Blind Optimism Over Intervention In Banks

Tuesday, February 11, 2009

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 parties 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 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. 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 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 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. This article was first published in the Daily Independent of Nigeria.