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Blind Optimism Over Intervention In Banks
By Olusegun Sotola and Kayode Olowookere
Last year, the chief executive officers of banks
requested the federal
government to intervene in the nation's financial
sector to prevent the effect
of the global meltdown. Building on that, there are
reports that the federal
government might soon be part owners of some banks.
The reason adduced for this is primarily to guard
against distress in the
financial sector. Hitherto, the central bank governor
has consistently assured that
Nigerian banks are healthy, safe and in excellent
conditions.
Of the 25 banks, none has publicly shown signs of
needing intervention.
Besides, measured by the financial statements and claims
of profitability churned out
annually by these banks, coupled with their ubiquitous
opulence, depositors can be rest assured that
their hard earned incomes are
safe.
It is therefore worrisome how suddenly banks that were
said to be in excellent
conditions are asking for intervention and possibly part
take-over by the government. One tends to infer
many of these banks are not as
healthy as the public was made to understand by the
Central Bank governor. Many of
them might possibly have their accounts in the red. But
the public was manipulated into believing
otherwise considering figures
from their annual statements of accounts.
What is more shocking is the argument being mooted
within the banking industry
that government should re-invest in banks. Under this
arrangement, government would acquire a
controlling stake of 30% in some
of the banks. The general concern is that what
thought pattern and logic
produces government as the best cure to banks' ailment.
The outcome of the part
ownership being canvassed is predictable.
Before the commencement of the privatisation of the
sector, banks were
characterized by large-scale mismanagement. Banks became
appendage of political party
depending on whichever was in power. Appointments into
the board were not based on
merit or expertise but on political patronage.
Sound banking practices were jettisoned. Banks' survival
was hinged on cyclical
governments funds.
The privatization of the banks which began in 1992
salvaged the above problems.
In the first place, it effectively ended government
intervention in the banks.
This helped in removing every vestige of mismanagement
and inefficiency that crept
into banks. Above all, privatisation improved
banks efficiency and management policies.
In fact, the bureaucracy that became the hallmark of
banking system ultimately gave
way for improved and prompt decision-making process
particularly in area of marketing and product
innovation. Secondly, the
privatization also led to financial sector
liberalization. As a result
there was increased market competition and improvement
in the asset quality.
The call that government should 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 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.
Government acquisition of equity is 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. Aside from
re-igniting loss of confidence
and run on banks as in the 90s, taking long-term
decision will be a mirage.
Expectedly, internal squabbles and boardroom politics
will be full-blown and take the center stage.
Those who are well do not need a physician. If the banks
are safe and healthy as
claimed by the central bank governor, it is anybody
guess what type of
intervention they actually need. The inference from call
for government intervention
and re-investment is that most of these banks are
not as buoyant as their statements tend to show.
Along the line, there are
probably some cover-ups. Should this actually be the
case, the central bank has
abdicated its roles and functions in order to protect
the interest of a few.
Nigerians, shareholders and customers alike, deserve to
know the true and correct financial situation in
each bank.
However, if the recent EFCC report confirming the
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 to question the central bank's
claim that post-consolidation
Nigerian banks have a total balance sheet of about
N10.43 trillion, a growth
of277% 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
bad.
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 reasons government
divested from financial
institutions and other state-owned enterprises was
largely because such
investments constituted a drainpipe on the national
purse.
Returns form such investments were minute compared to
amounts spent.
It is crystal clear that the global financial meltdown
is adversely impacting the
local economy. It is not only the financial sector that
actually needs government bailout. Other sectors
need bailout. But the danger
is that once a bailout is offered to a particular
sector, other sectors stay in
the line to ask for intervention. It is doubtful if the
federal government would be able to rescue all
the sectors without running
into a financial hitch.
Unfortunately, government intervention in the banking
sector would ultimately be a
reward for some bank chief executives who have become
richer than their banks. It is an incentive for
the chief executives to
continue what brought most of the banks to their present
state.
*Sotola and Olowookere are with the Initiative for
Public Policy Analysis, a
public policy think-tank based in Lagos.
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