Nigeria and the Global Financial Crisis Part 2

Last week I argued that with the exception of our sound macroeconomic conditions, every other element of the current global financial crisis is present in Nigeria. These include the existence of asset bubbles (share prices and probably property values), excess banks’ capital, imprudent financial sector lending, excessive capital market exuberance, and weak regulation in the financial sector and capital markets. As I wrote this article, I thought it would be interesting to review some of the things said in relation to the economy and particularly the financial sector in this column over the last two years.

Business in 2008 (February 13, 2008)

“The CBN policy of a uniform year end for all banks will mean tighter liquidity not just for the banks but all borrowers and corporates as the banks all seek to call-in loans and strengthen their balance sheets at the same time of the year…Many economists continue to question the link between corporate earnings and the pricing of shares in the Nigerian Stock Exchange. If this concern becomes a mainstream one, then there may be risky times ahead for capital market investors…On the whole sensible investors will be cautious.”

The Banking Industry in 2008 (February 20, 2008)

“I thought the imperatives for the industry at the end of consolidation included stronger corporate governance, professional ethics and transparency in financial reporting, stronger regulation, tighter credit standards, regional and continental expansion, putting in place institutional mechanisms for consumer finance (such as credit bureaus, abolishing the Land Use Act, instituting a national identity management system and faster commercial adjudication) and strengthening capacity-human, risk management, information technology and systems and processes-in the industry. I also thought that further consolidation was required in the industry to eliminate the two-tier structure such that the more marginal entities could be acquired by stronger local players or international banks and to guarantee sustainable levels of investment returns… But the emphasis in the industry has been a second round of capital raising, rather than further consolidation through mergers and acquisitions. The only notable merger transaction was the IBTC Chartered tie-up with Standard Bank of South Africa…questions will remain (and may generate heightened attention in the years to come) about the efficiency of the increased capital and assets that the banks now carry and their returns on investment.”

Soludo Again!!...Well? (August 29, 2007)

“I think we have done well with macro-economic and banking reforms, but I think we are both over-celebrating and doing so too early! A large part of the macro-economic success has been “wind-assisted”, aided by extra-ordinarily high oil prices. We remain dependent on oil for export earnings, the economy is still import-dependent, infrastructure is still decrepit and domestic productivity is still weak….our economy is still highly susceptible to internal and external shocks-stock market bubbles and high oil prices being my biggest concerns.”
Nigerian Banking: Differentiating or Commoditising? (August 1, 2007)

“This trend may also be re-enforced if over capacity emerges as banks build overlapping branches, duplicate ATM locations, chase the same markets and acquire capital in excess of current requirements. The classic sequence then is for price competition to ensue, margins to drop, and in the specific context of banking, imprudent loans and transactions to be booked. These sequences will be amplified if the market is not growing or growing slower than the rate of capacity accumulation. There is nothing that suggests that Nigerian banking must follow this sequence, but nothing precludes the possibility.”

Conclusion

It does seem that if policy makers and market participants had taken a few of the things written on these pages seriously, we would at the very least not be surprised by much of what has happened-the liquidity implications, and consequent failure of the uniform bank year end policy; the capital market collapse; the implications of excess bank capital (one notable exception-Skye Bank went to the market to raise just as much capital as it needed rather than follow the Joneses!); the sequence leading to imprudent lending; and weak supervision; we might as well have recognised the real imperatives for the industry-such as regional and continental expansion (which Access Bank for instance seems to get) and strengthening capacity, governance and systems.

Nigeria is not completely immune from the global financial crisis as some have suggested. On the other hand, we are unlikely to suffer as severe a financial and economic crisis as the western economies, even though individual institutions may get into trouble. But we have common attributes which if not well managed can deteriorate into crisis. If macroeconomic management and regulatory capacity are not improved, adverse scenarios may develop. So far however the regulators are simply in denial. Deferring banks’ recognition of already bad loans is not a good idea-like merely covering a wound with plasters, it merely postpones the evil day, makes the wound fester, and makes the required treatment more radical and expensive. Restricting the downward price movement of shares is a similar regulatory error. opeyemiagbaje.blogspot.com

Agbaje is CEO of Resources and Trust Company Ltd-a strategy, consultancy and business advisory firm. RTC POLICY is the policy, government and political consultancy division while RTC Strategy and Advisory offers private sector advisory services.