Last year, the chief executive officers of Nigerian banks asked the federal government to intervene in the nation’s financial sector in order to minimise the effect the global financial meltdown would have on Nigeria. As a result, there are reports that the federal government might soon be part owners of some banks. Hitherto, the central bank governor has consistently assured Nigerians that the country’s banks are healthy and needed no handouts.
By Olusegun Sotola and Kayode Olowookere
Of all 25 major banks in the country, none had publicly expressed the desire to be helped. At least their financial statements and huge undisclosed bonuses paid to top executives, which reflected in their exhibition of opulence, assured customers that their savings were not only safe, but was yielding attractive dividend.
It is therefore worrying how suddenly the same banks that were said to be in excellent health are now asking for government bail outs and in some circumstances partial take-over by the government. It is clear that the public was manipulated into believing the concocted figures that were churned out annually by banks.
As if the bail outs and partial ownership pills are not enough, there is a silly suggestion that the government should re-invest in banks. Under this arrangement, government will acquire a controlling stake of 30% in some of the banks. Whilst it is predictable what line of action the federal government will take, partly influenced by global examples, the general question being asked by many Nigerians is what thought pattern produces government as the best cure to the self-induced ailment of the banks?
Before the banking sector was liberalised in 1992, banks were characterized by large-scale mismanagement. Banks became appendages of political parties depending on whichever was in power. Appointments onto the board of many banks were not based on merit. Sound banking practices were jettisoned and as a result the survival of banks was hinged on cyclical government funds.
Privatisation, however, changed the banking scene, as it effectively ended government intervention in the banks. This helped in curbing mismanagement and inefficiency. Bureaucracy gave way for improved and prompt decision-making process, particularly, in area of marketing and product innovation, necessitating increased market competition and improvement in the asset quality.
A misguided aconomic folly
But all of these gains are being whittled away by the deep cracks that had underlain the liberalised industry all this while. Perhaps that is the beauty of running an open society. A free society while it rewards, also punishes, so we all can learn from our mistakes. The call therefore, for government to re-invest in banks at this point is largely misguided and economic folly at best. The cardinal duty of government is to provide the regulatory framework under which the banks operate and create a favourable climate conducive for them to contribute meaningfully to the growth of the economy.
Experience has shown there are incentives for government owned banks, partially or wholly, to be mismanaged. This is because government is assumed to have limitless sources of revenue that will always be a safety net. The urge to be frivolous and extravagant is high. This was the nemesis of the big governments sponsored enterprises, Fannie Mae and Freddie Mac, in the United States of America.
But there is a greater danger. Government acquisition of equity in some banks will obviously create good bank and bad bank mentality except the plan is to re-invest in all banks. Government backed banks become good banks. Depositors will move their funds from “bad” banks. This was the experience in UK late last year when depositors instantly moved their funds to Irish government- guaranteed banks.
Government re-investment in banks will have a devastating effect on the entire banking sector. A change in government will ultimately undermine and affect board composition and performance. Besides re-igniting loss of confidence in our banks as was the case in the 90s, taking beneficial long-term decisions will be a mirage. Expectedly, internal squabbles and boardroom politics will be full-blown and take the center stage.
CBN and NDIC guilty
However, if the recent Economic and Financial Crimes report confirming the true financial standing of most of the banks is anything to go by, it is an indictment on Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC). It further calls in to question the central bank’s claim that post-consolidation Nigerian banks have a total balance sheet of about N10.43 trillion, a growth of 277% in between 2003 and 2007. A figure this large signifies depth – a N388billion capital market loan exposure is not supposed to rattle them even if gone badly.
Government involvement in the banking system merely overshadows the gains of reforms in the financial sector. It is a road we have traveled before. It leads to nowhere. Part of the reason government divested state-owned financial institutions and other state-owned enterprises was largely because such investments were a drain on the national purse.
It is crystal clear that the global financial meltdown is adversely impacting the local economy. However, if there are any bail outs to be given, it is certainly not only the financial sector. Other sectors may be. But the danger is that once a bailout is offered to a particular sector, other sectors stand in line to ask for support. It is doubtful if the federal government would be able to rescue all the sectors without running into a financial ditch.
Unfortunately, government intervention in the banking sector will be a reward for some bank chief executives who have become richer than their banks. It would be an incentive for the chief executives to continue what brought most of the banks to their present state.
* Messrs Sotola and Olowookere are with Nigerian think tank, Initiative for Public Policy Analysis, which is an affiliate of African Liberty