Guardian

Post-consolidation was heralded with optimism as banks posted huge profits years after. But the trouble started when, irrespective of the profits churned out, the banks could not hold their own. The present banking reform has kicked off with profit declaration post-reform. Is this time any different? What is the guiding word for banks in 2013?  CHIJIOKE NELSON writes.

IT is normal to expect a business to yield profit as a reward to risks and factors of production invested. But the size of profit is always partly a matter of the organisation’s economy of scale- internal and external, which cannot be taken away from an establishment’s survival strategy.

While it is natural to expect a business to make profit, it would be a rude shock to know that some businesses might declare profits and huge one for that matter, when they are in the red line.

This was the case of Nigeria’s money deposit banks, which in recent years, declared ‘fatty’ profits, while there were ‘deafening’ irregularities and anomalies in their respective operations, including non-performing loans, occasioned by lack of corporate governance and ethics.

The post-consolidation era was precisely marked by the trend just mentioned. But, after these years of dealing treacherously with depositors’ funds and the consequences that followed, namely taking over of three banks by the government and the acquisition of two by other banks, the dusts may have seemed to be settling. But could it really be?

The Managing Director and Chief Executive Officer of the Nigerian Deposit Insurance Corporation (NDIC), Umaru Ibrahim, last year, said that the nation’s banking sector recorded improved performance in nine months, from December 31, 2011, as its total asset grew by 5.44 per cent. Since this year, almost all the banks in the country have declared their respective first, second and third quarters result, even as customers and investors currently await the fourth quarter and full year report, going by directives by the Central Bank of Nigeria (CBN) to financial institutions, to ensure uniform account reporting.

CBN Governor, Lamido Sanusi, at the sixth Financial Regulators’ Forum plenary session, in Abuja, said that Nigerian money deposit banks are now stable, but warned that their profitability could hinge on the diversification of their revenue sources, which must not stampede consumer rights.

The NDIC helmsman also warned financial institutions not to let down the guard on corporate governance, which caused the near collapse of the nation’s financial system recently, pointing out that its 2011 report showed that lapses in corporate governance may have started again in some banks.

Perhaps, the warning may have raised another poser over the sustainability of their respective profits so far declared and the end to persistent rounds of banking reforms, which would always weed out the weak links in the system, leaving few that would eventually dominate the rest.

NDIC said as at December 31, 2011, the total asset was put at N18.20 trillion and grew to N19.19 trillion as at September 30, 2012. Other areas in the banking sector performance included rise in loans and advances, which recorded a 16.2 per cent increase from N6.42 trillion to N7.46 trillion in the period under review.

Confidence in the nation’s banking system was also on the rise as total deposit liabilities grew by 6.57 per cent from N12.33 trillion to N13.4 trillion, made up of over 53 million depositors. According to Ibrahim, all the banks met CBN’s prescribed minimum liquidity ratio of 30 per cent during the nine-month period.

The three rescued banks– Mainstreet Bank, Enterprise Bank, and Keystone Bank also had a combined total assets of N928.7 billion, a total deposit of over N1.2 trillion (4. 45 per cent in the industry) and total credit of N126.27 billion (16 per cent in the industry).

However, the regulator’s e-payment and financial inclusion drive, which could have deepened the profits of the banks, suffered some challenges, which were widely acknowledged, though not without a notable positive contribution to the economy.

Among the challenges, according to Enhancing Financial Innovation and Access (EFInA), were the absence of relevant and reliable data, analysis about how individuals and households manage their finances, the right financial products, consumer protection and financial literacy, among other critical issues, were the biggest hurdles to improving access to financial services in Nigeria.

EFInA said only 37.8 million Nigerians, representing 43 per cent of the adult population, have access to and/or use formal financial services, while 34.9 million Nigerians representing 39.7 per cent of the adult population, are financially excluded. The good news is that between 2008 and 2012, the number of adults that are financially excluded decreased by 10.5 million.

Highlighting the major threats being posed to the economy by high levels of financial exclusion, the body said the nation is presently losing opportunities for business growth. In the absence of finance, people, who are not connected with the formal financial system lack opportunities to maximise their income and expand their businesses.

Even CBN corroborated the EFInA’s position when it said, “there have been some improvements in the move to drive financial inclusion in Nigeria, however, we still have a lot of issues to cover, such as access to financial services and to the right financial product.

“In addition, consumer protection and financial literacy are critical issues that are paramount to making financial inclusion work. The Central Bank, therefore, has set a target to reduce the percentage of financially excluded adults to 20 per cent by 2020, as stated in the National Financial Inclusion Strategy.”

NDIC also noted that during the period under review, there were 73 petitions/complaints, which bordered on excessive charges, breach of trust, abuse of trust by Asset Management Company of Nigeria appointed directors and failure to credit account, which also bordered on the rights of consumers.

It said that 65 of these complaints have been concluded, while appropriate sanctions, including directing the affected banks to refund their customers, were ruled. Ibrahim noted that all the 20 banks operating in the country paid their 2012 premium, through direct debit from CBN, amounting to N61.3 billion.

Dr. Regina G. Okafor of the Department of Accountancy, University of Nigeria, in her “Performance Evaluation of Nigerian Commercial Banks: Before and After Consolidation,” noted that “total bank credit showed a positive trend in the post consolidation era, though not consistent. It improved from N1.13 trillion (2004), N1.47 trillion (2005), N2.08 trillion (2006), N3.8 trillion (2007), to N6.17 trillion (2008) and a drop to N5.88 trillion in 2009.

“The ratio of aggregate credit to aggregate deposits was 55.5 per cent in 2004, 58.5 per cent in 2005 and 60.5 per cent in 2006, and was flat at about 71 per cent between 2007 and 2008, and increased to 77 per cent in 2009. The levels however, indicated increase, but were below the maximum recommended ratio of 80 per cent.

“Non-performing credits worsened in the post consolidation era. It grew from N316 billion in 2004 to N357 billion in 2005 representing an average of N337 billion in the pre consolidation era as compared to N222 billion in 2006, N388 billion in 2007, N464 billion in 2008, and N620 billion in 2009. The trend over the period 2008 and 2009 was certainly worrisome.

“Provision for bad and doubtful debts grew from N256 billion in 2004 to N390 billion in 2009. Similarly, non-performing credits to total net credit grew from 2.9 per cent in 2004 to 10.5 per cent in 2009, while the ratio of bad debt provision to total credits was 22.6 per cent in 2004, 19.1 per cent in 2005, 6.3 per cent in 2006, 8.1 per cent in 2007, 6.1 per cent in 2008, and 6.63 per cent in 2009. These ratios indicated a steady decay in the quality of bank assets as represented by total credit.”

She concluded, “the result of the consolidation in Nigeria is a replay of what happened in other countries. The experience in other countries is that banking consolidations induced by government rather than market forces merely create cosmetic changes in the balance of banks without generating sustainable improvements in banking sector performance.

“Consolidation has to a large extent improved the structure of Nigerian banking in terms of asset size, deposit base and capital adequacy. But it has not impacted positively on profit performance and asset utilisation efficiencies of the banks, which have declined since the conclusion of the programme.

The special joint committee of CBN and NDIC to conduct a special examination of all 24 universal banks in Nigeria corroborated these positions, when its report showed weak corporate governance, operational indiscipline and global financial crisis as the major causes of the weakness in the system.

According to the report, Nigerian banks, in their state, could no longer conveniently fulfill their obligations to depositors, “a situation which suggested that banking consolidation of 2005 was concluded on false declarations and fraud, lack of depth and almost qualified as a wasteful application of national human, financial and material resources.”

After an assessment of the nation’s double-digit Monetary Policy Rate (MPR), stakeholders in the financial and industrial sectors reached a conclusion that its harm to the economy does not spare banks too.

The conclusion was reached on the premise that more people would be inclined to borrow from banks, if the rates are lower and hidden charges put under check.

A simple application of the law of demand dictates that more people would be disposed to borrowing at lower rates, with significant degree of elasticity than at higher rates, while higher turnover at the same condition would ensure more profitability.

For example, if 50 people borrow in Nigeria at the prevailing rate, human development index and business clime, the probability that 120 people will borrow at single digit rate, given the same conditions will be high.

The corresponding result of increased borrowing from the above analysis at single digit rate will generate revenue that will offset whatever loss made due to the reduction in rates and ensure profit to a typical bank in Nigeria.

The benefit also would be that the risk associated with the credit will be low, because the cost of the borrowing will be more bearable to the borrower at single digit rate, the borrower’s services or products will be affordable and even at failure, the loss will be minimal compared to double digit rates.

Stakeholders said that in 2013, lower rates would be needed to sustain growth in the system, including banks’ profitability.

An Abuja-based development consultant, Jide Ojo, said: “CBN’s MPR at 12 per cent has made nonsense of government’s effort at stimulating the real sector of the economy. Even the aviation, textile and entertainment intervention funds set aside by government to revitalise these ailing sectors have been difficult to access by the target beneficiaries.

“By the time deposit money banks charge their own lending rates to their prospective customers, it’s usually between 15 and 20 per cent and more. The banks, besides charging high interest rates on loans, also add all manner of administrative or miscellaneous charges, which make the burden of borrowing unbearable.

“What obtains in many other developing countries, even in many underdeveloped African countries, are low interest rates of between five and eight per cent with a moratorium. What cheap loans do for entrepreneurs is that it makes expansion of business relatively easy.

“With the cost of doing business reduced, they in turn will be able to provide cheaper services and goods. Invariably the consumers get a better deal from the producer.

“In 2013, the entire lending process and procedures set by financial institutions need to be simplified and made investor friendly, if we are to forge ahead in the development plans. 

Interests rates are fundamental to a capitalist society and are normally expressed as a percentage rate over the period of one Gregorian year.
It is also a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.

“Interest rates are the main determinant of investment on a macroeconomic scale, that is to say, if interest rates increase across the board, then investment decreases, causing a fall in national income.

“A government institution, usually a central bank, can lend money to financial institutions to influence their interest rates as the main tool of monetary policy. By altering interest rates, the government institution is able to affect the interest rates faced by everyone, who wants to borrow money for economic investment. Investment can change rapidly in response to changes in interest rates and the total output.

“Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply (M2). By setting it, the government institution can affect the markets to alter the total of loans, bonds and shares issued.”

Lead Director, Centre fo Social Justice, Eze Onyekpere, said: “CBN and the banks need to work to reduce the spread between deposit rates paid to depositors and interest rates demanded from borrowers this year, to sustain banks\ profits. That Nigerian banks have moved from loss making entities to profitable ones is a very welcome development.

“However, the huge profits being declared by banks in a comatose economy, as it is now, is not sustainable in the long run. The challenge is for the CBN and banks to provide a level playing ground for a win-win scenario for all - the banks, the borrowers, depositors.

“Yes, the banks can make money by trading in government bonds and money instruments and charging outrageous rates on loans and advances, this cannot continue forever because sooner than later, the bubble may burst again. Perhaps, the policies of the Central Bank of Nigeria seems to be encouraging banks to make undue profits without adding value to the economy.

“The way forward is that the growth and profit margin of banks must be directly proportional and related to the growth of the real sector of the economy. Banks must intensify their mediation role in the economy and provide resources for economic growth that creates jobs, adds value and grows the GDP. Otherwise, the paradox and model of rich banks in an impoverished economy is not the way forward for Nigeria.”

Ojo, also added that “in 2012, many of the money deposit banks in Nigeria declared huge profits which are not in sync with the state of Nigerian economy.  These profits are allegedly made from fees and charges, commissions, savings on the overheads, trading on treasury bills and interest on loans.  Banks also make profits from trade financing and commissions on advisory services. It is true that many of the banks have been right-sizing or downsizing their workforce and embarked on other cost saving measures since 2009 when about five of them were declared distressed.

“However, support to the real sector of the economy such as the manufacturing sector and the small and medium enterprises have been very low and that is a huge challenge because that is the only way to develop the economy and earn more profit.

“Access to loans for the entrepreneurs in the real sectors has been coming at a huge cost. This should be reduced in 2013. The interest rate is too high, while collateral demands are also unfriendly. Ironically interest on savings has been as low as one per cent while inflation stands at double digits (about 12 per cent). This should equally be addressed.

“In 2013, for banks to remain profitable, the Central Bank of Nigeria needs to investigate thoroughly these banks profit declarations to be sure that their claims are genuine and where possible, help them. The benchmark interest rate should be brought by all means to single digit, like it obtains in other Africa countries- South Africa, Burkina Faso, Kenya and Senegal, so that there would be more borrowings for economic activities.

“There should be a regular round of integrity test or audit on money deposit banks to ensure their state of health, while banks should be encouraged to loan to real sectors at a more business friendly interest rates. CBN, Asset Management Company of Nigeria and NDIC must be alive to their responsibilities by protecting bank customers from being ripped off by our money deposit banks through the enforcement of rights of customers.

An executive director of one of the nation’s top money deposit banks, who spoke to The Guardian on condition of anonymity, said, “the results are real and it is possible that banks continue in that trend, though not without close supervision. But I still have my fears over the sustainability. At the moment, the clean bill by NDIC is true, but that does not mean that it would be true in the next six months or one year.

“Banks risks managers are becoming ‘funny’ these days. The proposals they present for approval, though attractable, are sometimes tainted secretly with interests and personal gains. This is because they are not usually held accountable whenever the loans turn bad, but the bank as an entity is usually the one to bear the brunt. Sometimes, they know that the loans will be bad, but because the borrowers are their customers, they will recommend them to the bank. Others do it for what they will gain from the customer, knowing that before the loans could be declared bad, they may have gone to another bank. Nobody calls them to account or to take responsibility, hence the bad debts go to the bank.

“The truth is that issues like these weaken the strength of banks and impact on their profitability, but if risk procedures can be strictly followed and corporate governance further strengthened in various banks, profitability and sustainability are as sure as the existence of the banks.”