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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 - 2
Author: Omotayo, J. A. | February 27, 2008



Fourth, encouragement of banks to get involved in politically motivated investments is unethical. While the federal government has been talking of deregulation of the economy, this has only been observed in ports, oil and gas but not in the banking industry. So far, the banking industry is the most regulated without any incentive. During the era of housing scheme, agricultural scheme, rural development, better life, etc., the government pressurized banks to issue out long-term loans with little or no collaterals. But when loans recovery became difficult for some of the banks leading to cash trap and or insolvency, there was no effort by government to bail these banks out. Rather they were left to liquidate. Recent financial crises in Northern Rock, Citi Group, Societe Generale, etc, have shown that even in developed economies, government are most likely to come to the aid of distressed banks either by way of capital injection or the prosecution of offenders. Yet, Mr. Obadiah M. (Deputy Governor of CBN) stated at a retreat in Cross river State that the CBN has again advised the surviving banks to grant agricultural loans to farmers at 14%. He went further that the CBN would bear 8% risk level and the balance of 6% by the farmers themselves (See: Anonymous – An Interview With Dr. Obediah Mailafia, Deputy Governor, Economic Policy, Central Bank of Nigeria, Executive Travels Nigeria, ISSN 111 – 5162, July – Sep 2006, Pg 36-37). The CBN did not indicate how the banks would recover the balance of 6% in the event that some farmers were unable to repay their loans. Fifth, instances abound where distressed banks with deficient cover were allowed by the CBN to hang on rather than invite the NDIC to take them over for political and economic reasons. This is more pronounced when there is insufficient money in the NDIC to pay off depositors, or where principal members on Board have very heavy political weights. A lot has been written and said concerning the old United Bank for Africa, Societie Generale Bank, Savannah Bank, National Bank of Nigeria, etc that pointed in this direction of deficient cover before the recapitalization exercise that one does not need to go into the details now. Sixth, although the CBN is believed to be supervising the banks, this role has been both inefficient and ineffective. Every year, banks publish their financial statements (balance sheet, income statement, statement of change in financial position, and the auditor’s report). One might ask the CBN whether these figures have been usefully and effectively analyzed using the simple consolidation theory earlier highlighted in my “Consolidation Theory Explained – 1, 2 & 3” to prevent distresses in our banks in the last two decades. Seventh, and similar to the above is the issue of nominal valuation. CBN insolvency standard has often been based on book value rather than market value. The import is that where the book value has been crooked up, a distressed bank remains nominally liquid and healthy. The opposite is also true. In the last two years after the so called consolidation of banks, Nigerians have been informed that certain banks overstated their accounts before their merger plans were concluded. The CBN accepted the figures faithfully without any critical evaluations. Yet one of the functions of the CBN has to do with verification and ratification of accounts of these banks. Is it not proper then to ask the CBN whether she has diligently and competently discharged her oversight functions without negligence and or sentiment? Eight, the high regime of entry capital has meant that competition is limited to only the rich, their friends and associates. The CBN has over the years been advocating and implementing increases in paid up capitals to liquidate small banks for political reasons. The use of informal approaches to woo prospective customers, engagement in “phoney” contract deals, etc were consequent upon the high recapitalization and MRR barriers which the banks has always tried to cross. Adapting Mr. Forbes ideas, such issues as unethical operations in the Nigerian banking industry should be blamed on the CBN (See: Amuchie, M. & Achi, L. (2006) – Forbes Lists Recipe for Economic Growth, Thisday, Sunday, 5 February 2006 pg 1 & 4 ) The Nigerian Banking Industry: Like the CBN, the following problems were self imposed on the individual banks directly or indirectly through a combination of factor bothering on lack of competence by the chief executive officer. First, let us consider the issuance of loans versus acceptance of deposits. The major problem with banks is often the tendency to grow a bank by issuing out long-term loans with lower interest rates while at the same time accept short-term deposits at higher interest rate. Consequently, there is an “imbalance between maturation schedules of assets (loans) and liabilities (deposits)” (apology to Henderson, J. V. & Poole, W. (1991) – Principles of Micro-Economics, D. C. Health & Co, Lexington). The money paid out (interest on deposit) soon far exceeds income received from loan repayments. Thus the tendency towards distress has been set in motion through careless approach to developing a bank to a bigger standard. Currently, all the 25 “big but beggarly” banks in Nigeria are not free from this type of incident. Second, banks tend to take very risky portfolios to grow and make profit. Sometimes in the past, one of the leading banks in Nigeria granted loans worth millions of Naira to a foreign contractor that was bidding for a communications project. By the time the deal collapsed, it was discovered that the foreign company was not registered by the Corporate Affairs Commission, that there were no collaterals collected from the foreign firm, etc. The aim was to make a resounding profit before the whole deal failed. The rest is history. In another instance, when a bank is operating on a decline curve leading to insolvency, the management is always quite aware. Naturally, the next thing is to attempt to steer the bank presumably out of danger (liquidation). Under this condition, the management tends to make the bank undertake riskier investment portfolios. The consequence is that the depth of insolvency is then increased or compounded (See: Kwan, S. – Banking Consolidation, FRBSF Economic Letter, Number 2004-15, Jun 18, 2004, San Francisco). A careful look into the books of banks like the old National Bank of Nigeria, United Bank of Africa, Societe General Bank, Savanah Bank, etc would reveal something similar to this postulation. Third, banks keep to too much confidentiality. Most firms, including banks, engaged in hide and seek game. When in problem, they “hide information, overstate costs and generally try to outmaneuver regulators”. When they are very healthy, they keep the secret of their success from competitors. Consequently, it becomes very difficult for the common man in the street to know the true position of things until the last days of distress signal is noticed. This phenomenon is not limited to Nigeria alone. The Northern Rock crisis, among others, in the developed world followed this trend. But unlike Nigeria, the Bank of England was aware of the problem with Northern Rock even though the former could not find appropriate solution(s) early enough to mitigate the crisis. Fourth, there is most often a collusion incident between banks and their auditors. Auditing firms have been colluding with banks because the latter are their employers. Such collusion cannot and must not be ruled out between the auditing firms and the banks for decades. After all these auditors have been auditing and giving out clean bills to most of these banks over the years before the various recapitalization and “Consolidation” exercises. For instance, in far away America, Arthur Anderson International colluded with Enron (though not a bank) until it collapsed. The same is true of WorldCom that collapsed because the auditing firms colluded.
Go to:- Part 1 , Part 2 , Part 3


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