Posted on March 23, 2009 - by Gavin

Games That Banks Play…

The Gaurdian

SINCE August 2008, when the credit crunch – which later evolved into full-blown global economic crisis – began in the United States of America, the Nigerian financial sector has been in a frenzy over the health, or otherwise, of the banks. Managers of the country’s monetary policy had boldly reassured the banking public that all would be well with the sector, as necessary shock absorbers had been put in place. But that was to change, as the realities of the global malaise soon emerged. At a time global financial institutions are asking for bailouts, their counterparts in Nigeria are in an ironic jamboree of demonstrating their liquidity.

Until recently, when the Central Bank of Nigeria (CBN) read riot acts to defaulting banks, the public has been inundated with reports of intimidating turnover and profit recorded by the banks, all in a bid to show themselves as oasis of plenty in the desert of need.

Most of the so-called balance sheet growths were in surprising variance with the country’s Gross Domestic Product (GDP) growth, a situation economic analysts describe as paradoxical.

The purpose of the balance-sheet growth publicity is mainly to show existing and potential customers that the global economic meltdown would have little or no impact on Nigerian banks.

However, the banks are unwittingly sending a signal of distress to their target audience. With the current spate of unhealthy competition, evident in the form of high interest rates, arbitrary charges, de-risking, de-marketing, de-leveraging, and indeed, salary cuts and downsizing, there is every sign that all is not well.

In recent weeks, subscribers were harassed with text messages, obviously from desperate banks, containing a list of about 10 banks, which according to the ‘prophets’ of doom, would soon go under.

This has raised concerns over issues of professionalism and ethics.

Most people are worried by the rate the banks are gunning for deposits, even amidst claims of liquidity. But another school of thought is of the view that the desperate show of appetite may not actually paint the true picture of the state of banks’ coffers, as it is customary for banks worldwide to grow deposits as well as credits. The snag is just that the voraciousness for deposits is not complemented with availability of credits, a situation that is attributed to the booking of bad credits in the crashing stock and energy markets.

It is suspected that a handful of banks could have funded the oil and gas sector heavily when the oil price was going for $147.

Now that the prices have crashed, there is a gap, which needs to be filled. In moves aimed at shoring up revenues, banks are cutting down on staff and salaries, a development that has put staff at daggers drawn with their management.

Also, the capital market meltdown had created some hardcore facilities in the banks, and for them to continue to do business, they will need to clear their stable of those.

One other headache the banks are battling to surmount is the uniform year-end, which would give a lie to the spurious ratings some of them have arrogated to themselves. The uniform year-end, which has the backing of the Bankers’ Committee, is to put paid to some issues bordering on unhealthy competition, especially in the areas of financials and other ratings.

“I don’t know what the monetary authorities want to achieve by trying to maintain a single end of year, ” said a concerned observer. The implication is that banks will have to get board approvals to change their year-end to tally with the new regulatory directive.

This is consequent upon the provision in the Companies and Allied Matters Act (CAMA), where the boards of the various companies incorporated under CAMA will decide their accounting year-end.

A source, who picked holes in the new rule, said: “But, to me, this is a lazy man’s way of thinking. If you are doing your job of making sure that they do the right thing, the issue of false claims will not arise. By the time Bank A declares N100 billion profit, and Bank B declares $80 billion, you are going to create a problem for Bank C.

“It does not mean that Bank C has a bad banking culture anyway. People will tend to withdraw their money. And there is no way the banks are going to have the same turnover. So, what do you want to achieve?”

“I may be wrong. But I’m saying that the CBN should allow the banks operate the way they have been doing it before. The robust claims by banks will not stop, even if there is a uniform accounting year-end.”

IN this jealous competitive mood, de-leveraging appears to be the order of the day; banks are not even lending to one another in the money market; everybody is looking for money, and every bank wants to hold tight to what it has. They appear to work towards individual competitive edge ahead of the uniform year-end.

The Central Bank, no doubt, has a window through which the banks can access funds in times of need, but most banks, it appears, don’t want to go there now. Inter-bank lending and borrowing is normal in banking but using the CBN window this time could not be favourable for struggling banks.

Experts explain the undercurrents of pressure to meeting conflicting interests as central to the reasons banks play games.

For some of the bankers, there is need to meet conflicting interests – the interest of their shareholders, interest of the government (for their taxes), the interest of liquidity, and the interest of playing according to the rules set by the regulators.

All these are conflicting and because they and their directors do not know how they will ensure the balancing of these interests, the banking public is bombarded with unethical competition and practices, some of which manifest in the form of booking of bad credits (without proper consideration), falsification of accounts, and window-dressing.

Then, there is this big boy-syndrome, which came into banking, as no chief executive was ready to yield grounds in the celebrated game of showmanship.

That way, the banks went on talking big about what they wanted to do, and in that process, other irregular things started happening. This could explain how some of them got into the present trouble of bloated ‘personality’.

Right now, there are concerns in the high echelon of banking over the tsunami of uniform year-end. Sources, within the industry say the CBN may, once again, reverse itself on the policy ‘to save faces’.

Why Banks Are Under Pressure, By Unegbu

Former President of the Chartered Institute of Bankers (CIBN) and (visiting) lecturer of Banking Law and Ethics at the University of Lagos, Dr. Okechukwu Unegbu, in this exclusive interview with MARCEL MBAMALU, charts a course for Nigerian banks in the face of the current economic downturn. Excerpts:

Nigerian banks and economic crisis

I remember I did say that, for the bankers to get it right, they must clear their stable. There are so many things that have gone bad.

Let me believe the Governor of the Central Bank, who said that the banks are sound. They are the ones that have the figures; I don’t have the figures. But what I believe is that they are not doing the right things to ensure they are not affected by the external stimulus.

Internally, they probably have arranged themselves so that nothing happens to them. But when there is an external stimulus or any policy-induced shock, it will scatter them.

It has happened before; remember the collapse of many banks in the eighties and nineties. At lot of them died because, internally, they were weak; there were internal control weaknesses in the banks.

They may be sound but there are certain things they need to do to be able to shore up internal controls.

The problem is not with the banks alone. Every sector in this country is in trouble, and we have to admit it to be able to find solution. An example is the manufacturing sector. As at today, the sector has less then 15 per cent capacity utilisation and because of that, most of them have closed shops.

These are small business establishments and because they are closing shops, some of them will probably reduce salaries, and do away with some of the workforce. This means that we have more problem of unemployment in our hands, coupled with other dislocations.

De-marketing

Yes, when I heard that, I wasn’t surprised, because it has always been there. It is irresponsible target setting by banks that has given rise to the issue of de-marketing; but it has always been there.

When I was managing a bank. We were de-marketed. I remember I did send a report to the CBN to say that certain banks were de-marketing us.

The managing director of the bank may not be aware and may not have sent his staff out to de-market other banks. But unrealistic target is an indirect way of asking staff to go and de-market others.

When you give a fresh staff the target of turning in N5million monthly, or you give your branch a deposit target of N50 billion, the branch will assign the N50 billions to their staff. In the process of setting up this policy, you have not asked any staff to go and de-market other banks.

Now, the marketers come to my office. They already know I do my business with Bank A, and they will come with all sorts of offers, which they know they do not have the authority to approve.

Now, they cajole you to do so many things and open the account. In the process, they will tell you that Bank A is not doing well, and that it is not in clearing. In that process, they are de-marketing Bank A and they convince you to quickly remove your money.

The movement that happens, you will call your friend, who then calls other friends of his to tell them the problem that Bank A has. So, that de-marketing that was started by one person goes on. The bank director never gave that permission.

On stock brokers being responsible for de-marketing in banks

I read it in the newspapers. But any bank director that says that is not intelligent, because if you owe a bank, even when the bank goes under, you are not free. There will be liquidators.

So, it is in the interest of any stockbroker to pay and ensure that the creditor bank continues to survive. If the bank dies, the stock brokerage firm is not going to survive. And I don’t think that the idea thing is for you to set up a business to kill it.

One of the bad things about our system is scape goatism. That is where that one comes from, because I do not believe that it is possible. I have been a victim. It is mostly the unintelligent, the untrained, and unskilled marketers of banks that de-market.

The depth of banks’ troubles

The manufacturing sector is also heavily indebted to banks. The problem of the manufacturing sector is that of infrastructure, which is where they put most of the money borrowed.

The real estate sector, the housing sector, is in trouble. Almost all the banks have invested in that sector.

Uniform accounting year-end for banks

Even though there is a minimum capital base of N25b, Bank A, through growth of reserves and public issues, may have raised its shareholders fund to N100b. Bank B, also having the same minimum, may have been able to raise theirs to N70b. Bank A will have more money to play with and probably grow deposit faster.

People are clapping now that this is a good policy. But I see it as a policy that is about to affect the banks negatively. That is another form of de-marketing, because people will say, Bank A has N150 billion; Bank B has N50 billion capital base; I think it is better to do business with Bank A. This may also create its own problems.

One of the things we should also have in mind is that when policies are designed, there are intended and unintended consequences.

Now, the essence is to have a reference accounting period and to ensure that the banks don’t advertise their financial position arbitrarily; that they are able to do proper records for their shareholders and are able to operate by the rules for their customers. These are the intended consequences of the policy. But you should also look at the unintended consequences, which you don’t see immediately.

I think every bank should be watched. You don’t achieve that by having a common year-end. What you need as a regulatory body is having a robust adequate mechanism. These days, there is a lot of Information Technology, (IT) to be able to do that.

We are even sending wrong signals to the banking public.

On new rules for Bureaux de Change

You are solving a problem created by one sector and passing the same problem to another sector in the same market.

So, the best way is not to give a blanket ban on all BDCs that are not bank-related.

You wanted to cut their excesses but ended up transferring the same excesses to another sector -the bank-related BDCs. This is going to worsen the fall of the Naira.

Once there is scarcity in the market, you are going to have a problem of meeting demand. So, the Dollar gains against the Naira. But because you have created a sort of monopoly, people will hoard whatever they have.

But when there are many of them and everybody is in the market, the rate will not go up very fast. This is what has happed and nobody saw it coming.

The CBN has less than $50 billion in reserves, which is what they can use. If they had allowed the market to go the way it was going, these other people would have been getting funds elsewhere – the autonomous markets (oil companies, other inflows from abroad).

A lot of them withheld their funds waiting for the Dollar to hit N200 before they send it back.

Also when the BDCs were being licensed, many of them didn’t have offices. So, you couldn’t control them. But you were licensing them.

You are supposed to have done some due diligence, inspect their offics, find out who are the members of their board, and other backgrounds.

The apex bank caused the problem because it did not do its job very well.

Again, the rumour in the market now is that some officials of the CBN own BDCs.

If they do, where are their offices? What did they do?

The CBN started very well but lost control midway. All they needed to do was to go back and close those ones that didn’t meet their requirement, even though they had licensed them.

The only way out now is to ensure that those who have been meeting their conditions are allowed to operate.

The banks have foreign exchange but when you go there, even with your passport and air ticket, they tell you they can’t give you more than $4000. So, the banks are rationing.

In a situation where there is rating, the highest bidder gets the show because they are supposed to sell to direct end-users.

So, we don’t need to react to events; we should be proactive. Instead of closing down the Bureaux, we are supposed to ensure we do the right thing from the beginning.

The CBN allowed itself to be used and watered down the conditions for the licensing of the BDCs. It shouldn’t have been allowed to happen.

The solution is for them to go back and reverse the blanket ban and try and allow those that have offices to operate.

In fact those without offices will easily raise that capital because they knew who they are and where they are coming from.

Isolating commercial banking from associated operations

Most of us attacked the CBN when they allowed the banks to enter the microfinance market.

We knew that when they get into the system, they are going to create a problem for the microfinance banks; and once that starts happening, the CBN will react by temporary closures of some of the microfinance banks.

So, the CBN is wrong in allowing banks to own microfinance banks and Bureau de change.

In London, BDCs, are just located in small shops or kiosks. They operate side by side with banks.

Over there, the BDCs might change 50 pence for changing $200, but the banks might charge nothing. So, the user who is in a lorry can go to the BDCs.

I think we should do everything to ensure that the banks and the BDCs are made to operate side by side. Don’t allow the banks to do everything under one roof. I don’t think it is the best thing for us. We should allow other people to set up institutions.

When there was competition between the banks and the BDCs, you noticed that the exchange rate was stable. The difference, in rate, between the banks and the BDCs at that time may be 20 kobo for each dollar.

But when we had meltdown, we didn’t plan properly.

Banking is the big engine for our economy. So, you don’t toy with it for any reason, because people will die when they lose their deposits.

Source: http://www.ngrguardiannews.com/sunday_magazine/article01/indexn2_html?pdate=220309&ptitle=Games%20That%20Banks%20Play