saying that even with N25 billion, how many banks can finance major oil contracts That raises some suspicion about the potential handicap in realising so soon the goal of being global players, moreso as our Naira remains anaemic, relative to the convertible currencies. At least, I am reminded of the woeful failure of the devaluation argument that was canvassed in the 1980s, namely, that our goods would be in a position to compete in the world market. Our prime good, oil, was then, and still is, denominated in dollars. Not surprisingly, no one peddles the argument any longer in favour of devaluation. They have found new excuses, in much the same way as those, who used to harangue us that a litre of petrol was cheaper than a bottle of Coke, have become ostriches as high petrol prices exact their inevitable toll.
It should also be worrisome that the notion of mergers and acquisitions in the banking subsector is being regarded as a process as simple as A,B,C. Mergers and acquisitions are like marriage. You have to carefully select your partner, while strange bedfellows cancel each other out. In this day and age when churches are demanding AIDS-free certificates as a precondition for solemnizing marriages, it is unthinkable that banks would not be prudent enough to go beyond appearances before they proceed with a merger or an acquisition. Just as HIV no dey show for face, so too the degenerative diseases of some banks do not manifest on the surface. Every merger or acquisition will involve some reasonable degree of due diligence of a forensic variety. With so many books upside down, or deliberately concocted, every institution about to embark on a merger or acquisition will require the instincts and services of detectives, be they in or out of the banking system. Conservative estimates indicate that such due diligence could take up to six months for the bonafide balance sheet to emerge and for the parties to decide whether or not to go ahead with their business marriage. To rush it, is to end up with the fate of African Petroleum in the privatisation exercise.
Faced with a deadline and the threat of extinction in the event of not satisfying the N25 billion recapitalisation, banks for the next year or more will be interested first, and probably last, in their own survival. Every prudent banker will strive to conserve what he has, rake in whatever he can and hold on to it, because of the looming danger. Thus, the goals the CBN envisages will be further compromised in the lead-up to the December 2005 deadline. Yet, all the consequences that the economy is already buffeted with " such as high interest rates " could have been modulated if the CBN adopted a phased implementation of recapitalisation. For instance, the CBN could say that by December 2005, any bank with a capital base of less than N5 billion will not have more than Nx of public sector funds. Similarly, a bank with less than a capital base of N5 billion would not be allowed to bid for more than US$x at the weekly foreign exchange auction. And periodically, the CBN would raise the bar, until it hits N25 billion, if that is the ultimate target.
