Nigeria Content Online

The
new live broadcast of the Nigerian Stock Exchange (NSE) market data on
Reuters’ system is expected to improve transparency and market
participation, a Thomson Reuters’ head has said.

Speaking
at the Lagos floor of the stock exchange, on Tuesday, to celebrate the
partnership between the NSE and Reuters, Busisa Jiya, the Manager,
Africa Markets Division, of Thomson Reuters, said the live data feed,
which was launched on December 15, 2009, gives an opportunity to
clients in Nigeria and the rest of the world to actively participate in
the Nigerian economy.

Thomson Reuters is an online source of information for businesses and professionals.

“This
broadcast will help us (Reuters) to improve the ability of the world to
see Nigeria and have access to information live; whether in the form of
data, in terms of stocks prices, or on how we can improve our news
coverage on political and economic issues,” Mr. Jiya said.

He
added that Reuters and the NSE are optimistic that the real-time data
feed that is been celebrated will bring about liquidity. According to
him, illiquidity in the market will soon end because “all our global
clients will now be able to participate in trading and stock operations
in Nigeria, and we will be able to provide our clients with answers
relating to risk associated questions.”

“We’ve
had a long relationship with Nigeria and Africa since 1960; then from
1986, with the directorate of the NSE. Today marks the day we reiterate
our commitment that we will be here for ever. We will continue to
improve the partnership we have formed,” the senior company officer
said.

Asked
what the profit sharing formula would be for both organisations in the
live date feed partnership, Musa Elakama, assistant director general of
the stock exchange, said, “There is no profit sharing between us (the
NSE) and Reuters because we are not paying them any money. It is free
of charge. We’ve been together since 1986.”

Subscription fee

Matthew
Dago, a member of the Reuters team, said the live data feed subscriber
will pay a nominal fee of about N250 per month. “The feed can be
accessed on mobile phones and the Internet. The benefit of this is that
it will help subscribers in investment decision making,” he said.

“We
hope to see more products made available in the market due to the
availability of data. Also, a greater degree of transparency is
expected in the market which will also increase market participation,”
Mr. Dago said.

Meanwhile,
Ndi Okereke-Onyiuke, the Exchange’s director general and chief
executive officer, said that the information partnership has “afforded
Thomson Reuters robust opportunity to disseminate real-time market data
from the NSE to the global investment community.”

“The
data for investors and market operators that are being provided include
the bid/ask prices, volumes, latest trades and market depth information
on equities and indices listed on the Exchange,” Mrs. Okereke-Onyiuke
said.

“The development has also enhanced accessibility to the NSE’s data, thereby reinforcing market transparency.”

Strategic improvement

She
said the NSE had in 1986 signed on Reuters to transmit stock market
data through a Electronic Contributor System. The NSE’s boss added that
the current real-time dissemination of the Exchange’s data marks a
“strategic improvement in the information partnership” between the two
organisations.

In
a vote of thanks to the guests, the spokesperson for the stockbrokers,
Babatunde Sobamowo, managing director and chief executive officer of
Global Assets Management, said, “We give thanks to Reuters for dimming
it fit to extent their business formation process to Nigeria at no
cost. We need to let the world know what is happening in Nigeria; that
is why the information partnership is quite timely.”

The International
Monetary Fund (IMF) says it anticipates that exchange rate pressures
and volatility will persist for some time in Nigeria and other
Sub-Saharan African countries, according to latest report posted on its
website:

“African economies
can expect exchange rate pressures and volatility to persist for some
time. Shifts in commodity prices as well as in portfolio and other
private capital flows are likely to continue given the highly uncertain
trajectory of the global recovery, the geographic rebalancing of trade
flows, and volatility in the exchange rate of the main currencies,” the
IMF said after an analysis of the evolution of exchange rates of
sub-Saharan African currencies in the context of the global financial
crisis.

The report, which
focused on the differences in the magnitude and volatility of the
exchange rates among countries, was drawn from a sample of seven
countries, four members of the East African Community (EAC) (Kenya,
Rwanda, Tanzania, and Uganda), and three others, which experienced
large exchange rate losses at the outset of the crisis: Ghana, Nigeria,
and Zambia.

External Factors affected exchange rates

The IMF cited
external factors that reflect the transmission of the global crisis
through the trade and financial channels as well as the volatility of
the U.S. dollar, the main international reserve currency.

Abrupt fluctuations
in capital flows also contributed to exchange rate movements. “A
tightening of credit conditions in global financial markets and a
decline of confidence triggered a frantic race to safety by private
investors at the onset of the crisis. As expected, the resulting
depreciation was more pronounced in those countries that had received
large portfolio inflows prior to the crisis (Ghana, Kenya, Nigeria,
Uganda, and Zambia).”

The volatility of
the U.S. dollar as a reserve currency also had a strong effect on
African currencies. The dollar rose sharply against all currencies,
amplifying the depreciations that were triggered by other external
factors.

Challenges and implications

The IMF stated that
exchange rate volatility could hinder progress with financial
integration, skewing capital flows toward short-term options at the
expense of longer-term investment.

Lydia Olushola, an
economist and a consultant at Sky Trend Limited, a finance service
firm, said that real exchange rate is one of the major relative prices
in an economy, which actually defines the rate of exchange between
domestic goods and their foreign counterparts, and as a result, its
volatility has economy-wide implications.

“Exchange rate
volatility has real economic costs on an economy. It affects price
stability, firms’ profitability, and the country’s financial stability,
as a whole. Exchange rate volatility is also influenced by and
correlated to domestic economic uncertainty.”

She added that
countries have reasons to be worried about exchange rates volatility as
it may hinder international investment flows. “Companies may also be
reluctant to establish new firms or purchase existing ones in such
countries as exchange rate uncertainty reduces the expected profits
from such projects.

“Volatile exchange
rates also create uncertainty about income expected to be earned on
international transactions. It is one of the reasons some firms add
some allowance to all they sell to be on the safe side. These costs are
then passed on to consumers in form of higher prices, and then you know
what happens. Even traders would also be reluctant in their businesses
too as the volatility in the exchange rates adds additional risks to
their expected gains,” she said.

IMF’s remedy

The IMF however,
outlined ways of escape, both for the short and long term, to the
countries that are still experiencing exchange rates volatility, adding
that the deepening domestic financial markets is key to enhancing their
capacity to handle external financial volatility over the long term:

“Broader bond
markets will allow diversification into longer-term investment
instruments—important for long-term investors. Developing forward
hedging instruments would also generate some stability in the foreign
exchange market by reducing forward settlement risks.”

Nigeria’s Naira stable

Bismarck Rewane,
Managing Director, Financial Derivatives Company, a finance and
research analysis firm and Member, National Economic Steering
Committee, is however, confident that the Nigerian Naira would remain
stable.

“The Naira is
expected to remain stable because higher oil prices will boost the
accumulation of external reserves, and this will also be supported by
increased sale of Forex by oil majors. The Naira remained unchanged at
N148.6to the dollar in the official market in February. In the parallel
market, it appreciated marginally by 0.32 per cent to N152 to the
dollar from N152.5 to the dollar the previous month. The FOREX demand
however, surged 7% to approximately $1.2 billion in February.

“The gain in
parallel market has been attributed to the increase in forex supply
from the Central Bank. The Year on Year spread between the official and
parallel rates narrowed by 87. 41% to 3.29 from 26.15 in 2009,
indicating a relatively more stable forex macroeconomic compared to
what obtained the previous year,” he explained.

Nigeria’s foreign
exchange market has remained relatively stable since the 2010 year
began. Sanusi Lamido Sanusi, the governor of the Central Bank of
Nigeria, in November 2009, said the Naira will trade between the N150
to $1 band till it finally regains full stability.

Consumer prices in
China rose 2.7 per cent in February over the year-earlier period,
according to data released on Thursday, partly attributable to the
Lunar New Year holiday but also to the rising inflationary pressures in
China’s economy.

Other data, on
Thursday, reflected China’s continued strong recovery from the global
economic crisis. For the combined January to February period, which
factors out distortions from the Lunar New Year holidays, industrial
output expanded by 20.7 percent and retail sales rose 18 per cent
compared to a year ago.

Those figures followed data on Wednesday that showed robust growth in both China’s exports and imports in February.

No shift in economic policy

Overall, economists
said the picture suggests no shift in economic policy is in store,
although interest rates on loans are likely to rise as China strives to
hold down inflation.

While inflationary
pressures are clearly building, “current inflation is still modest,”
said Ken Peng, an economist with Citigroup Global Markets in Beijing.
“Right now, we are still okay. This is not going to cause any panic
among policy makers.”

Jinny Yan, an
economist with Standard Chartered Bank in Shanghai, said the data
released this week does not suggest China’s economy is overheating,
despite pockets of speculation, especially in the red-hot property
market.

“We see the recovery continuing to keep its momentum,” she said. “The policy makers will continue to hold their stance.”

Drop in food production

China’s leaders
insist that inflation as firmly in check, below the government’s target
of three percent. The 2.7 per cent increase in February followed a 1.5
percent increase in January. Food prices led the way, a potentially
troublesome sign for the leaders of a country where as much as 40 per
cent of poorer household budgets go to food.

But prices are
typically jacked up during the Chinese New Year holidays, when families
tend to splurge on food and gifts. The National Bureau of Statistics
also blamed the harsh winter, which it said hurt food production.

A spokesman for the
bureau, Sheng Laiyun, predicted prices would come down after the spring
harvests. “We don’t see any signs of economic overheating,” he said.

China’s deputy
central bank governor, Su Ning, told reporters last week: “We believe
we can successfully contain inflationary pressure this year.” He said
the bank was more concerned last year, when prices fell for nine months.

“While we don’t
want to see prices rising too fast, the current situation is necessary
for the development of our economy and cannot be described as
inflation,” he said.

Other data released
on Thursday showed the government’s efforts to rein in loans after last
year’s lending spree, which was designed to spur the economy. Chinese
banks lent only about half as much money in February as they did in
January.

Premier Wen Jiabao
announced that China would lower its lending target for this year to
7.5 trillion renminbi, or $1.1 trillion, about 72 per cent of the 9.6
trillion renminbi in 2009.

The central
government, twice this year, increased the amount of money that banks
are required to deposit with the central bank as a monetary reserve
rather than lend to customers.

Many economists predict one or more interest rate increases in the
coming months, but higher interest rates are unlikely to threaten
China’s economic recovery because growth is governed more by the
availability of loans more than their cost, economists said.

Some finance
experts in the education sector have warned that corruption and lack of good
corporate governance in business organisations are a threat to national
development.

Soji Apampa, an
Executive Director at Integrity Organisation, a consultancy firm, said that
corruption in business damages the ability of a company to “effectively and
efficiently utilize the resources available.”

Speaking at a
one-day meeting of accountants in education, organised by the Institute of
Chartered Accountants of Nigeria (ICAN), Mr. Apampa said that “corruption has a
negative impact on national development because it makes the people on the
advantage side (close to government) gets richer while those on the disadvantage
side gets poorer.”

Corporate governance

Citing an
example of a corrupt system, he said, “So much is budgeted for education at the
national level but just a faction of it is felt at the local level where it is
supposed to have impact, and that is destroying the quality of education that
is possible.”

Speaking on the
topic “Corporate Governance and Disclosure: The Impact of Corruption and
Accountability on National Development,” he said, “Corporate governance is a
system by which companies are directed and controlled. It is supposedly carried
out by board of directors for the benefit of the company’s operators to provide
direction, authority and oversight management.”

He added that
corporate governance “ensures that the board of directors is accountable for
the pursuit of public objective, and that the corporation itself conforms to
laws and regulations,” he said.

Explaining from
the economic perspective, Mr. Apampa said corporate governance is a tool in
investigating the efficient management of corporations in the use of mechanism
such as contract, organisation design, and legislation. “It also improves
financial performance. It addresses the issue of divorce between ownership and
control of organisations,” he said.

According to
him, the basic tasks of any board are to have foresight, set up strategies,
delegate responsibilities, and providing general oversight for the company.

Mr. Apampa also
said, “a good corporate governance is impossible without appropriate levels of
disclosure that involves dividing to each company’s operator the type of
information to which they have a right.”

He, however,
added that “appropriate disclosure assumes that there will be appropriate
governance of scrutiny” which should enforce accountability.

Speaking on a
similar topic, Ishola Akintoye, Head of the Accounting Department of Olabisi
Onabanjo University, Ogun State, said, “A company where good corporate
governance is expected must have a well-functioning board, accountability, clarity
of purpose, transparency and openness.”

He said the
qualities of good corporate governance are trust, credibility, legitimacy, the
ability to weather crises, a climate and relationships that ensure financial
stability.

Mr. Akintoye
also maintained that “if a company’s process of bringing people to the top is
defective, there will be problem. You cannot create legality out of
illegality.”

Also, Adekunle
Owojori of the Department of Accounting, University of Ado-Ekiti, Ekiti State,
said that corporate governance and business ethics that examine immoral
practices.

Mr. Owojori
said for corporate governance to be effective practice, “all audit committee
members must be financially literate.”

Fighting corruption

On how to
combat corruption, he said that a professional and well-motivated civil
service, budget reform, and a strong judiciary system are required. He added
that civil societies and the media also have roles to play.

Meanwhile,
Elizabeth Adegite, the president of ICAN, said that the issue of corporate
governance “is that of change of attitude and reorientation of all Nigerians,
whether professionals or not.”

She said,
“Corporate governance is important to the institution because charter
accountants are in the middle of all these issues. Internal and external
auditors, consultants, chief executive officers, board of directors are charter
accountants. So we must take responsibility as professionals and chart a course
on how to engage in good practice.”

However, she
said that ICAN has a code of conduct for charter accountants.

“If anybody gets wanted
after our investigation, disciplinary actions will be taken appropriately. And
this is why we say the certificate you hold as a charter accountant is the
property of the institute, it can be revoke if indicted.”

The Central Bank has stated that the sale of the rescued banks will be made open to all willing investors, local and foreign, even if they are old owners of the banks.

The Central Bank’s spokesperson, Mohammed Abdullahi, said it is a free and fair competition for willing individuals.

“As far as we are concerned, anybody that is bringing the money in for recapitalisation is free to compete, subject to the conditions that we have drafted and that they are aware of. However, it should be clear that we are not returning the banks to the former owners.

If they have the money to recapitalise the banks, and can also afford to return the money the Central Bank used to bail the banks out, they are welcome. It is open to everybody. There is no restriction there,” he said.
Old shareholders show interest

Speculations are rife that old shareholders of the rescued banks are interested in buying back the banks.
A source at Oceanic Bank said that major old shareholders are interested in buying back the bank. “I do not think this should be a controversial issue.

There should be a fair ground for intending investors, irrespective of whether they used to be shareholders here or not. The recapitalisation is in progress and former shareholders are already indicating that they want to reinvest in the bank,” he said, declining to reveal the identities of the interested parties.

“Everything is possible within the environment we find ourselves,” a source at FinBank said. “Even the Central Bank brought up the idea that they may grant the bank shareholders an opportunity to recapitalise if they are capable, so it’s been in the public discourse. However, narrowing it down to FinBank, it is not to my knowledge that there are moves by old shareholders to buy back and you know that there is no formal way to know until it is communicated to us officially,” he said.

The story was the same at Intercontinental Bank, where an official said that there is no official notification by the old owners of the bank indicating a buy back. “I have made enquiries. Presently, there is nothing like that happening now,” he said.

Last month, the Central Bank announced that it held an interactive meeting with the shareholders of the 10 affected banks comprising their directors and principal shareholders. According to Mr. Abdullahi, the objective of the meeting was to inform the stakeholders on plans for the implementation of the second phase of the banking sector reforms.

The banks comprised of Afribank Plc, Bank PHB, Equitorial Trust Bank Ltd., FinBank Plc, Intercontinental Bank Plc, Oceanic Bank International Plc, Spring Bank Plc, Unity Bank Plc, Union Bank of Nigeria Plc, and Wema Bank Plc, who were represented by their respective board members, management and independent shareholders.
Equatorial Bank’s case

Although old shareholders may feel free to compete with other investors to own shares of the rescued banks when the banks are fully up for recapitalisation (which is already in progress), any bank whose shareholders desire to outright buy back will go through stated terms and conditions relating to the specific objections raised by the regulatory body, Mr. Abdullahi explained.

Among the 10 banks, only Equitorial Trust Bank’s shareholders have officially indicated to be allowed to rectify its shortcomings. In a statement issued by the Central Bank the shareholders executed a deed of covenant, with specific terms and conditions.

In granting the bank’s requests, the CBN noted that “the Special Examination had not raised issues of serious supervisory concern or criminal activity by any member of the Board of ETB,” adding that it will closely monitor the implementation of the terms of the covenant to ensure that the lapses are fully rectified and in the overall interest of the banking system.

The European
Central Bank and the Bank of England left their benchmark interest
rates unchanged at historic lows Thursday, as both worried about the
strength of the economic recovery.

The European
Central Bank, which sets monetary policy for the 16 countries in the
euro zone, left its benchmark interest rate at 1 per cent, where it has
been since May. The bank believes that the euro-zone economy remains
too weak to create an imminent danger of inflation.

In Britain, which
just barely emerged from recession last quarter, the Bank of England
left its benchmark rate unchanged for a 12th month, at 0.5 percent.

Fear of recession

Bank of England’s
committee members, meanwhile, are watching closely for any signs that
Britain’s fragile economy could relapse into a recession. Gross
domestic product rose 0.3 percent in the fourth quarter from the third
quarter, the office for national statistics said last month, revising
an earlier estimate upwards.

“It’s pretty
unlikely they’ll do anything for the next six months,” said James
Knightley, an economist at ING in London. “The environment is still
very uncertain. If the data continues to show a gradual improvement,
they will just keep everything as it is.”

The fear of rising
unemployment and concerns about the sustainability of house prices,
which remained relatively high, is prompting consumers to curb
spending. Unemployment unexpectedly rose in January to the highest
since 1997.

Tight housing
supply and low interest rates are expected to keep property prices from
falling this year, the Royal Institute of Chartered Surveyors said
Tuesday, easing some pressure on homeowners. Still, the availability of
credit remained under pressure as some banks are concerned to meet any
future regulatory requirements. Mortgage approvals dropped to the
lowest level in eight months in January.

Uncertainty about
the outcome of the general election, which is expected to be held
within the next three months, and whether the new government would push
ahead with large-scale spending and job cuts in the public sector meant
consumers were increasingly holding off big purchases. Yet, unsecured
debt rose as Britain’s already indebted consumers borrowed more through
credit cards and personal loans in January.

The pound fell to
the lowest in 10 months against the dollar on Monday before it started
to recover on Wednesday amid concerns Britain might soon face a similar
sovereign debt crisis to Greece. The Bank of England voted last month
to halt its program to purchase government bonds and other debt to
strengthen the economy but said it would not rule out continuing the
program should the economy deteriorate again. The bank is expected to
review its decision in May.

Implication of too much available cash

In the euro area,
the European Central Bank president, Jean-Claude Trichet, and the
bank’s governing council are cautiously draining the cash they began
providing in October 2008 after the collapse of Lehman Brothers brought
interbank lending practically to a standstill.

The bank is
concerned that too much available cash will fuel inflation or asset
bubbles of the type that preceded the 2008 crisis.

The central bank
may be ready to return to competitive bidding to set the interest rate
on three-month loans, which would raise costs for banks. But amid
nervousness about Greek debt and signs that some institutions are still
dependent on central bank funds, the bank is expected to continue
providing unlimited financing on a shorter-term basis.

The European
Central Bank has already stopped making any more 12-month loans to the
roughly 2,200 banks in the euro zone that are eligible. The bank said
in December it will make the last round of six-month loans at the end
of this month.

The central bank
had extended the time periods for loans beyond the customary three
months to encourage institutions to continue lending to the private
sector. The bank also allowed banks to borrow as much as they wanted at
the benchmark interest rate, provided they could supply collateral. And
it expanded the definition of the kinds of bonds and other securities
it accepted as collateral.

Analysts say they
expect the European Central Bank to continue providing unlimited funds
for one-week periods, to avoid a crunch as the longer-term loans expire.

When Mr. Trichet
holds a news conference this afternoon, analysts will be watching for
any revision of bank staff estimates of euro-zone economic growth.
Currently the bank projects growth in the euro zone of 0.8 percent this
year and 1.2 percent in 2011.

Nigeria’s United
Bank of Africa (UBA) has started operating in Zambia with a capital
investment of $15 million as it seeks to expand its influence on the
African continent, Chief Executive Officer Abba Bello said on Thursday.

Mr. Bello told
Reuters one UBA branch was already operational in Lusaka and the bank
planned to open two more in the country’s mining towns on the
Copperbelt and another in Solwezi, which hosts two key mines in
Africa’s largest copper producer.

“Our focus is on
wholesale and retail and we play in all sectors of any economy that we
are in, so when you say mining, yes we will be in mining but we will be
in all sectors of wholesale space in Zambia and we will support that
with retail play,” Mr. Bello said.

Mr. Bello said UBA hoped its growing influence in Africa would help boost trade and spur the continent’s economic growth.

“UBA is here as a
vehicle to ensure that Africans have their own bank that can assist in
empowering indigenous Africans in growing intra-African trade and trade
between Africa and the rest of the world,” he said.

Mr. Bello said with the start of operations in Zambia, UBA was now present in 17 countries in Africa.

In October, UBA
launched its Kenyan operation to compete with pan-African group Ecobank
Transnational Inc which began working in Kenya in 2008.

Bello said the competition, brought about by the opening of more
banks in Zambia, which now has 18 banks, and favourable economic
indicators in recent months would help bring down interest rates.

The newspaper headlines, as usual, differed from the content of
the news stories they pointed to. However, the gist of it all was that at a
recent conference in Lagos, the Minister of State for Finance, and the Governor
of the Central Bank of Nigeria (CBN), did not quite see eye-to-eye on the apex
bank’s current reform initiatives.

I seriously doubt, to begin with, that as the media reported,
the honourable minister questioned the necessity for the CBN’s operational and
statutory independence. Despite the sundry dislocations occasioned by the
global financial crisis, a central bank’s independence is not one of the values
that have been called to question. Even in economies such as ours, where
governments have made a good fist of their work, this concept has played a key
role in achieving low inflation.

Still, we could differ on the chances that we would always get
competent hands to run the central bank to ensure that its medium-term take on
price directions in the domestic economy are robust enough to act as a foil to
the politicians’ narrow focus on the short-term imperatives of the four-year
electoral cycle.

Nevertheless, we ought no longer to tolerate a situation where
fiscal and monetary policies are decided in the same room, by the same people
(especially, when this latter lot are beholden to political interests). Of
course, one lesson from the current crisis comes out of the fact that fiscal
policy did take up the slack once monetary policy reached its limits. I would
thus be in the vanguard of any call to strengthen collaboration between
monetary, regulatory, and fiscal policies going forward.

On the question of the central bank’s competence, it is hard to
conclude otherwise than that the incumbent governor has done this economy a
world of good. It is so illogical that we should clamour to trade in a final
cure (because of a near-term allergic reaction) for a major ailment. Of course
we now know that it is proper policy to maintain a firewall between regulators
and the industry they regulate. It is obvious too, that banks occupy a hallowed
place in the economy; although we’d always suspected this from the relationship
that existed between demand deposits, which sit on the liabilities side of
banks’ balance sheets, and the credits they create which sit on the asset side.
Once impaired, especially by the markets’ beginning to question the soundness
and stability of the system, the resulting runs on deposits, affects the
industry’s ability to create loans. Unfortunately, banks’ ability to create
loans on a sustainable basis does matter for any economy’s growth.

The central bank governor

What about the person of the central bank governor? Sanusi
Lamido Sanusi has been described as too showy; a caudillo. In mitigation, we’ve
heard arguments in favour of “stronger institutions”; and inscrutability as a
preferred attribute. Now, I cannot recall many strong institutions that have
been built on the back of invertebrate leadership. Conversely, the gnomic Alan
Greenspan is often indicated as the ultimate model of a central bank governor.
How useful is this? If any financial market took its cue from the coordinates
of its central bank governor’s eyebrow, this was undoubtedly because the market
works well, and that this semaphore had been integrated in its signalling
mechanisms.

But the point of the CBN’s current work is the fact that the
domestic industry had become a burlesque of bank practices. Markets were skewed
so badly that the price mechanism worked selectively, and interested party
transactions held sway over many business decisions.

Financial accounting was a joke. The flipside of this is that as
we make our way tentatively out of the current crisis, we can no longer argue
that financial regulation should remain outside the macroeconomic framework.

When the CBN governor says the reforms are a process, not a
destination, it is my understanding that the apex bank is moving from financial
regulation as a tool for addressing the failings it has since discovered in the
industry, towards using its capacity to design prudential rules for the
industry, to address broader macroeconomic questions, including using it to
moderate the boom-bust cycle.

How do we get the
banks to resume lending to key sectors of the economy? And how do we
reverse market sentiments (capital and funding markets to be precise)
in favour of the financial services industry? These questions have
furtively moved to the top of the list of the average Nigerian’s
worries over how to move this economy away from its addiction to oil,
and into rehab. Apparently, in respect of financial sector worries, not
much will be achieved before something is done about the banks’ loan
books.

At the height of
the last economic bubble, banks were lending as if the funds they were
holding would burn a hole in their vaults otherwise. With the massive
increase in access to retail credit, consumer spending jumped as a
proportion of domestic output. Domestic output growth in turn drove
increases in banks’ deposits, allowing the banks to lend more over the
next cycle, and so on. When the floor came off the home mortgage market
in the United States, this virtuous cycle turned vicious very quickly.
The bottom fell off the local stock market, and with stock prices
plummeting, most bets on the trajectory of the equities market came
unstuck. Since a goodly number of retail investors had piled into the
market with nothing but the prospects of the virtuous cycle supporting
their punts, the nation’s nest egg ended up trapped in the equities
market.

Loans default

With borrowers
unable to meet their obligations, the downturn has meant that banks
have a portfolio of loans on which they haven’t earned anything in a
long while. Even when most banks in the country have taken losses on
the unprecedented levels of provisioning they have had to make to clean
their balance sheets, they cannot create new assets until they have
sorted this mess out. And the markets, investors largely, will not take
this group of businesses seriously, as long as their balance sheets
still contain so much dross.

Enter the Central
Bank of Nigeria. If the central bank governor is to be believed, the
bank’s intervention in the market thus far is anchored on four pillars:
enhancing the quality of banking in the country; ensuring financial
stability; ensuring healthy financial sector evolution; and making sure
that the financial sector contributes to the development of the
economy. Its proposal to clean up the banks’ balance sheets with the
Asset Management Company (AMC) must thus be interrogated within this
context. The plan is for banks with large non-performing loan burdens,
to move these assets off their balance sheets and onto the books of the
Asset Management Company. The company then bears all the risks of the
assets transferred, and arranges to deconsolidate the bad loans through
sale to external investors. Meanwhile, the banks obtain a fresh lease
on life from the ability to use their newly clean balance sheets to
restore their profit and loss accounts.

Commentaries on the asset company

Most commentators
on this proposal have focused on the cost of this process. For
instance, given the trillion naira estimates of the size of the
non-performing section of the banking sub-sector’s loan book, how
adequate would the N10 billion proposed as initial capital for the
asset company be? There are other costs: legal, tax, regulatory, and
accounting. How much forbearance would government and the regulatory
authorities have to offer banks to ease the proposed asset transfers?
Then, there are governance matters. Would the process be better served
by establishing an independent valuation process/agency? What other
incentives would the banks have to sell these assets, after providing
fully for them? The eventual look of the banks will depend on how the
final structure of the company combines these variables.

Important, though
all these are, one point is sorely missed: Transparency. It is the lack
of transparency on the books of the severely burdened banks arising
from their bad loans portfolios that interferes with the capital and
funding markets’ interest in these institutions. The value of the
banks’ loan books, the risk transfer process, and the rationale for the
forbearances that the regulators offer to sweeten the transfer process
must be as plain as a pikestaff if the process is to result in a
re-opening of the banks’ access to new funding sources. This
requirement is even more crucial in the context of the CBN’s barely
concealed desire to have new capital come into the industry.

So
the Central Bank of Nigeria (CBN) would like to see credit to the
private sector grow by more than it has done in the past year?

Credit has strong
uses in most modern economies. Just before the last global crisis
broke, credit-based consumer spending accounted for about 75% of output
growth in the United States. Moreover, current International Monetary
Fund (IMF) estimates indicate that stronger consumption in the US has
been part of the new recovery. Credit works for business investment
too; and when government borrows, it drives government spending.

The apex bank is
thus justified trying to resuscitate bank lending. To this end, it has
tied itself up in several knots. It has eased monetary conditions, only
to find banks building up liquidity in the wrong places, including
balances with it. It has tinkered with the corridor around the policy
rate, trying to discourage banks from warehousing surplus funds in the
CBN’s vaults.

Still, the banks
would rather keep such money with the apex bank, and earn 2% on it,
than lend to sectors of the economy where higher returns might be met
with. When you consider as fact that one of the main responses in the
markets to the current crisis has been for depositors to demand higher
returns on their funds with the banks, then the banks’ behaviour
becomes harder to explain. Surely, there must be better ways to lose
money?

Put differently, is
it enough for banks to have a surfeit of cash in order that they may
lend money? In response to the global and local shocks that have hit
the industry, most banks have tightened their risk acceptance criteria.
They have not only shortened the maturity profile of new loans, they
are more prone to demand that would-be debtors meet requirements that
were not in place nine months ago. Again, we imagine that further down
the road, these loan covenants will firm even more. This would follow
naturally, as risk management frameworks are strengthened in response
to the lapses unearthed by the CBN’s recent special audit.

There are other
worries, not least of which is the fact that most of the banks that
have been at the receiving end of the apex bank’s monetary forbearances
are still in the process of rebuilding their capital. Add to this, the
on-off debate over the extent to which current levels of provisioning
may have sufficiently addressed the industry’s portfolio of
non-performing loans, and the effect on bank lending of current
proposals by the Basle process to raise the industry’s capital adequacy
ratio.

But none of these
attend to the question of how strong the demand for credit is. Current
concern with the supply side of the market for credit is all very well.
However, no less crucial is the need to establish whether there is a
market out there for loans. Are there investment vehicles?

Did the stock
market bubble not inflate largely because the banks had no other place
to put these funds? And what has happened to non-bank sources of
credit? Why have these not taken up the slack from the failure of bank
credit?

The more probable
cause of the credit market problem is that there are major structural
policy challenges constraining the supply and demand sides of the
market.

Until recently, the
downstream sector of the oil industry was a major market for bank
credit. Apparently, the central bank’s intervention at some point dried
this market up. Now, the banks are asking that would-be importers of
fuel obtain promissory notes from the federal government before they
provide the necessary trade finance cover. Because government has
refused to meet this demand, oil importers haven’t had access to the
credit necessary to remove the unsightly fuel queues from our roads. Of
course, government’s practice in the past of not paying these importers
on time was the one reason why their bank facilities did not perform.

Until issues of
this nature are addressed, and you want to add the difficulty with
passing the petroleum industry bill to this list, I am not sure that
the market for credit in this economy will pick up.