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Author Name: Omotayo, J. A.
Number of articles: 211
During my time too, there were scholaships, grants and busary awards to students. Some of my friends... (0) Comment


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X-raying The Causes Of Recurring Distresses In Nigeria’s Banking Industry - Part 1
Author: Omotayo, J. A. | February 27, 2008



This is the second to the last stage of my work on the recapitalization cum consolidation of the banking industry in Nigeria. I have used the article titled “Consolidation Theory Explained – 1, 2 & 3” to clarify the import of the theory and reduce misconceptions. This has been followed by another series titled “X-rating Why Mr. Soludo’s Banks’ Consolidation Approach Was Wrong – 1, 2 & 3”. I then gave fourteen out of about twenty reasons why the application was wrong. But in this series, I intend to examine the causes of the recurring distresses witnessed in our banking industry before offering what I consider to be the feasible solutions. For quite some time, Nigerians have wondered aloud whether those at the helm of affairs in the nation’s economic and financial circles have the capabilities and competences to resolve our economic woes. During his reign as a military leader, Mr. Babangida expressed surprise that the economy did not “collapse”. During our last civilian dispensation, the talk of “ill digested theory” by Mr. Audu Ogbeh and the need to “X-ray concrete issues of economic importance” reflected a serious gap between the theories of our economic policy makers and the reality being faced daily by the majority of the citizenry who were at the receiving ends. Consequently, the way out of the problems in our banking industry does not lie in ad-hoc economic measures and policies that keep on oscillating like the pendulum, gaining and losing momentum from time to time, without any appreciable improvement to the general wellbeing of the citizenry. However, it lies in our collective efforts to critically examine the problems before proposing solutions. Such a critical thinking has forced me to come to the conclusion that both the regulating agency, the Central Bank of Nigeria (CBN), as well as the individual banks have their own shares of the problem. These problems constitute what I like to refer to as barriers to our banking industry’s growth and development. I like to deal with problems associated with the CBN first, followed by those of the individual banks subsequently. Central Bank of Nigeria (CBN): Most of the problems facing the Nigerian banking industry have their origins at the CBN. Are you surprised? The following issues will illuminate this standpoint: First, the use of high Minimum Rediscount Rate (MRR) recently changed to Monetary Policy Rate (MPR) is burdensome. The CBN has for a long time maintained a high MRR at 13% to 15% while at the same time claiming to create the enabling environment for the survival of a healthy banking industry in particular and the foundation of economic growth in general. I have written many comments on this issue, one of which was on MPR of 10% (See: Omotayo, J. A. - Comment on “Central Bank Introduces New Interest Rate Policy, www.ngex.com, December 5, 2006). The current MPR is 9%. The corresponding values in currently use by Bank of England is 5.25%, that of European Central Bank is 4.0%, America’s Federal Reserve is 3%, Bank of Japan is 0.5%, etc (Courtesy of EuroNews television, Business news, 30 Jan 08 and 7 Feb 08). At a glance, the MPR figure in Nigeria is almost twice as large as that of Britain, the highest in the list above. Why? Lack of appreciation of the CBN’s disruptive economic policy initiative, of course! I like to illustrate with the following example. When the Bank of Japan wanted to stimulate similar economic growth and healthy banking industry, she kept her MRR at 0% for years. The same was also true of Bank of China. The import of this is that if a Nigerian bank were to take a loan of just N100million at 15% MRR from the CBN, the repayment would have been doubled to N200million in about five (5) years, using the usual compound interest formula approach. Even at a current rate of 9%, the amount would have doubled to N200 million in just about eight years. But if a Japanese bank took a similar loan of ¥100million when the MRR was zero, the repayment would remain ¥100million for the same period. Even under this current MRR of 0.5%, the repayment at the end of eight years will be ¥104.071 million, the initial capital increasing by just ¥4.071 million. This is the predicament of the Nigerian banking industry, striving under a very difficult business environment created by the supervising agency, the CBN. Obviously, the high MRR of Nigeria’s CBN is unhealthy for the growth of the Nigerian banking industry as well as the economy. Second, the CBN operates like an extension of military institution with an unwholesome overbearing influence anchored on inappropriate conceptual rigidities. The apex bank has over-regulated interest rates in the banking industry for decades. The penalties for not falling in line with these wrong concepts and policies have been swift and overbearing. For instance, the CBN in 1992 attempted to peg banks’ interest rates at 17-18% even when MRR was raised from 13% to 15%. The then Managing Director of First Bank of Nigeria, Mr. Omisore, delivered a lecture Institute of International Affairs, Lagos criticizing this decision. He reasoned that if the CBN put MRR at 15%, and inter-banks interest was put at 2%, then the prevailing banks interest rate would hover between 19% and 21% to cater for profit and cost of operations. The lecture cost him his job as well as the banker of the year award for which he had been penciled down. His counterpart from Union Bank who supported the same idea was also shown the way out. It was the same conceptual rigidity and overbearing influence that has been making the CBN to forcefully apply recapitalization therapy erroneously in her attempt to stimulate a healthy banking industry. In the process, a few promising small healthy banks that would have grown into medium and perhaps big banks but which were unable to recapitalize have all been forcefully liquidated. At least, two years after the forceful liquidation of banks, three banks are still in court challenging the right of the CBN to do so. If their accounts were not good enough, I strongly believe that these banks will not be in court to seek redress. Third, the cyclic withdrawal and deposit of public funds constitutes another source of instability to the Nigerian banking industry. The CBN has always rolled out regulations and counter-regulations on government deposits into and withdrawals from Nigerian banks. Initially, the banks represented the government’s vault where capital allocations were deposited. Each cycle of deposit of public sector funds into banks operating capitals has meant correspondingly high liquidity to the existing banks. The sudden withdrawal has adversely caused cash trap and near insolvency in most cases. Each time this sort of exercise was embarked upon by the CBN, the timing has always been rather too short to leave room for easy recovery. For instance, Structural and Metallurgical Engineers know that cyclic loading, even of smaller magnitude than the designed load, can cause failure and the ultimate collapse of structural members. I like to quote from the works of Mr. Patrick P. Pizzo, a Materials Engineering Professor Emeritus, in his article on aircraft accident investigation. I quote: “This brings up another type of structural failure: fatigue. It is sometimes referred to as 'metal fatigue', but even plastic parts succumb to cyclic loading. Cyclic, 'back-and-forth' loading of a metal or plastic part will first cause cracks to form, and then to grow. Fracture results. An easy demonstration of this is to take a paper-clip, bend it straight, and then flex it back and forth until it breaks. Repeat loading can cause failure at much lower stresses than those required to break a part under a one-time load (See: Patrick P. Pizzo - Aircraft Accident Investigation, San Jose State University, http://www.engr.sjsu.edu/WofMatE/AAI.html)”, unquote.
Go to:- Part 1 , Part 2 , Part 3


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