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Now and again, newspaper headlines just go over the top.

Thursday last week,
on the strength of the captions alone, you’d have thought that a fresh
banking crisis was in the offing. Apparently, a new report by the
Central Bank of Nigeria (CBN) indicated that of the nation’s 24 banks,
only one has a rating above “C”, on a five-point scale from “A” to “E”,
with “A” the highest rating. A couple of paragraphs down, it is then
obvious that the report should read, “only one had a rating above ‘C’,
on a five-point…”, because the report in question is the apex bank’s
annual report and statement of accounts for 2009. Many will recall that
in August of that year, the CBN released the result of its special
audit of banks in the country. To say that this result was shocking is
to put it mildly: huge portfolios of bad loans; insider-related abuses;
and governance failures. Again, these governance questions are pushed
to the fore by the time it has taken the apex bank to publish its
report for 2009. Nonetheless, since discovering the Augean stable in
most banks’ back offices, the CBN has done its best to stem the
industry’s haemorrhage.

Why then did the
newspaper report alarm so? Partly because financial services are so
essential to the design and implementation of any economic reform
programme. Across the economy, infrastructure is noticeable because of
its absence: the transport sector is in a mess; and the power sector
shambolic. Public finances are lousy too. Now, the latter is something
of a surprise. We have earned more in recent times from increased
production of our major export item, and higher prices for it on the
international markets, than at any time in the last twenty years. Yet,
the budget deficit this year is twice what it was on the average for
the eight years to end-2007. Recent public debates suggest that a
higher burden of governance might be complicit in the difficulty
experienced by managers of the public purse. But then, neither the
nature, nor the structure of government has changed since 1999.

Whatever the
provenance of the problems on the fiscal side of government’s business,
it is obvious that government alone cannot bear the burden of
development. Private investment must bear a part of this load, if we
are to meet any of the development goals we have assigned ourselves in
anything like the times we have also committed to. In addition, even
the World Bank admits that “deepening the financial markets is a key
component of job creation”. I suppose, therefore, that this is where
the concern with the banks comes into play. It is inconceivable that
the private sector will play the roles designed for it, without access
to bank lending.

This lending has
been problematic of late. From the post-bank consolidation era, when
lending to the private sector grew at close to 100% annually, we have
seen lending reduce to a trickle. According to the most recent document
from the CBN, while credit to the private sector, grew marginally by
3.22% in the 10 months to October 2010 (or 3.86% cent on an annualised
basis), bank lending to government “grew substantially by 53.35% over
end-December 2009 (or 64.02% on annualised basis). Concerned about the
crowding-out effects of rising government expenditure and borrowings on
the private sector, the CBN has called for “fiscal consolidation and
the continuation of comprehensive economic and structural reforms to
remove supply-side bottlenecks” in the domestic economy.

How true, though, is this orthodoxy? In an August 2010 report,
“Nigeria’s Credit Squeeze and Beyond”, the World Bank argues against
the notion that there is a credit squeeze in the country. Apparently,
the phenomenal growth in bank lending to the private sector between
2006 and 2008 was not just “unsustainable”, but the bulk of this growth
did not go the way of real sector operators. It went instead to
speculative and outrightly criminal activities: margin lending; oil
importation; and insider lending. The World Bank’s picture gets uglier
at a more granular level. It appears that internal funds/retained
earnings are the biggest source (70%) of short-term finance for the
organised private sector in the country. Why, then, have we invested so
much in the bank rescue programme if “less than 1% of Nigerian
businesses ever had access to bank finance?”.