In the last two weeks, I have published reflections on the Nigerian banking industry. The first part focussed on issue of strategy vis-a-vis regulation and counselled against the trend for players in the industry to act in a homogenous manner. Last week we examined issues of future structure of regulation in the industry and approaches to resolve current challenges faced by the industry. In both articles, I was merely re-stating arguments that had been expressed on these pages up to two years ago. In these final reflections, I go back even further to an article written immediately after the conclusion of consolidation early in 2006 titled “Banking Consolidation...and then What?”
The arguments I made in that article (which unfortunately were by and large ignored) have been borne out in three short years, to everyone’s regret. I will do no more than quote from that article which started by reminding all concerned that “…simply consolidating the industry will not automatically put an end to all the problems therein. Like they say, it is not yet Uhuru!” I went on to diagnose the pre-consolidation problems of the industry, “…poor corporate governance and weak institutional capacity, low skill levels, weak processes and standardization, weak management information systems, sub-optimal utilization of technology, amongst others-in addition to low capital which recapitalization and consolidation has addressed.” The point being made was that consolidation addressed only one problem-low capital-which of itself did not remove the others!
Indeed in that article I warned about a particular problem which it turns out consolidation did not address but appears to have made worse, the issue of ethics-“…Crucially the concept of who a good banker is has changed from a trained, thinking, careful person of very high integrity to what in effect has become some thing resembling a clever, aggressive, “sharp” and unscrupulous person. Consolidation will not change that! The industry will itself have to redefine what acceptable ethical standards will apply to its staff and the institutions themselves.” I also noted that the transition from capital base of less than N2billion in most cases to over N25billion did not automatically raise the institutions’ capacity to manage at the new level urging “The banks have to develop the required institutional capacity to manage at their new “mega bank” status-at the level of strategy, processes, people development, corporate governance etc. Higher capital levels do not automatically guarantee those.”
The article also focused on more technical concerns which as an erstwhile insider I was aware of, “At the technical level, the banks will have to deal with credit process, credit culture, credit management and credit restructuring and work-out, the standards regarding all of which have deteriorated rather dramatically within the last fifteen years… The industry’s treasury and liquidity management is characterized by rules of thumb and other unscientific decision-making processes, under-the-table practices, and very poor judgment. While the banks have succeeded in using technology to improve operations and service delivery, it is clear that many processes remain outside the purview of technology and management information systems remain inadequate and subject to substantial manual intervention.”
It is these inadequacies that have led to the anguish and pain many of the banks are currently facing with imprudent lending, for instance to capital market loans, based on rules of thumb and subject to little rigour and analysis. I recall that speaking at a NECA seminar in February 2008 (as it turns out days to the beginning of the capital market collapse in March of that year), I mentioned that I thought the capital market was grossly over-valued and may be due for some correction. The bankers in the room vociferously disputed my position, based on no evidence other than “this market cannot fall!”
Finally I also called attention to improvements required in regulation and regulatory capacity, “At the level of the regulators- CBN, NDIC, and SEC, there is also a vast amount of work to be done! The history of the financial sector in fact does not reveal large capitalization as of itself a very enduring indicator of which financial institutions will do well or vice versa. Neither does capital of itself guarantee the long term health and safety of any financial sector. N25 billion can easily be lost in four or five loan transactions. The more sustainable indicators are the quality of corporate governance, ethical and professional standards, skill levels, risk management and compliance, and the robustness of institutional processes and systems. And of course regulatory capacity!”
Today re-reading that article, even I was shocked at how accurate my analysis has turned out to be. If only I was wrong!
Monday, June 8, 2009
Reflections on Nigerian Banking Part 2
Last week I reminded readers about two articles featured on this column in July/August 2007. The basic argument in those two articles was similar-strategy, unlike regulation is about uniqueness. Regulation on the other hand is about common standards and fair and equal treatment. Since the successful banking industry consolidation of 2004-2005, the banking industry by-and-large abdicated strategic thinking to the regulator, the CBN and the result was largely homogenous behaviour by industry participants, who were now left competing on size, network, branding and execution. The current economic circumstances remind everyone that businesses can only be managed on the basis of distinct strategic intent, competitive profile and values.
This week I want to be more forward looking. What options should the industry and policy makers be examining in the present scenario? First of all we note that the CBN governor has stated a figure-N800billion as representing impaired capital market margin loans. We would for the sake of prudence take that figure as a minimum rather than an actual estimate. We also know however that margin loans do not represent the entirety of impaired assets in the banking sector, especially in the context of an economic slowdown when the propensity for asset quality deterioration in banking is higher. Reports suggest for instance that downstream oil sector lending may also be problematic. I would also examine real estate development loans and unsecured import finance facilities for instance as other categories worth examining.
It is the above considerations that make me support the concept of an “Asset Management Company” or “bad bank” a proposal that was initially part of Soludo’s consolidation agenda but that has now been revived in the wake of margin loan losses. Just like in other financial markets, if a way is not found to free up the banks’ balance sheets, liquidity to the rest of the market will be impaired as inter-bank lending freezes, interest rates continue to rise, and the liquidity crunch will move from the capital to the money market. I however believe deciding on an asset management company is the easy part. The more complex and critical issue is fashioning out the operating modalities and securing legislative backing for the proposal. How will the assets to be taken over be valued? Will they be acquired at the value of the underlying loan or the significantly diminished value of the collateral? What conditions, including sanctions and penalties will attach to availing oneself of the AMC’s “bail out”? How will the regulators ensure transparency and the protection of public interest in this whole process? These are important questions that will either frustrate or discredit the idea.
There is also talk of a UK style “Financial Services Authority” carved out of the CBN and other financial sector regulators to form an industry-wide financial services regulator with remit over the whole rather than sectoral silos as is the present practice. I also support this proposal which I think is actually over due. Indeed in my article of July 25 2007 on FSS 2020, I made the same point, “There are other issues that will have to be addressed as CBN and the banks implement FSS 2020-what will be the future role of the CBN itself-a financial services regulator (like the UK Financial Services Authority-FSA) or an economy manager concerned with price stability (like the Bank of England or US Federal Reserve) or both as it currently is?-the broader question is of course about the structure of legal and regulatory systems”.
I believe a new integrated financial services regulator should be created out of a merger of three CBN departments, banking supervision, bank examination and other financial institutions department (OFID) with the insurance regulator and SEC. I personally will prefer that the pensions regulator be kept out of this structure for now-the pension sector is incipient and immature and there may also be some value in isolating pension assets to build contributor confidence and insulate pension assets (to the extent possible) from the rest of financial assets. But even then I would like new statutory mechanisms to increase coordination between the new “FSA” and the pensions regulator, perhaps including appointing PENCOM Commissioners and its head from that body and creating mandatory consultative structures.
There is also the question of headship of the CBN. What is the profile of persons to be appointed to the CBN Governorship? People will off course point out that the global trend is to appoint academic economists to head central banks. I would however argue that given our circumstances and the pool of available talent, the net should be cast wider to include persons with depth of knowledge and experience of finance and financial markets, banking, business and the economy whether or not such persons obtained a degree in economics. In the US, the profile of the Federal Reserve chair is not just an economics degree or doctorate. He is comfortable in boardrooms, has held senior positions probably in regional reserve systems and is reasonably comfortable (and thus relatively immune from temptations!). There are not many academics in Nigeria who fit that profile.
This week I want to be more forward looking. What options should the industry and policy makers be examining in the present scenario? First of all we note that the CBN governor has stated a figure-N800billion as representing impaired capital market margin loans. We would for the sake of prudence take that figure as a minimum rather than an actual estimate. We also know however that margin loans do not represent the entirety of impaired assets in the banking sector, especially in the context of an economic slowdown when the propensity for asset quality deterioration in banking is higher. Reports suggest for instance that downstream oil sector lending may also be problematic. I would also examine real estate development loans and unsecured import finance facilities for instance as other categories worth examining.
It is the above considerations that make me support the concept of an “Asset Management Company” or “bad bank” a proposal that was initially part of Soludo’s consolidation agenda but that has now been revived in the wake of margin loan losses. Just like in other financial markets, if a way is not found to free up the banks’ balance sheets, liquidity to the rest of the market will be impaired as inter-bank lending freezes, interest rates continue to rise, and the liquidity crunch will move from the capital to the money market. I however believe deciding on an asset management company is the easy part. The more complex and critical issue is fashioning out the operating modalities and securing legislative backing for the proposal. How will the assets to be taken over be valued? Will they be acquired at the value of the underlying loan or the significantly diminished value of the collateral? What conditions, including sanctions and penalties will attach to availing oneself of the AMC’s “bail out”? How will the regulators ensure transparency and the protection of public interest in this whole process? These are important questions that will either frustrate or discredit the idea.
There is also talk of a UK style “Financial Services Authority” carved out of the CBN and other financial sector regulators to form an industry-wide financial services regulator with remit over the whole rather than sectoral silos as is the present practice. I also support this proposal which I think is actually over due. Indeed in my article of July 25 2007 on FSS 2020, I made the same point, “There are other issues that will have to be addressed as CBN and the banks implement FSS 2020-what will be the future role of the CBN itself-a financial services regulator (like the UK Financial Services Authority-FSA) or an economy manager concerned with price stability (like the Bank of England or US Federal Reserve) or both as it currently is?-the broader question is of course about the structure of legal and regulatory systems”.
I believe a new integrated financial services regulator should be created out of a merger of three CBN departments, banking supervision, bank examination and other financial institutions department (OFID) with the insurance regulator and SEC. I personally will prefer that the pensions regulator be kept out of this structure for now-the pension sector is incipient and immature and there may also be some value in isolating pension assets to build contributor confidence and insulate pension assets (to the extent possible) from the rest of financial assets. But even then I would like new statutory mechanisms to increase coordination between the new “FSA” and the pensions regulator, perhaps including appointing PENCOM Commissioners and its head from that body and creating mandatory consultative structures.
There is also the question of headship of the CBN. What is the profile of persons to be appointed to the CBN Governorship? People will off course point out that the global trend is to appoint academic economists to head central banks. I would however argue that given our circumstances and the pool of available talent, the net should be cast wider to include persons with depth of knowledge and experience of finance and financial markets, banking, business and the economy whether or not such persons obtained a degree in economics. In the US, the profile of the Federal Reserve chair is not just an economics degree or doctorate. He is comfortable in boardrooms, has held senior positions probably in regional reserve systems and is reasonably comfortable (and thus relatively immune from temptations!). There are not many academics in Nigeria who fit that profile.
Reflections on Nigerian Banking
This week I am thinking a lot about the financial services sector. I consider myself somewhat of a stakeholder in that sector and appreciate the need to rein in fear and scaremongering that appears to be growing concerning the state of things in the sector. Unfortunately in the absence of information and transparency, concerns about the financial sector spread and if not assuaged develop into a freezing of the inter-bank system and on the part of investors and depositors a flight to (real or perceived) safety. The proper response is transparency and full disclosure about the condition of individual banks instead of hoarding information which raises fear and may precipitate an unnecessary systemic crisis. But first I am forced to reflect again on some of the things that I have written in this column in the past.
On July 25, 2007 in an article on the so-called FSS 2020 I wrote, “…it does appear that most of the strategic thinking in Nigeria’s financial services is been done not by the operators, but by the regulator while the banks are carrying out homogenous activities dictated by regulator-designed strategies and competing on quantum of capital and execution. Didn’t Michael Porter say that strategy is essentially about uniqueness? Or is the industry passing through a standardization phase in which it is more important strategically to be compatible and compliant rather than differentiated?” The very next week I examined the same questions further in another article titled “Nigerian Banking: Differentiating or Commoditizing” (August 1, 2007)
In that piece I wrote “…since July 6, 2004 when Professor Charles Soludo launched the ambitious banking consolidation programme, banks in Nigeria appear to have been forced to abandon unique strategic positions in favour of measures designed to secure regulatory compliance and survival. The consolidation exercise appears to have largely eroded these and other distinct competitive positions in Nigerian banking. Since July 2004, most Nigerian Banks have done largely the same things-raise capital, merge with or acquire other institutions, change names, logos or colours, build many branches, buy ATMs and build e-commerce capabilities, increase retail market penetration, establish subsidiaries, go back to raise more money and open branches in West Africa and beyond-such that unique competitive positions are more difficult to sustain.
Of course it is simplistic and false to argue that after consolidation, 25 “mega banks” with similar attributes emerged in the industry. The truth is that stronger and weaker institutions remain, but the basis of strength or weakness appears increasingly not to depend on unique or differentiated strategic positions but size-of capital, branch network and balance sheets. If the above analysis is correct, then it suggests a trend towards homogenization (and perhaps attendant commoditization) in Nigerian banking…If differentiated positions are disappearing and banks are adopting homogenous strategies, commoditization (or at least standardization) may develop. 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…”
I find it amusing that the Central Bank which has de facto assumed responsibility for the strategies implemented by banks is now turning around in the face of difficult times to divert the blame to the banks. It is curious for instance that the bank is blaming deposit money banks for over-publicity, a trend of which the regulator is arguably guiltier. But the more important point the entire industry will have to internalize is the fact that there is a difference between regulation and strategy. Regulation is based on industry-wide standards and common principles, but the objective of strategy is, or should be uniqueness which means each institution must craft its own strategy based on institutional intent, values and peculiarities.
On July 25, 2007 in an article on the so-called FSS 2020 I wrote, “…it does appear that most of the strategic thinking in Nigeria’s financial services is been done not by the operators, but by the regulator while the banks are carrying out homogenous activities dictated by regulator-designed strategies and competing on quantum of capital and execution. Didn’t Michael Porter say that strategy is essentially about uniqueness? Or is the industry passing through a standardization phase in which it is more important strategically to be compatible and compliant rather than differentiated?” The very next week I examined the same questions further in another article titled “Nigerian Banking: Differentiating or Commoditizing” (August 1, 2007)
In that piece I wrote “…since July 6, 2004 when Professor Charles Soludo launched the ambitious banking consolidation programme, banks in Nigeria appear to have been forced to abandon unique strategic positions in favour of measures designed to secure regulatory compliance and survival. The consolidation exercise appears to have largely eroded these and other distinct competitive positions in Nigerian banking. Since July 2004, most Nigerian Banks have done largely the same things-raise capital, merge with or acquire other institutions, change names, logos or colours, build many branches, buy ATMs and build e-commerce capabilities, increase retail market penetration, establish subsidiaries, go back to raise more money and open branches in West Africa and beyond-such that unique competitive positions are more difficult to sustain.
Of course it is simplistic and false to argue that after consolidation, 25 “mega banks” with similar attributes emerged in the industry. The truth is that stronger and weaker institutions remain, but the basis of strength or weakness appears increasingly not to depend on unique or differentiated strategic positions but size-of capital, branch network and balance sheets. If the above analysis is correct, then it suggests a trend towards homogenization (and perhaps attendant commoditization) in Nigerian banking…If differentiated positions are disappearing and banks are adopting homogenous strategies, commoditization (or at least standardization) may develop. 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…”
I find it amusing that the Central Bank which has de facto assumed responsibility for the strategies implemented by banks is now turning around in the face of difficult times to divert the blame to the banks. It is curious for instance that the bank is blaming deposit money banks for over-publicity, a trend of which the regulator is arguably guiltier. But the more important point the entire industry will have to internalize is the fact that there is a difference between regulation and strategy. Regulation is based on industry-wide standards and common principles, but the objective of strategy is, or should be uniqueness which means each institution must craft its own strategy based on institutional intent, values and peculiarities.
Political Scenarios
Where is our politics going? As President Umaru Yar’adua approaches the mid-point of his four-year term, this question is not irrelevant! Why is Abubakar Atiku engineering reconciliation with his erstwhile boss and latter-day foe, Olusegun Obasanjo? Why is Muhammadu Buhari seeking a more trustworthy base for his political adventures or trying to seize the reins of the present one which has proven to be unreliable under its present leadership? Why is there a silent repositioning and re-alignment in Yoruba politics? Why are the Governors organising themselves into a potent and powerful political pressure group? Everyone can pretend not to notice, but clearly there is an elephant in the room! The jostling for 2011 has begun!!!
As unlikely as it may appear, the first assumption must be that the President will be (or will attempt to be) a candidate in 2011. A sitting president is always a formidable opponent in an election, especially in a political system that is dependent on patronage and in which all prosperity flows from the government. And in a presidential system in which the president basically controls the ruling party, which controls an overwhelming majority of state governments and seats in the federal legislature. But several factors will militate against the President’s attempt to seek a second term, and significant constituencies-locally and perhaps internationally as well, may be inclined to discourage him from pursuing that course of action. On the other hand, current beneficiaries of the power vacuum in Abuja will insist that he ignores such voices. It remains to be seen how fate and destiny will play out!
Of course you can expect Atiku Abubakar to be a candidate as well, either by challenging Yar’adua for the PDP ticket, by persuading him against running or by running on the platform of another party which may or may not be the AC. He will remain a formidable candidate. Many in the system are still sympathetic to him. If his negotiations with Obasanjo and others in the PDP are successful he may return to the PDP, but he may learn one or two lessons from others in the past who thought they had a deal with Obasanjo! But then it may be in the mutual interest of both to cooperate and PDP power blocks like James Ibori, Alamieyesegha and other politicians of the 1999 to 2007 era may swing to his side. Don’t write off Atiku.
Buhari will of course run. His preference will remain seizing the ANPP machinery, but if that fails, he can always concoct an alternative party platform. He remains the most popular Hausa/Fulani politician and remains favoured in the religious and traditional constituencies up north as well as amongst the masses who view him as pious and righteous, in contrast to the other suspects. If Yar’adua is not a candidate, Buhari can win, and even if he is, Buhari will still be a threat. But the average Nigerian politician is afraid of entrusting power to him, and Southerners and Christians will still be uncomfortable with a Buhari presidency, especially as crisis in Jos and other places revive inter-religious suspicion.
By 2011, several governors will have completed their two terms-Bukola Saraki of Kwara, Danjuma Goje of Gombe, Modu Sherrif of Borno, Ibrahim Shekari of Kano and Idris of Kogi. As has become the pattern, many of these gentlemen will seek to remain relevant by becoming Senators, Ministers or party leaders. Expect some of them to challenge for the presidency. And some may actually be formidable, Buki Saraki (and perhaps Goje) being an obvious one. Down South, Gbenga Daniel and Olagunsoye Oyinlola (all things being equal) will also be completing their second terms and will also be re-positioning. Daniel may offer himself as a candidate for Vice-Presidency and Oyinlola will not offer himself but may be offered. The real contest in Yoruba land will however be between Bola Tinubu and Obasanjo.
What will happen to the political parties? I have always believed the real problem of our democracy is not the Constitution, but the weak political party system. My hope has always been for a strong two party system, one “a little to the left and the other a little to the right”. Each of the two should transcend ethnic and religious boundaries and both ideally should be internally consistent with broadly compatible membership. Can this emerge? I hope so, but I do not know. The PDP always threatens to splinter, but the allure of money and power is a stronger glue. If Atiku goes back to the PDP with the core of the PDM, the AC will become fully Tinubu’s show and will attempt to provide that “left-of-centre” alternative to the PDP. And you can never underrate Bola Tinubu.
Ideally the AC-minus-Atiku would try to attract Segun Mimiko of Labour (who may yet be governor of Ondo State!), Peter Obi of APGA and others across the country. If the PDP splits, it should try to gain Governors Jang of Plateau, Sule Lamido of Jigawa and other progressives presently in the PDP. But then as already mentioned, the death of the PDP has always been greatly exaggerated!
As unlikely as it may appear, the first assumption must be that the President will be (or will attempt to be) a candidate in 2011. A sitting president is always a formidable opponent in an election, especially in a political system that is dependent on patronage and in which all prosperity flows from the government. And in a presidential system in which the president basically controls the ruling party, which controls an overwhelming majority of state governments and seats in the federal legislature. But several factors will militate against the President’s attempt to seek a second term, and significant constituencies-locally and perhaps internationally as well, may be inclined to discourage him from pursuing that course of action. On the other hand, current beneficiaries of the power vacuum in Abuja will insist that he ignores such voices. It remains to be seen how fate and destiny will play out!
Of course you can expect Atiku Abubakar to be a candidate as well, either by challenging Yar’adua for the PDP ticket, by persuading him against running or by running on the platform of another party which may or may not be the AC. He will remain a formidable candidate. Many in the system are still sympathetic to him. If his negotiations with Obasanjo and others in the PDP are successful he may return to the PDP, but he may learn one or two lessons from others in the past who thought they had a deal with Obasanjo! But then it may be in the mutual interest of both to cooperate and PDP power blocks like James Ibori, Alamieyesegha and other politicians of the 1999 to 2007 era may swing to his side. Don’t write off Atiku.
Buhari will of course run. His preference will remain seizing the ANPP machinery, but if that fails, he can always concoct an alternative party platform. He remains the most popular Hausa/Fulani politician and remains favoured in the religious and traditional constituencies up north as well as amongst the masses who view him as pious and righteous, in contrast to the other suspects. If Yar’adua is not a candidate, Buhari can win, and even if he is, Buhari will still be a threat. But the average Nigerian politician is afraid of entrusting power to him, and Southerners and Christians will still be uncomfortable with a Buhari presidency, especially as crisis in Jos and other places revive inter-religious suspicion.
By 2011, several governors will have completed their two terms-Bukola Saraki of Kwara, Danjuma Goje of Gombe, Modu Sherrif of Borno, Ibrahim Shekari of Kano and Idris of Kogi. As has become the pattern, many of these gentlemen will seek to remain relevant by becoming Senators, Ministers or party leaders. Expect some of them to challenge for the presidency. And some may actually be formidable, Buki Saraki (and perhaps Goje) being an obvious one. Down South, Gbenga Daniel and Olagunsoye Oyinlola (all things being equal) will also be completing their second terms and will also be re-positioning. Daniel may offer himself as a candidate for Vice-Presidency and Oyinlola will not offer himself but may be offered. The real contest in Yoruba land will however be between Bola Tinubu and Obasanjo.
What will happen to the political parties? I have always believed the real problem of our democracy is not the Constitution, but the weak political party system. My hope has always been for a strong two party system, one “a little to the left and the other a little to the right”. Each of the two should transcend ethnic and religious boundaries and both ideally should be internally consistent with broadly compatible membership. Can this emerge? I hope so, but I do not know. The PDP always threatens to splinter, but the allure of money and power is a stronger glue. If Atiku goes back to the PDP with the core of the PDM, the AC will become fully Tinubu’s show and will attempt to provide that “left-of-centre” alternative to the PDP. And you can never underrate Bola Tinubu.
Ideally the AC-minus-Atiku would try to attract Segun Mimiko of Labour (who may yet be governor of Ondo State!), Peter Obi of APGA and others across the country. If the PDP splits, it should try to gain Governors Jang of Plateau, Sule Lamido of Jigawa and other progressives presently in the PDP. But then as already mentioned, the death of the PDP has always been greatly exaggerated!
Are we all Socialists now?
The current edition of Newsweek magazine declares “We are all Socialists Now”. Coming soon after Time Magazine’s depiction of Karl Marx on its cover in an article entitled, “Rethinking Marx”, you might be forgiven for believing that socialism has finally triumphed over the notion of free enterprise. But that would be if you did not go beyond the cover of both magazines! John King on CNN’s “State of the Union” was the one who alerted me on Sunday night to the Newsweek story. Given its bearing on my article which was already a work-in-progress, I delayed completion of the column to see the on-line edition of the magazine and inverted the story’s title for this article.
The Newsweek story does not expect America or indeed Europe to adopt the socialist model as seen in China (before Deng Xiaoping), Leninist or Stalinist USSR or Cuba. Instead the core argument was that America at the end of the process unleashed by the current financial and economic crisis would resemble Europe rather than the extreme free market capitalism seen under Reagan and George W Bush. Which is not exactly the same as Marxism. It is true of course that one notion of capitalism has been discredited by the current crisis. The extreme right wing view of a free market without government, without regulation and without taxes advocated by Reagan, theorised by the so-called Chicago School of Economists, and implemented for the last eight years under Bush has failed, and deservedly so.
This view was however not the mainstream view of economics. Most economists and market analysts accept that sometimes markets fail, and in such situations, governmental action is required. They recognise that there are areas of societal development that markets may not address at specific points in time and which government and other actors need to fill the space-education, health, disease eradication, and many aspects of infrastructure and public goods for instance may have to be provided by government or else no one will. Policing and public safety as well as national defence and security may not be fully amenable to the market mechanism. And the current financial crisis makes it clear that while the profit motive is useful in stimulating innovation, unbridled search for profits often leads to greed and may undermine the markets hence the need for regulation.
The problem as Bill Clinton pointed out during the recent campaigns is that the Reaganite “trickle down” economics ideologues (lower taxes for the rich and prosperity will trickle down to the poor), did not have the opportunity of fully implementing their notions due to democratic control of congress, until under George W when Republicans controlled the White House and both Houses of Congress to disastrous results as we have now seen. Those policies expanded the fiscal deficit, increased the national debt and left the weakly-regulated financial sector and people like Bernard Madoff free to exploit the gullible public. It is a fitting irony that it is a conservative Republican who has now being forced to nationalise banks to preserve a more sensible definition of capitalism.
The Time Magazine story “Rethinking Marx” reminds us that “Marx’s utopian predictions about revolution and the triumph of socialism were dead wrong; indeed many of the policies carried out in his name in the 20th Century brought misery to millions in countries ranging from Russia to China, and large chunks of Africa.” Of course, the ongoing crisis confirms that just as any human system, capitalism also has its limits. Time concedes that Marx was right in his diagnosis of these limits-capitalism left on its own will expand inequality between the rich and the poor; it treats labour like a commodity to be purchased, but work should bring fulfilment; potentially unrestrained capitalism will squeeze the middle class out of existence, leading ironically to the collapse of capitalism since the middle class is required to purchase goods and services produced by capitalist firms; and in capitalist systems, profits take a larger and larger share of the economy at the expense of wages again accentuating the gap between the rich and poor and marginalising the middle. America has seen all of these dynamics play out and that is why America as Newsweek predicts will continue to move closer to the European model which uses taxes to redress inequality and provides welfare and benefits for the poor.
The lesson here is that reason and human experience is more useful than pure ideology in shaping society. That is the lesson China also learnt from the left! When Deng Xiaoping became Chinese leader in 1978 he realised that socialism was destroying and impoverishing his people and advocated to his communist colleagues the injection of some capitalism into the Chinese economy urging his party apparatchiks, “It cannot harm us, it cannot harm us”. He defined a new economic system which he called, the “Socialist Market Economy” which accepted private property, markets and profits-the central elements of the capitalist system, but retained the communist political structure. The point is even Deng Xiaoping and post-Deng China were pragmatic in re-interpreting Communist doctrine to redress the obvious limitations of socialism.
What do I believe? I am a “socialist” in those areas that concern the poor-public education, health, rural development, public transportation, unemployment and social security, subject to social policies being sustainable. However the economy functions best in line with free enterprise principles and so I am convinced most economic sector decisions are best based on market principles. But government retains a role-to ensure markets are fair, competitive and well-regulated, to protect labour and other less-powerful groups, and to shape investment climates and provide macro-economic stability and security.
The Newsweek story does not expect America or indeed Europe to adopt the socialist model as seen in China (before Deng Xiaoping), Leninist or Stalinist USSR or Cuba. Instead the core argument was that America at the end of the process unleashed by the current financial and economic crisis would resemble Europe rather than the extreme free market capitalism seen under Reagan and George W Bush. Which is not exactly the same as Marxism. It is true of course that one notion of capitalism has been discredited by the current crisis. The extreme right wing view of a free market without government, without regulation and without taxes advocated by Reagan, theorised by the so-called Chicago School of Economists, and implemented for the last eight years under Bush has failed, and deservedly so.
This view was however not the mainstream view of economics. Most economists and market analysts accept that sometimes markets fail, and in such situations, governmental action is required. They recognise that there are areas of societal development that markets may not address at specific points in time and which government and other actors need to fill the space-education, health, disease eradication, and many aspects of infrastructure and public goods for instance may have to be provided by government or else no one will. Policing and public safety as well as national defence and security may not be fully amenable to the market mechanism. And the current financial crisis makes it clear that while the profit motive is useful in stimulating innovation, unbridled search for profits often leads to greed and may undermine the markets hence the need for regulation.
The problem as Bill Clinton pointed out during the recent campaigns is that the Reaganite “trickle down” economics ideologues (lower taxes for the rich and prosperity will trickle down to the poor), did not have the opportunity of fully implementing their notions due to democratic control of congress, until under George W when Republicans controlled the White House and both Houses of Congress to disastrous results as we have now seen. Those policies expanded the fiscal deficit, increased the national debt and left the weakly-regulated financial sector and people like Bernard Madoff free to exploit the gullible public. It is a fitting irony that it is a conservative Republican who has now being forced to nationalise banks to preserve a more sensible definition of capitalism.
The Time Magazine story “Rethinking Marx” reminds us that “Marx’s utopian predictions about revolution and the triumph of socialism were dead wrong; indeed many of the policies carried out in his name in the 20th Century brought misery to millions in countries ranging from Russia to China, and large chunks of Africa.” Of course, the ongoing crisis confirms that just as any human system, capitalism also has its limits. Time concedes that Marx was right in his diagnosis of these limits-capitalism left on its own will expand inequality between the rich and the poor; it treats labour like a commodity to be purchased, but work should bring fulfilment; potentially unrestrained capitalism will squeeze the middle class out of existence, leading ironically to the collapse of capitalism since the middle class is required to purchase goods and services produced by capitalist firms; and in capitalist systems, profits take a larger and larger share of the economy at the expense of wages again accentuating the gap between the rich and poor and marginalising the middle. America has seen all of these dynamics play out and that is why America as Newsweek predicts will continue to move closer to the European model which uses taxes to redress inequality and provides welfare and benefits for the poor.
The lesson here is that reason and human experience is more useful than pure ideology in shaping society. That is the lesson China also learnt from the left! When Deng Xiaoping became Chinese leader in 1978 he realised that socialism was destroying and impoverishing his people and advocated to his communist colleagues the injection of some capitalism into the Chinese economy urging his party apparatchiks, “It cannot harm us, it cannot harm us”. He defined a new economic system which he called, the “Socialist Market Economy” which accepted private property, markets and profits-the central elements of the capitalist system, but retained the communist political structure. The point is even Deng Xiaoping and post-Deng China were pragmatic in re-interpreting Communist doctrine to redress the obvious limitations of socialism.
What do I believe? I am a “socialist” in those areas that concern the poor-public education, health, rural development, public transportation, unemployment and social security, subject to social policies being sustainable. However the economy functions best in line with free enterprise principles and so I am convinced most economic sector decisions are best based on market principles. But government retains a role-to ensure markets are fair, competitive and well-regulated, to protect labour and other less-powerful groups, and to shape investment climates and provide macro-economic stability and security.
Nigerians can be led!
The debate about whether Nigeria’s problem is one of the leadership or followership recurs every now and then. I have heard many in and out of government comment on the amount of pressure Nigerians are subjected to once they assume a public position, and even immediately they hint at an interest in contesting for public office. The implication of this point of view is that Nigeria’s problem is at least partly one of followership. And this point is not without some basis. I have often marvelled at the way Nigerians react to the appointment or election of people into so-called “juicy” positions. Congratulatory adverts appear in the newspapers-from friends, colleagues, old classmates, business partners, banks and other “stakeholders”. The fellow is immediately offered a chieftaincy title by his traditional ruler, elevated to a front row seat in his church and becomes a “Chief Launcher” at every fund raiser.
His closest friends no longer call him by his name. He is now “Honourable Minister”, “Honourable Commissioner”, “My DG”, “My ED” etc. In short we give the poor guy little chance of retaining a proper perspective founded on service and sacrifice. Protocol officers begin to restrain the fellow’s very humanity and before long the man is virtually compelled to act like a colonial district officer in the midst of some illiterate or hostile natives! Don’t mistake all the fawning and respect for genuine love, loyalty or admiration! It is all self-serving sycophancy designed to manipulate the office holder into sending a share of the “national cake” in their direction. And then people begin to offer the guy earnest advice-“this is your chance”, “once you are out of office, no one will remember you oh!”, “take care of tomorrow” etc until the fellow is completely compromised.
Our people are also implicated in some of the worst aspects of the Nigerian electoral system. Those who collect bribes from office seekers and say “na manifesto we go chop?”; those who dismiss progressive candidates as unelectable and vote instead for corrupt generals and party “chieftains” in a self-fulfilling prophesy that good people can never win elections in Nigeria. And indeed didn’t Chief Obafemi Awolowo and Alhaji Aminu Kano offer themselves to Nigerians as leaders over and over again? Didn’t Gani Fawehinmi’s National Conscience Party contest elections in Nigeria? How many Nigerians voted for that party? Wasn’t Femi Falana a candidate when Ekiti people elected Ayo Fayose? Didn’t Osun people vote out Bisi Akande after a corruption-free first term?
But in spite of these arguments, I have always preferred the alternative viewpoint. Leaders are people who are able to lift the people above their present level-in terms of civic citizenship, social consciousness, ethical, political and moral values and otherwise. All South Africans do not have the spirit of forgiveness and statesmanship that Nelson Mandela exhibited. All Americans do not have the intellect and organisational skills that Barack Obama displayed in his march to the White House. Mahatma Ghandi’s message of peaceful resistance was not the behaviour exhibited on the streets of India. Lee Kwuan Yew had to force those principles that eventually lifted Singapore “from third world to first” down the throats of some of his countrymen and women.
The point is leaders, real leaders that is, rise above their environment and lift up their people. They create a vision that is higher and bigger than the present, they communicate the vision, they influence people and secure support, they elevate motives (including their own), and they lead people towards realisation and execution of the vision. Often they change first themselves, and then their societies. They do not descend to the level of their streets! Not Abraham Lincoln, Obafemi Awolowo, Murtala Muhammed, Margaret Thatcher, Martin Luther King, Deng Xiaoping or any great leader for that matter. Any political leader who blames followers or even advisers for his failings concedes implicitly that leadership is not his or her calling!
If I had any doubt that Nigerians are ready and willing to be led in a positive direction, those doubts were dispelled on Friday night (January 30) at the Silverbird Man of the Year event at Eko Hotel where Comrade Adams Oshiomole was honoured. Two incidents-both similar in their significance defined this conviction. Governor Babatunde Raji Fashola of Lagos was the Special Guest of Honour. When Fashola was introduced, the hall erupted in spontaneous applause and then a standing ovation which persisted for several minutes. It was unplanned, the MC did not have to remind anyone to “give his Excellency a round of applause” as we are always urged to do; it was completely spontaneous and completely unanimous! And this for a Governor who has ruled for less than two years.
It was the same with Adams Oshiomole after his acceptance speech. As he articulated why he has always fought against social injustice and oppression, recounted his experiences as a factory hand who was sacked merely because he didn’t look physically strong, explained his occasional reflections on all the companies and governments who have been on the receiving end of his labour activism and agitation due to his compulsive inability to ignore oppressive use of power, pledged to demystify governance and remain on the side of the common people, the hall erupted in another standing ovation. These two gentlemen reinforced my conviction that when Nigerians see good leadership, they will follow. Their hopes may have been dashed over and over again, but Nigerians are still willing when the right leader emerges to rise and build the nation of their dreams.
His closest friends no longer call him by his name. He is now “Honourable Minister”, “Honourable Commissioner”, “My DG”, “My ED” etc. In short we give the poor guy little chance of retaining a proper perspective founded on service and sacrifice. Protocol officers begin to restrain the fellow’s very humanity and before long the man is virtually compelled to act like a colonial district officer in the midst of some illiterate or hostile natives! Don’t mistake all the fawning and respect for genuine love, loyalty or admiration! It is all self-serving sycophancy designed to manipulate the office holder into sending a share of the “national cake” in their direction. And then people begin to offer the guy earnest advice-“this is your chance”, “once you are out of office, no one will remember you oh!”, “take care of tomorrow” etc until the fellow is completely compromised.
Our people are also implicated in some of the worst aspects of the Nigerian electoral system. Those who collect bribes from office seekers and say “na manifesto we go chop?”; those who dismiss progressive candidates as unelectable and vote instead for corrupt generals and party “chieftains” in a self-fulfilling prophesy that good people can never win elections in Nigeria. And indeed didn’t Chief Obafemi Awolowo and Alhaji Aminu Kano offer themselves to Nigerians as leaders over and over again? Didn’t Gani Fawehinmi’s National Conscience Party contest elections in Nigeria? How many Nigerians voted for that party? Wasn’t Femi Falana a candidate when Ekiti people elected Ayo Fayose? Didn’t Osun people vote out Bisi Akande after a corruption-free first term?
But in spite of these arguments, I have always preferred the alternative viewpoint. Leaders are people who are able to lift the people above their present level-in terms of civic citizenship, social consciousness, ethical, political and moral values and otherwise. All South Africans do not have the spirit of forgiveness and statesmanship that Nelson Mandela exhibited. All Americans do not have the intellect and organisational skills that Barack Obama displayed in his march to the White House. Mahatma Ghandi’s message of peaceful resistance was not the behaviour exhibited on the streets of India. Lee Kwuan Yew had to force those principles that eventually lifted Singapore “from third world to first” down the throats of some of his countrymen and women.
The point is leaders, real leaders that is, rise above their environment and lift up their people. They create a vision that is higher and bigger than the present, they communicate the vision, they influence people and secure support, they elevate motives (including their own), and they lead people towards realisation and execution of the vision. Often they change first themselves, and then their societies. They do not descend to the level of their streets! Not Abraham Lincoln, Obafemi Awolowo, Murtala Muhammed, Margaret Thatcher, Martin Luther King, Deng Xiaoping or any great leader for that matter. Any political leader who blames followers or even advisers for his failings concedes implicitly that leadership is not his or her calling!
If I had any doubt that Nigerians are ready and willing to be led in a positive direction, those doubts were dispelled on Friday night (January 30) at the Silverbird Man of the Year event at Eko Hotel where Comrade Adams Oshiomole was honoured. Two incidents-both similar in their significance defined this conviction. Governor Babatunde Raji Fashola of Lagos was the Special Guest of Honour. When Fashola was introduced, the hall erupted in spontaneous applause and then a standing ovation which persisted for several minutes. It was unplanned, the MC did not have to remind anyone to “give his Excellency a round of applause” as we are always urged to do; it was completely spontaneous and completely unanimous! And this for a Governor who has ruled for less than two years.
It was the same with Adams Oshiomole after his acceptance speech. As he articulated why he has always fought against social injustice and oppression, recounted his experiences as a factory hand who was sacked merely because he didn’t look physically strong, explained his occasional reflections on all the companies and governments who have been on the receiving end of his labour activism and agitation due to his compulsive inability to ignore oppressive use of power, pledged to demystify governance and remain on the side of the common people, the hall erupted in another standing ovation. These two gentlemen reinforced my conviction that when Nigerians see good leadership, they will follow. Their hopes may have been dashed over and over again, but Nigerians are still willing when the right leader emerges to rise and build the nation of their dreams.
Business in 2009
Last week we examined the policy implications of the current constrained economic environment. It is clear that the only way to avert the type of economic pressures Nigeria was subjected to in the 1980s and early to mid-90s is to change the policy direction (or lack of it) that the current regime has adopted since May 2007. It requires a return to an economic model that leverages and indeed actively seeks private capital from foreign and domestic sources; a clearly articulated development strategy that addresses the debilitating power and infrastructure situation; an assault on corruption and mismanagement of the budgetary and procurement processes that denies the Nigerian economy value-for-money even for the limited budget dollars that we appropriate; and it requires exceptional leadership at the Presidency and in the critical ministries, departments and agencies that impact on the Nigerian economy and on the conditions of our people.
There appear to be tentative signals that the Presidency is finally coming to an understanding of these requirements, based on the evidence from some of the recent actions of government, but then some consistency of action and “follow through” is required. Observing the volatility of the foreign currency markets in just two weeks of 2009, I was uncannily reminded of the early days of my career as a banking executive when perhaps seventy-five percent of management energies were directed towards procuring the forex needs of our clients. Those days seemed to have ended with the return of high oil prices, the build-up of foreign reserves, the 2005 Paris Club debt write-off, resumed FDI and portfolio investment, and the successful banking consolidation exercise. Today, we are reminded of the dangers of over-celebration. As I have warned long before in this column, our economic advantages though important were significantly “wind-assisted” by high oil prices and a bullish international economic environment.
Early in December while making presentations on the economic outlook in 2009 in several boardrooms and management meetings, I projected some Naira devaluation, at first to around N125 but before the middle of December, it was clear to me that we were probably going to be facing a more severe devaluation and we revised our average exchange rate for 2009 to N135-N140 to $. By and large, we stand by that projection, in spite of the volatility we have just witnessed. I would argue that the scenario in January was merely exacerbated by speculation and panic induced by the policy vacuum from the Central Bank. The financial markets hate lack of information! But one also understands Charles Soludo’s increasing hesitancy in leading policy debates. He burnt his hands in the currency denomination and dollar payment of state and local government revenues quagmire and perhaps will like to live his last days at the CBN in peace. With the Central Bank taking a clear policy position, the exchange rates will be moderated we believe to our projected range.
Beyond the exchange rate, business is concerned with the state of infrastructure-particularly power and transportation; the state of the financial sector, the availability of credit and interest rates; inflation and money supply; the stock market; government’s fiscal stance especially given the role of government in our economy; and the level of economic activity and GDP growth. What is the outlook in 2009 for all these variables? Nothing will happen to drastically change the conditions of our power and transportation infrastructure in 2009, but there will be some incremental improvements as the year unfolds. I believe there may emerge a better policy posture in power after an unduly long learning curve, but we now have a minister for power who should understand what is required. We also have the emerging outlines of a concessioning strategy for roads and an agency, the Infrastructure Concessioning and Regulatory Commission (ICRC) that can lead action in that regard.
I hold the view that the financial sector will be tighter in 2009. Banks will be dealing with several challenges-declining earnings, asset quality erosion and its accounting implications, bloated payroll (and possibly headcount), declining international lines of credit due to the global financial crisis, increasing operating expenses, paucity of attractive transactions, lower government revenue and a more difficult macroeconomic environment. It will be the first time since perhaps 1998/1999 that the sector will be dealing with such adverse circumstances and I am not convinced there is enough depth of skills and competences in the industry to handle these challenges. The implications will be tighter credit and higher interest rates! And for those hoping for a quick stock market turnaround, we have seen no reason to expect one before the latter part of 2009.
By and large, we support the government’s oil price budget benchmark of $45 per barrel, even though my firm believed a more prudent benchmark of $40 was more realistic. On the other hand, we recognise that some deficits may be tolerable in this recessionary environment to prevent a complete economic meltdown. There will be mixed inflationary pressures-Naira devaluation increasing input costs for producers and suppliers of imported raw materials and end-products but constrained government revenue and financial sector credit acting in the opposite direction. The final inflation outcomes will reflect the relative force of these countervailing pressures. We have predicted foreign reserves will be down to $50 billion or less by year end. That projection is now beginning to look optimistic with reserves already at $53billion in January!
Finally in December we advised our clients to expect GDP growth in the range of 4-6 percent. We stand by that expectation. The President’s budgetary projection of double digit growth may simply have been wishful thinking. With both oil price and volumes down, with supply and cost of credit constrained, with the manufacturing sector hobbled by power, we have only few sectors-agriculture, communication, trade and services to look up to. Those are unlikely to produce aggregate growth beyond 6 per cent.
There appear to be tentative signals that the Presidency is finally coming to an understanding of these requirements, based on the evidence from some of the recent actions of government, but then some consistency of action and “follow through” is required. Observing the volatility of the foreign currency markets in just two weeks of 2009, I was uncannily reminded of the early days of my career as a banking executive when perhaps seventy-five percent of management energies were directed towards procuring the forex needs of our clients. Those days seemed to have ended with the return of high oil prices, the build-up of foreign reserves, the 2005 Paris Club debt write-off, resumed FDI and portfolio investment, and the successful banking consolidation exercise. Today, we are reminded of the dangers of over-celebration. As I have warned long before in this column, our economic advantages though important were significantly “wind-assisted” by high oil prices and a bullish international economic environment.
Early in December while making presentations on the economic outlook in 2009 in several boardrooms and management meetings, I projected some Naira devaluation, at first to around N125 but before the middle of December, it was clear to me that we were probably going to be facing a more severe devaluation and we revised our average exchange rate for 2009 to N135-N140 to $. By and large, we stand by that projection, in spite of the volatility we have just witnessed. I would argue that the scenario in January was merely exacerbated by speculation and panic induced by the policy vacuum from the Central Bank. The financial markets hate lack of information! But one also understands Charles Soludo’s increasing hesitancy in leading policy debates. He burnt his hands in the currency denomination and dollar payment of state and local government revenues quagmire and perhaps will like to live his last days at the CBN in peace. With the Central Bank taking a clear policy position, the exchange rates will be moderated we believe to our projected range.
Beyond the exchange rate, business is concerned with the state of infrastructure-particularly power and transportation; the state of the financial sector, the availability of credit and interest rates; inflation and money supply; the stock market; government’s fiscal stance especially given the role of government in our economy; and the level of economic activity and GDP growth. What is the outlook in 2009 for all these variables? Nothing will happen to drastically change the conditions of our power and transportation infrastructure in 2009, but there will be some incremental improvements as the year unfolds. I believe there may emerge a better policy posture in power after an unduly long learning curve, but we now have a minister for power who should understand what is required. We also have the emerging outlines of a concessioning strategy for roads and an agency, the Infrastructure Concessioning and Regulatory Commission (ICRC) that can lead action in that regard.
I hold the view that the financial sector will be tighter in 2009. Banks will be dealing with several challenges-declining earnings, asset quality erosion and its accounting implications, bloated payroll (and possibly headcount), declining international lines of credit due to the global financial crisis, increasing operating expenses, paucity of attractive transactions, lower government revenue and a more difficult macroeconomic environment. It will be the first time since perhaps 1998/1999 that the sector will be dealing with such adverse circumstances and I am not convinced there is enough depth of skills and competences in the industry to handle these challenges. The implications will be tighter credit and higher interest rates! And for those hoping for a quick stock market turnaround, we have seen no reason to expect one before the latter part of 2009.
By and large, we support the government’s oil price budget benchmark of $45 per barrel, even though my firm believed a more prudent benchmark of $40 was more realistic. On the other hand, we recognise that some deficits may be tolerable in this recessionary environment to prevent a complete economic meltdown. There will be mixed inflationary pressures-Naira devaluation increasing input costs for producers and suppliers of imported raw materials and end-products but constrained government revenue and financial sector credit acting in the opposite direction. The final inflation outcomes will reflect the relative force of these countervailing pressures. We have predicted foreign reserves will be down to $50 billion or less by year end. That projection is now beginning to look optimistic with reserves already at $53billion in January!
Finally in December we advised our clients to expect GDP growth in the range of 4-6 percent. We stand by that expectation. The President’s budgetary projection of double digit growth may simply have been wishful thinking. With both oil price and volumes down, with supply and cost of credit constrained, with the manufacturing sector hobbled by power, we have only few sectors-agriculture, communication, trade and services to look up to. Those are unlikely to produce aggregate growth beyond 6 per cent.
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