With financial stress looming over Nigeria’s public sector, there is some anxiety that turbulence could once more buffet the banking system. This fear was heightened last week when Umaru Ibrahim, Managing Director of the Nigerian Deposit Insurance Corporation, revealed how bad loans and fraud appeared to be rising again in the sector. The country simply cannot afford systemic stress and the regulator should brace for the protection of the financial sector from adversity.
Though the authorities are still confident about the system’s resilience, dangers appear to be coming from within and without. In its predictions for 2015 titled, “A Pessimist’s Guide to the World in 2015,” Bloomberg News, an international news agency, calculates that Nigeria may crumble as oil prices fall and Islamist radicals gain strength. Oil prices and revenues, that fund 80 per cent of our national budget, have been falling fast. On Tuesday, the freefall saw benchmark crude price plummet to $58 per barrel, down from $63pb last week and a dizzying crash from $109pb in July this year. According to some reports, it may fall to as low as $40pb by early next year.
Despite a rally, the naira remains weak against major international currencies. The upshot, for a commodity and import-dependent economy, is all round pressure on the domestic economy, impacting on inflation, production, unemployment and markets. The Nigerian Stock Exchange lost N64 billion in value on a single day as foreign portfolio investors continued pulling out.
But stress, if it hits, will be largely the result of poor choices and lack of effective policies to protect and grow the local economy. Failure to diversify revenue sources, stimulate the productive sectors and promote exports lays the economy open to turbulence when oil prices fall and the banking system to stress when the public sector that drives it is hard of cash.
Nigerian banks often run into problems when high double-digit interest rates mix with volatile naira exchange rates and high exposure to public sector funds. The tendency is for many banks to become margin traders, foreign exchange traders, round-tripping scarce foreign currencies at the expense of core intermediation functions. This heady mix featured prominently in the systemic distress of the 1990s. It is ominously gathering now with the benchmark lending interest rate raised to 13 per cent and overnight rates among banks spiking to over 40 per cent last week.
Have we learnt the right lessons? Distress has hit the Nigerian banking sector before, most recently in 2008-2009, during the global meltdown and the near crash of our capital market. That the banks had N398 billion worth of non-performing loans on their books as of September this year is worrisome. Though a far cry from the over N1 trillion in bad debts purchased by the Asset Management Company in the first phase of its mop-up of banks’ toxic assets in 2010, it bucks the strict credit risk management guidelines handed down by the Central Bank of Nigeria in the aftermath. Though he said banks’ liquidity ratio at 66.6 per cent was still healthy, Ibrahim warned that there could be systemic shocks in the future. With loans and advances at N15.5 trillion, alarm bells may not have started ringing, but the revelation that bank frauds involving N21.7 billion were recorded in 2013 should set them off.
It is a road the country traversed in 1930-1946 when 21 out of 25 indigenous banks collapsed. The cycle was repeated in the 1960s and again the 1980s, 1990s and recently in 2008/2010. Between 1994 and 1998, 44 commercial and merchant banks were liquidated. Eight more banks were taken over by regulators in 2009/10. According to John Ebhodaghe, pioneer CEO of the NDIC, banks fell due to poor risk management, weak internal controls, fraud, poor management and over-reliance on public sector funds in an economy with a weak private sector. Whereas between 1991 and 1996, frauds involving N8.2 billion were recorded, in 1997 alone, frauds totalled N7.4 billion. By 1998, 26 banks with 347 branches in 32 states and Abuja were liquidated.
Experts say a banking system that is in crisis cannot carry out its intermediation role effectively, as lending, especially to the productive, job-creating sectors, will dry up. In response to the financial crises of 2008/9, the United Kingdom scrapped its bank regulatory agency, Financial Services Authority, replacing it with two successors – one to ensure financial services stability, the other to monitor the sector’s behaviour – and both overseen by the Bank of England.
A study by the Basel Committee on Banking Supervision for the Bank of International Settlements in 2004 found that better credit risk management, better regulation, capital adequacy and fraud-free operations enable a banking system to survive turbulent times. US regulators too have tightened supervision after 465 banks collapsed between 2008 and 2012.
Back home, it was the bold, imaginative programme of takeover, restructuring and Purchase and Assumption option adopted by Lamido Sanusi as CBN governor that prevented a disastrous systemic distress in a sector that had only mega deposit money banks. The economy cannot afford such a shock again. Though NDIC’s Minimum Deposit Insurance Cover has been raised to N500, 000, it is better to avoid massive loss of savings altogether.
The weakness of the economy is exposed in the reality that it was the withdrawal of public sector funds in 1989 that triggered the bank failures of the 1990s. Today, the 75 per cent Cash Reserve Ratio (the ratio of deposits banks must hold) on public sector funds imposed by the regulator has hit our banks hard as the private sector remains weak and transactions, rather than production, receive the largest chunk of bank credit.
We must learn from our past and from the experiences of others to fortify the system. The CBN and NDIC should reform themselves and re-position their operations to be able to properly monitor the financial institutions in real time to ensure compliance with the rules and detect signs of stress before they graduate to distress. Our banks too should have plans for worst-case scenarios and be realistic in their projections. They should begin to find other funding sources away from public sector deposits and take steps to reduce risk.
The CBN should, therefore, scrutinise the system now, roll out strong policies and stamp out sharp practices whenever and wherever they pop up.