Nigerian Banking Crisis: From irrational market exuberance to regulatory exuberance

Since Friday August 14, the Nigerian banking system has not been the same. What started as a rumour that some bank chiefs were about to be sacked became real. The CEOs of Intercontinental Bank, Oceanic Bank, Finbank, Union Bank and Afribank went to the office as CEOs in the morning and returned home early and jobless and with the real prospect that they were also on the verge of losing their stakes in the banks they have sat on as owner managers for close to two decades.

 

The Central Bank of Nigeria (CBN), the apex regulatory organ for Nigerian banks had taken the decision to wield the biggest stick in the Nigerian banking industry. Sacking five CEO’s, three of whom before the sack, were considered among the top five banks in the country, have been described as the Nigerian banking tsunami.

 

Justifying its action, the CBN facts are convincing. The five banks according to CBN had given out loans of close to N2.8 trillion of which close to 50 percent were classified as none performing. The five banks, said the CBN, had become virtually illiquid accounting for 90 percent of inter bank borrowing over a seven month period, first through the CBN expanded discount window and then when the window was closed and the interbank market opened, they borrowed from the interbank window to pay down their debts at the EDW. This, no doubt was a clear sign that these banks had run out of money to meet their day to day operations and will collapse like a pack of cards if they are not able to borrow short term funds from the interbank market.

 

Besides, their desperation at the interbank market was also distorting rates at that window where the CBN was doing all it can to reduce the lending rates. As long as these big banks engaged in desperate borrowing from this window, the CBN efforts to bring down interbank lending would be fruitless. It was obvious that these banks could only survive their critical liquidity challenges with a fresh injection of equity or debt capital.

But considering the state of both local and international capital markets, it was obvious that any attempt by these banks to raise fresh capital may be like a camel going through the eye of the needle.

 

So the CBN was left with the option of injecting its own capital, arranging a bail out of the banks like it happened in America. In its wisdom however, the CBN felt that, it would not pump in capital and allow the same managers, which by their action and inaction allowed their banks to run into this state of illiquidity to continue to sit at the top of management. Most importantly, it is obvious that the CBN felt that it was time, that it sent a strong message out there that poor banking practices in the industry will no longer be allowed.

 

But in the process of sending out this message to the industry has the CBN “over killed.” It is obvious that Sanusi Lamido Sanusi, riding on his strong reputation as a risk manager, may have unduly focused on curtailing poor credit risk practices in the industry without taking into consideration reputational risk. So in an attempt to pluck the loop holes created by poor credit risk practices, the Sanusi may have left the banks exposed to reputation risk damage that the concerned banks may never recover from and the banking industry at large may take a long time to overcome.

 

Was there a better way to effect the significant changes required in the practice of banking in Nigeria without creating all the drama that is currently prevalent in the Nigerian banking industry? Many have argued that the CBN could have forced all the banks to make the required provisions, declared their losses and take the hit on their capital that would have invariably resulted and demanded the recapitalization plans from the board of the banks. Where they were not in a position to recapitalize, the CBN will move in with its new capital and as the new majority owner, sack the board and effect the necessary changes.

 

This may have taken a longer time but no doubt the process would have been more tidy and transparent. The haste with which CBN has sacked the MD’s has been overtly populist. Surprisingly, the CBN sacked only the MD’s leaving the board, whose responsibility it is to ensure proper banking is enshrined in their institutions, intact. It is not clear why the CBN sacked the MD’s and left the boards intact. If there has been a failure in these institutions, it was a failure of the board rather than executive management. Leaving the board intact is an endorsement of poor corporate governance and the continuation of board negligence and inactivity which has primarily been the course of recurrent bank failures. If the CBN really wanted to change the way banking is done in the country, sacking the board would have be the best action as it would sent the strongest signal that sitting on the board of a bank comes with its privileges but it also comes with huge responsibilities which must not be taken for granted.

 

Regulatory exuberance is further displayed in the CBN action with its hasty publication of the list of bank debtors without even allowing the new management it had put in place in the banks it had taken over to settle in. Basically, the CBN action has removed the greatest tool the new management has in collecting these loans, that is the threat of “Name and Shame” the debtors. Having lost this tool, they have now resorted to the lame tool of threat of arrest.

 

This is a lame threat considering that lending is not a crime neither is borrowing. Lending without collateral is an offence under BOFIA but there is no definition what collateral is and besides no bank lends without a form of collateral. And still in the spirit of regulatory exuberance the EFCC goes ahead to ask debtors to pay within seven days by issuing a draft in favour of the Federal Government. The first question is, did the Federal government lend money to these so called debtors? So why should they pay money to the Federal Government?

 

Then where will the alleged N774 billion owed by the debtors come from? Is it from the supposedly healthy banks in the system? How many of the supposedly healthy banks survive the removal of N774 billion from their vaults in seven days? This order does not only smack of regulatory exuberance but also strong ignorance of how the financial system works. And the truth is that if  the banking system had N774 billion lying around in its vaults, there will not be liquidity crisis, neither will interbank and lending rates be hitting new highs.

 

The most dangerous aspect of the current regulatory exuberance however is the current attempt to criminalize lending and borrowing. Since 2005, the Nigerian economy has been able to sustain a growth rate of six percent and above and this period also marked the unprecedented growth in bank lending to the private sector. The link between economic growth and bank lending is not coincidental as many economists will tell you. This is where the danger lies in the current CBN/EFCC joint efforts to criminalize the act of lending and borrowing.

 

There is a real possibility that this may result in a credit freeze to the economy. First banks may become averse to take the risk of lending to the vulnerable sectors of the economy that usually have a higher risk of default why entrepreneurs will also become averse to borrowing. If this happens, the impact will be disastrous to the economy. The already high unemployment rate will get worse and poverty will be intensified.

 

There is no doubt that following years of carefree growth; the banking industry needed an urgent dose of sanity. But sadly, the way the CBN has gone about it will harm the Nigerian economy in the long run. The CBN under Sanusi has effectively replaced irrational market exuberance with its own regulatory exuberance.

 

Finance and communication specialist with experience in banking, research and financial analysis and media. Academic qualifications include an M Sc in Banking and Finance, a Bachelor’s Degree in Finance and professional affiliation to the Chartered Institute of Stockbrokers (CIS level I) and the National Investor Relations Institute (NIRI) United States. Good computer skills- Microsoft Excel, Access and Word-. Won four different merit awards in financial journalism

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The future of Nigerian banking after the current crisis

How would the current crisis in the Nigerian banking system affect the way banking is done in the country? What are the lessons to be learnt and what are the strategies Nigerian banks should adopt to overcome the many negative impact that this crisis will leave behind? Do the regulators stand to learn from this crisis? What should the business community expect or learn from this crisis when it blows over? These are the many questions that should be going through the mind of everyone watching the unfolding crisis in the Nigerian banking industry.

 

Taking these questions one by one, we will attempt to answer them and possibly paint a picture of what banking will look like after the current crisis which has been termed the Sanusi banking Tsunami.

 

How would the current crisis affect banking in Nigeria?

The first casualty will be the ranking of the top banks in the country. Three of the five banks taken over by the CBN are ranked among the top five banks in the country. These are Oceanic Bank, Intercontinental Bank and Union Bank. These banks are likely not to retain this position when the current crisis blows over. Though feelers show that these banks may not have experienced the massive run that most had expected them to experience after the CBN takeover, nonetheless confidence in them as strong financial institutions may have been irreparably eroded that it will affect their ability to compete as they have done before. Going forward, these banks will fight to survive than compete.

 

Also the fact that the CBN has plans to put these banks on sale will mean possibly new priorities for whoever takes over these banks. The new owners of the banks may decide to forego growth for stability or be a core player in a specific field than a general market player. There is also the real possibility than the former owners may lack the drive of the former owners.

 

Entrance of foreign banks?

Foreign owned banks are said to be waiting on the wings to enter the Nigerian banking market. Before now the strong presence of Nigerian banks and disposition of the CBN towards foreign owned banks has been a hindrance. Now the current CBN under Sanusi is ready to handover a 100 percent ownership in Nigerian banks to foreign owned banks and some of them are said to be willing to take the opportunity of the current crisis to enter into the Nigerian market. Any of the five banks would definitely be a good pick for them depending on how they want to play in the Nigerian banking industry. Also the stricter reporting standards and transparency that is expected after the current CBN action will create a more favourable environment for these banks to operate in the system.

 

Would foreign banks benefit the Nigerian system?

This is critical question perhaps better answered by asking how has the currently existing foreign owned banks impacted on the Nigerian banking system? Who are their major customers? Who do they lend to? What would be the impact on the Nigerian economy if top Nigerian banks are foreign owned and run? Experiences from other economies have shown that foreign banks are usually the first to take flight with their capital from a domestic economy when there is a hint of crisis. This was easily seen in the Nigerian capital market crisis when hedge funds took flight setting off the steep decline in the Nigerian capital market. If the CBN wants foreign banks to come in, do they have strategy to ensure that they do not leave the Nigerian economy high and dry when they are needed the most? The critical question though is will they be disposed to lend to Nigerian owned businesses whose business practices in most cases may fall below their international benchmark standards?

 

Any lessons to be learnt from the current crisis by Nigerian banks?

There is no doubt that Nigerian banks have many lessons to learn from the current crisis. The first obvious lesson is that poor risk analysis can have a debilitating effect on banking operations. Nigerian banks ignored the dangers of credit, operational, financial, currency and reputation risks and today are paying a heavy price for it. Banking goes beyond deposit mobilization and lending. Banking is about risk analysis, strategic placement of funds to enhance maximum returns at minimal risk. It is not about “my balance sheet is bigger than yours” or “I am that fastest growing bank”. For too long, Nigerian banks have taking banking for granted and now they have to realize that it is a serious and solemn business that demands the highest sense of diligence.

 

First area most banks will have to focus in the post crisis period will be to increase their in-house risk analysis talent. The two critical areas that sank the five banks taken over by the CBN was lending to the oil and gas sector and the capital market. These two areas are sectors which most of the banks were opening their books to for the first time. Obviously, from hindsight it is obvious that there was poor risk analysis of lending to this sector. It is difficult to blame the banks for this oversight as risk analyst talents in these two sectors are scarce in the banking industry. Going forward most banks have to grow their skills in these two potential lucrative sectors that also comes with high risk.

 

Also I am not sure of how many Nigerian banks have Chief Risk Officers (CROs) reporting directly to the board through the MD/CEO. Going forward most banks will have to set a fully empowered risk division to help the banks evaluate and manage the various risks it faces in the deployment of the huge assets at its disposal. As Nigerian banks grow bigger and go international, they are increasingly taking on several risks that before now they have been unfamiliar with. Banks ability to manage, cross border regulatory risks, currency risks, financial market risks are all strange to the average Nigerian bank. Skills in these areas will be critical going forward.

 

Any lessons for the regulatory bodies?

Did the regulatory bodies go to sleep while Nigerian banks went on lending spree? I really do not think so because even in the United States of America, credited to have had the most stringent regulations, over 75 banks, including some of the oldest and respected like Lehman brothers, have failed since the global economic crisis started in the last one year. The implication is that this crisis may have been more due to regulatory knowledge gap than regulatory laxity. Recently, Alan Greenspan, whose word is considered sacred in banking worldwide, noted that “you cannot legislate against greed” neither can you regulate greed. When greedy people see an opportunity to make money that looks “easy” it is difficult to stand in their way.

 

But there is no doubt that regulators have to sit up and become more proactive in their regulatory functions. It is not enough to react to crisis, the CBN must be anticipate potential crisis in the banking sector and nip it in the bud. The CBN and the NDIC must improve its stock of in-house skills to do this. They must be well remunerated and be people of high integrity.

 

Other regulatory bodies like the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE) must all sit up. The development in the international capital market is so fast and complex that the current pedestrian regulation of the capital market will not do.

 

How does it affect credit?

Businesses should be prepared for a most likely credit freeze. Banks will have to get their acts together before they start lending again especially to the most vulnerable sectors of the Nigerian economy which bears the highest credit risk. Small businesses are likely to bear the biggest blunt as banks put in place new credit risk appraisal techniques that are likely to be more stringent than current practices. Besides, the publication of bank debtors list and the criminalization of lending and borrowing by the Economic and Financial Crimes Commission (EFCC) will likely have a negative impact on lending in and borrowing in the long term. Its great danger lies in its ability to inhibit free enterprise as no expanding good business can do without credit. Good business ideas are usually nurtured by bank credit. If entrepreneurs start getting afraid to borrow to pursue their ideas and expand their businesses, then we will soon start having economic stagnation. This is the danger in the current tactics pursued by the CBN and the EFCC.

 

Would targets gone wild be tamed?

After this crisis, would banks reduce their “crazy” deposit and profit targets? This is doubtful. Deposit targets will remain but profit targets may no longer be that ambitious and perhaps the crazy timelines will be relaxed. The truth however is that for banks to be effective in the new environment, they have to restructure their targets to reduce unnecessary risk taking, take into consideration staff internal and external motivation in meeting targets and reduce the motivation for fraud. Banks may need to realize that high targets lead to higher risk taking which results in higher profits because of the higher risks taken and not necessarily to higher performance. Banks have to evolve a strategy to attain high performance within acceptable risk levels.

 

Axis Bank Credit cards: maps very reliable and useful

Most people in Germany, I think that would lead to a credit card to indulge in more debt and the financial crisis. But these cards are very useful and beneficial for those manner.There that in a right-hander take advantage of many benefits of using a credit card. A major advantage is that there is no need to put your friends and family when you need money. It helps you to solve unforeseen costs. It also helps the amount paid for a couple of hotels, airlines and tour operators who do not accept payment in cash. How this can be many benefits of credit cards from the right purposes.As the number of people who enjoyed require a credit card in India is increasing day by day, several banks and private companies entered the market and the credit is started with credit cards with different amounts, interest rates and repayment plans.Among these banks, Axis Bank is one of the leading banks in India, with good performances in the Indian banking sector for many years. Offers different types of credit cards that fit the needs of all types of people. All credit cards Axis Bank as a high card utility known. Provides for its customers, the bank trust, even the large amount of low interest credit card credit rates.Some most common are from Axis Bank Axis Bank Credit Card Silver, Axis Bank Gold Plus card credit, Axis Bank Corporate Credit Card, Axis Bank and Axis Bank Platinum Credit Card Secured Credit Card (Gold). Most major financial institutions provide credit cards and, therefore, the user is likely to have thoughts about the benefits of taking credit cards, which are given by Axis Bank. Some of the benefits are indicated in the preceding paragraphs, and thus a reflection on each of them is sufficient for the purpose of using this cards.However for a person who is financially help a bit ‘more skill, the reason may take the form of interest rates, which are given by the following credit cards indicated. One of the most interesting features is that they are expressed, while the customer as one of the most important factors for consideration.Hence, interest rates are very comfortable and the repayment period of these cards. Versatility and flexibility are two of the most ardent supporters of the main features of Axis Bank Credit cards.With the advent of the Internet, now you can find information on all businesses, credit cards in one place. So they can compared to all credit card offers in the world of credit cards available in one place where you can choose the best according to their needs. Axis Bank offers online banking services to its customers. Then, the person may receive a credit card from Axis Bank in the online application without filling the visit of bank.If details that are on the application form, you want to be valid, the credit sanctioning bank employees quickly. If you do not use your credit card Bank board, are not obliged to pay such interest. Another advantage of these cards is that you can get extra points and discounts if you pay back the amount of credit time.Finally, we can say that the axis of bank credit to low interest rates available and are useful for users.

Read More : www.bankcreditsite.com

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Axis Bank Credit Cards, Credit Lethal Shot provides for the elimination of all financial insurrections

After witnessing the massacre caused by liquidity crisis, considering the committed credit facilities for a good cause could be taken only as a dream. Most likely yes, because, after the chaos caused by the global crisis, the negotiation of claims in any form, will be a tough fight. This great challenge for the trading of credits, in turn, the show really need a credit card that has led to phenomenal growth reported in the recent past, compared to debit cards. The remarkable success after a lean patch has helped gain a strong position in the field of credit cards. When the economic crisis forced an entrance into the economy, declined to the whole banking sector to ensure liquidity to keep the business of loan application-centric. All this has come the weakness of small and medium-sized businesses with a means to save the capital. This created a gap between the alternatives of capital and traders who turn instead to be a unique opportunity for all credit agencies, who have seized and used with great success. Yes, it revealed the credit card that a friend needs these needy class, responding quickly enough to recognize the importance of this channel of funding. What was the only channel that is in adverse economic conditions mediated currently on their business. The same applies for the generation of Axis Bank Credit to seek perfection in person, an efficient transfer of credit agency. Axis Bank Credit cards offer a wide range of credit cards for their customers. Axis Bank, a rich offering that wonderful products and banking services, which have been specially designed to suit almost all types of debts on behalf of customers to include features. As for the credit card portfolios, Axis Bank has 16 different credit cards, his name, as determined each catering to a particular customer service particularly challenging. Axis Bank One Credit Card Axis Bank Subhiksha Credit Card. This is a card specially designed to serve the needs of families. Yes, now the customer can take with this card, not only the benefits of financing to buy their daily needs, and timely, but also the daily food from the outlet nearest Subhiksha, where he was able to win to get discount and offers of purchase. Another axis of the People’s Bank credit card Bank card is the axis eShop. A map that meets all the needs of the customer application software through the online method. Because of its rich and affluent class people Axis Bank Axis Bank Platinum Credit Card offers. A card that concentrates bring all the best for its users. Best form of individual treatment, with intensive coverage of a line of credit of cash are just some of the highlights of this unique credit card from Axis Bank. As more users access to a different panel and offers a luxury service. All in all, Axis bank credit card, the best segment of the global loan. However, Barclays Bank to offer credit cards, credit cards, ICICI, American Express and many others, with the best service in the league.

Read More : http://www.bankcreditsite.com/

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Banks Rush to Cut Penalties

By far the most interesting outcome of the recent reductions announced by the National Australia Bank, Westpac and Commonwealth Bank is exactly how much the industry has been fleecing its customers every time it has imposed one of these unpopular charges.

Thanks to the fact that publicly listed companies have to announce to the sharemarket any material changes to their financial positions, a great deal of light is beginning to be shed on the sums that have been flowing directly to the banks’ bottom lines.

To that end, we have to be fair to Westpac and Commonwealth, which followed up their announcements of wide-ranging fee reductions (note, not abolitions) with statements to the ASX about the effect on their bottom lines.

In the case of Westpac, whose cuts from $40 to $9 in a variety of overdraft, dishonour, missed and late payment charges were the biggest of the lot, $210 million of an estimated $300 million ”lost” revenue would be carved from its 2010 bottom line.

The Commonwealth, which undercut Westpac in some areas but didn’t go as far in others, will give up $200 million of income and $135 million of cash profits.

Contrast that with NAB, which sought to be ”whiter than white” by starting the ball rolling, but which, in fact, got rid of only one fee: its $30 overdraft charge, and only as it applies to its personal customers, not businesses like the other two.

NAB estimated that its move would affect $100 million of revenue but wouldn’t disclose how much profit would disappear, presumably because it didn’t want to reveal the real cost of imposing the fee and therefore just how much of a money-spinner the charges are.

However, thanks to its rivals and some quick back-of-the-envelope calculations by banking analysts at UBS and Deutsche Bank, we now have a better idea.

The admissions by the two biggest lenders, Commbank and Westpac, show that between 67 and 70 cents in every dollar earned from the penalty fee harvest was pure profit.

That represents about 5 per cent of Westpac’s cash profits, which UBS now estimates will fall to $4.1 billion from $4.3 billion in the 2010 financial year, which starts on October 1.

Deutsche forecast that Westpac and its smaller sister bank, St George, would have taken a further $50 million hit if it had cut its myriad fees to almost zero and charged only the actual administrative cost involved.

As for the Commonwealth, UBS reckons that the country’s biggest lender has been raking in $347 million a year from its penalty fees, from which it has been profiting to the tune of $243 million.

So based on those figures and the ones released by the bank, the Commonwealth is giving up 58 per cent of that part of its revenue and 55 per cent of the profit.

And since its penalty fee reductions don’t apply to credit cards, it appears the bank is continuing to hold on to the most valuable part of that particular income stream.

If the same calculations are applied to NAB, then it has been making somewhere in the region of $55 million and $87 million on the $100 million of overdraft fee income and most likely towards the latter.

That leaves ANZ ,whose chief executive Mike Smith made it clear last week that it, too, would soon announce a package of new, presumably lower, fees.

Unlike the others, though, Smith said his bank’s structure would be based on across-the-board fees for services rather than a differing bunch of individual charges on different accounts.

He used the analogy of car-park charges by which drivers could see exactly how long they would be billed for and at what amount: the implication being that if you go into overdraft of any account, customers would pay X, and if you miss a credit card payment you would pay Y.

It was probably the best explanation of why some kind of small charge is acceptable since, in most cases, there is a cost to the banks when people run up an overdraft or have a cheque dishonoured.

Nevertheless, that doesn’t get away from the forecasts that ANZ, according to UBS, is scoring $290 million a year in exception-fee revenue out of which it may give up $200 million of profit if it cuts along the lines of Westpac.

Taken together, it’s little wonder, then, that the banks have been so hooked on charging such exorbitant sums and why it’s taken so long to wean the industry off them. Which leads us back to the original question: why now?

There’s no doubt that consumer anger, political pressure and now real legislative power allowing customers to challenge the unfair nature of such fees, which comes into effect in January, have all played their part in the decisions to slash these charges.

If anything, the industry is learning the lessons from the days of closing hundreds of branches: that poor or bad customer service generates unpopularity and there’s nothing worse than a gouging bank.

But the real reason is more likely to do with the fact that the big four have done so well out of the global financial crisis by increasing their market shares (and their revenue and profits to boot) that they can comfortably make up the $800 million of affected fee income elsewhere.

Yet again, size matters.

Source: The Sydney Morning Herald

More info financialredress.com.au

Financial Redress is the first law firm in Australia to specialise in recovering compensation from financial institutions for excessive charges or mis-selling. Financial Redress focuses on bank/credit card penalty charges.

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