Saturday, June 20, 2009

The CBN is in need of intervention

FOR the CBN, the time of test has come. And it needs help. All along it had been shielded from reproach by the unprecedented oil boom receipts and the laudable banking sector consolidation even though it was saying and doing a lot of things wrongly. Had the good run of revenues been sustained, every crack would eventually have sealed up. But the worldwide financial crisis makes imperative a higher degree of circumspection in the words and actions of the central government, generally, and of the CBN, particularly.

It is well-known that the approach of the CBN to the consolidation of banks was very unconventional and ended up with a lot of window-dressing, with form dominating substance, in the books of most banks. The primary objective of the consolidation was to beef up funds attributable to shareholders in order to minimise the probability of business losses and investment in fixed assets impairing the deposits of innocent customers. But the CBN became so fixated on 'new money' that a bank like ACB, with landed assets of about N7 billion, was valued at only N420 million, whereas almost all the banks which raised money during the period, whether by private placement or by public offer, would devote an average of 30 per cent of the proceeds to the development of landed property, mainly by way of branch buildings, according to the prospectuses.

The mindset of the CBN remained unchanged even after the interim management it put in place at Springbank, where ACB berthed, had, with its approval, realised several billions of naira from the disposal of some of ACB's landed assets, to sustain the bank and in spite of the higher valuation of ACB by a consortium in which the same CBN participated. To add insult to injury, it went ahead to collaborate with the interim management and Bank PHB in the recent hostile takeover of Springbank without any attempt to correct injustice in the precedent merger, particularly, the type that shortchanged shareholders of Springbank who entered through the erstwhile ACB. Meanwhile, banks which were less than transparent in the recapitalization programme, including those said to have provided counterpart funding to subscribers to their public offer of shares and which, therefore, do not have all the equity funds they claimed to have raised, were given a bill of good health. There are many more tales of woe in the consolidation already swept under the carpet.

A great test now awaits the CBN on the exposure of banks to the securities and the oil and gas markets that have fallen flat. It should be noted that the posturing of the CBN on margin facilities could be indicted in the drastic decline of the stock market. By now most of the stock exposures should be doubtful or lost if the banks complied with prudential classification. In what way would the CBN manage the situation to avert a liquidity crunch that would ground the system? It has left everyone gazing, whereas some banks urgently need significant life-line if they are to restructure that portfolio successfully.

Already exchange rate stability has become an issue - no thanks to the CBN which ignited the freefall of our currency, first, by deliberate depreciation and then by panic reaction to the repercussions, in a highly speculative market. With a lot of money outside the banking system and with people taking the position that the rate would slide further to N200 or more, how would the CBN deal with capital flight? How does it even ascertain the legitimacy of disbursements under the Retail Dutch Auction system? Money is a measure of value. Is it, therefore, possible to stabilise the currency when oil revenue has fallen sharply, without stimulating domestic production? How then would the CBN successfully defend the Naira, given our paltry reserves, in this era of borderless world trade? When a man loses his job or even suffers a deep pay cut, how should he utilise his limited savings: increase the household maintenance expenditure or open a small store for the wife to sell food items, fruits and vegetables, so that the family might feed tomorrow?

A prudent man would go for the store and that is capital expenditure. The times are not for salary increase - not to talk of profligate spending such as the outlandish remuneration of political members of the executive and legislative arms of government. It is time for efficient capital expenditure. What is the CBN, the custodian of our reserves, telling the government: we have not seen enough diligence and desperation to rehabilitate the laws and to drive the PPP programmes for power and other infrastructural components so that the people can produce competitively - even when oil price rebounds, as it is bound to?

The banks loathe lending to the productive sectors of the economy, particularly, agriculture and manufacturing, without which the economy cannot prosper. Instead, they lend massively for the import of finished goods, including consumer assets like pleasure cars, which they now encourage people to buy on credit and mortgage their future earnings, thereby accelerating the outflow of money from the cycle of national income to other lands. Even the Small and Medium Enterprises Equity Investment Scheme, funded from banks' annual profits, has been made discretionary! What of the patriotism expected of the banks and what is the CBN doing to reverse the ugly trend of resource allocation?

The more the financial resources turned over to the banking system by individuals, households and businesses, the more effective government's monetary measures would be. But many of the banks appear unmindful of disincentives to the development of banking habit among segments of potential savers, which include high (and, oftentimes, illegal) tariffs, interest rates and documentation requirements. Many banks charge astronomically for convenience facilities such as ATM card, e-account statement and transaction alerts/notification, meant to expedite service delivery and draw customers, in the competitive market. Should they really be allowed to charge customers for these pure convenience facilities? Take the ATM Card, for example. Whether you used it or not, most banks would still levy the ATM Maintenance charge at the tour of a month. Consequently, the vast majority of the populace is being alienated, by excessive charges, from the system. The permissive conduct of the banks has been abetted, in part, by their evidently paternalistic relationship with the CBN, at the expense of the people.

One could go on and on recounting CBN's errors of omission and commission in the governance of the banking system. It has demonstrable propensity to focus on objectives at the expense of procedure and due process, with scant attention to details. While such failure could pass unnoticed when the revenue stream was strong, its outcome could be catastrophic in such volatile times as we are now in. The CBN, therefore, needs to sit up, watch its utterances and actions, avoid panic reactions and become more circumspect, henceforth. The time of test has come and "the good is oft interred with their bones".