How did we get to today�s point. The Nigerian economy got into a structural dead end as a result of Dutch Disease and all the other oil related problems. To stimulate growth Financial Deepening was necessary so that resources could move into the financial system and the mediation process would result in financing diversification. There had been little deepening because little of the money in circulation entered the banking system given the inefficiencies of the banking oligopoly which kept people out as a result of transaction costs associated with the long queues the banking system was known for.
The simple logic of 1986 was that if you lowered entry barriers into
banking you would increase competition and services will improve, leading
people to using banking services such that monies hitherto under the
Pillow, idle, could be in a bank where it could be applied to the
mediation process to create wealth. Banks may be much maligned for not creating enough new businesses. I too have been in that league and still argue that banks can do more. One thing is sure they did create the competition that has led to increased deepening.
I once asked the late Chief Sam Asabia who had been MD of First Bank
and deputy Governor of CBN before founding First Interstate Bank, if he
did not think small banks would not have the muscle to compete against
the giants, and so become extinct. This was in 1989. His response was
that the big ones were more endangered. He was right. Had regulatory
agencies been more vigilant to prevent the bad habits of a few banks from
degenerating into systemic distress resulting in the so called flight to
safety in the 1990s it is the old big banks that would have gone the
way of the dinosaur as Chief Asabia predicted.
If lowering entry barriers produced some deepening it may seem then
that the problem may lie with how much new banks are financing start-ups
and growth. This is a frequent basis for lampooning the banking system,
especially the smaller banks. Do we have evidence on this. My dear
friend Charles Soludo, with my absolute agreement, made legend of the need for evidence based prescription. Relative to Capital Base who has
financed more growth ventures, the big or small banks. It may be useful to
research that subject. Besides, without a Zenith First Bank will not be
investing in technology.
The other point of this policy choice is that our banks are too small
to finance major ventures. I agree. Not even our top three can finance
anything significant in the sector most dear to our economy, Oil and
Gas. Will the new policy change that. Definitely not. I have always been
an advocate of incentives to get a combination of some of the big public
quoted banks who could, in addition, attract foreign interests and
build strategic alliances that will allow us play more strongly in the Oil
sector. It was part of the basis for the initiative I started, to bring
stakeholders together to discuss Local Content in Oil and Gas at the
Lagos Business School.
Does this mean smaller banks are of no purpose in the economy. Surely not. There are hundreds of banks in the UK where we have the Barclays Banks. The Royal Bank of Scotland , a smaller bank gobbled up NatWest. I was in Malaysia at the height of the Asian financial crisis in 1997 and spent quite a bit of time talking to officials of Bank Negara, the Central Bank. I do not recall their problem being small banks. By the way, there are small banks and boutique banking institutions in Malaysia and South Africa. The Bumiputra banks catering to native Malay entrepreneurs do not have USD200 million capitalisation.
The other point about one size fits all is that it negates the place of
strategy in enterprise advance. It discounts the fact that there are
globally accepted ratios of capital adequacy to risk. Very importantly it
presumes that a bank that creates value like IBTC is somehow less
valuable because it does not have 25billion of shareholders funds. How come we turn to a bank like Credit Suisse when we want to raise big money for NLNG or such projects rather than the bigger more capitalized banks. They have know-how and know where to find the money.
There is also the line about sharp practices in small banks impacting
on the macroeconomic fundamentals. First it should be about the
regulators doing better work and secondly many can show you those practices in bigger banks.
Above and beyond the foregoing, my real worry is that the impression is
being created that big banks do not fail. They fail everywhere. What�s
more, the older, bigger enterprises have less capacity to create new
value and tend to prevent growth from accelerating. I am writing down
these thoughts just minutes after listening to Zoltan Acs at the Barcelona
Forum global Dialogue on the role of Business in the 21st Century. He,
like many of the global leaders from Business, Academia and Governments around Europe attending the Forum, have made this strong link between Entrepreneurship and Economic advance. Particularly important about the point made by this American scholar working on Entrepreneurship is the point that there really are two kinds of economies; the managed economy and the entrepreneurial economy. In the managed economy large firms and governments collaborate to defend the status quo. Such economies do not grow much in the long term. I have made similar points in the past citing Rajan and Zingales exciting book Saving Capitalism from the Capitalists. This is the major difference between many European economies on the one hand and the faster-growing US economy.
This is where I classify the new Capital requirement of the CBN. It is
the anti-thesis of an entrepreneurial approach. This is why I am
certain that X years from now some policy maker will reverse it. The only
loser will be the Nigerian economy. Doubt me, check the Essential Drugs
List policy that started de-industrialisation of our Pharmaceutical
sector, or the ban on Wheat. Both were reversed but the damage had been done. Other policy choices combining incentives, threat of sanctions and better regulation would have produced a win-win outcome. Instead we have this recursive pattern of two steps forward three steps backwards. I
admit that when I heard a group of Economists from the UK describe the
Nigerian Economy as a recursive economy I saw the power of the concept
but I did not realise another example of that was going to come so soon.
To conclude, let us return to process. In not allowing consultations
with entrepreneurs in the area of policy in consideration, policy makers
may imagine they are riding a high of the low image of the enterprise,
banking today as Four Milling in 1986/87. But it does not help our
ambition to build an entrepreneurial economy to treat such people as too
stupid or irresponsible to discuss with. When regulators and governments
treat such people this way they provoke images of Peter Drucker making
the point that Josef Schumpeter was one of the few economists to truly
understand Entrepreneurship. Yet as some have argued, economists are
essentially historians who analyse what entrepreneurs did yesterday. How
can they prescribe if they do not respect the clan
This is why I keep harping on the point that unless the other five of
the key sets of variables I consider key to economic advance are treated
as we treat policy we will continue to be all dressed up with nowhere
to go. They are entrepreneurship, Human Capital, Institutions, culture
and leadership. Here we short-changed entrepreneurship.
Professor Utomi is of the Lagos Business School, Pan African University in Lagos
