On the looming risk in banking sector

There is no gain saying that the banking sector plays a significant role in the financial system. In fact, the economy of any country fully rests on the banking system, because the system contributes to economic development in several ways such as mobilization of savings for investment purposes, channelling resources from surplus economic units to deficit economic units, and assisting government in the implementation of monetary and credit policies aimed at ensuring price stability and moderating inflationary pressures, full employment, exchange rate stability, even development and high economic growth. Hence, the concern about the possibility of banks not being able to recoup their investment in the power sector and its likely consequence on the financial system should not be treated with levity.

At the launch of the ‘2014 Nigerian Banking Sector’ report by the Managing Director, Afrinvest Securities Limited, Mr. Ike Chioke stated that the issues in the industry, with the lending that the industry has done, particularly to the power sector, if there is a problem in that sector and they are not able to service all these loans they have taken, there will be a problem in the balance of the Central Bank of Nigeria (CBN).

According to him, with the current revenue profile of the power companies, if they are not able to service their debts, the indebtedness would have severe consequence on the banking system; and the CBN balance sheet, may not be able to accommodate another bailout because we have just gone through one. In addition, he argued that the CBN’s balance sheet as at November 2013 raises crucial questions that require urgent attention. Over 40 per cent of CBN’s asset portfolio is unmarketable, comprising principally of AMCON bonds, intervention funds and development finance loans. These are said to be long term investments without a discernible exit frame other than the eventual performance of the loan portfolio. He stated that the 190.5 per cent surge in other liabilities from N2.1 trillion in December 2009 to N6.1 trillion in November 2013; traceable to the acquisition of AMCON’s debt by the CBN is alarming. In the event of another crisis in the banking space, the CBN may not have the capacity to bail out the banks without avoiding the option of printing money which has significant consequences on price stability. He predicted that the CBN may be forced to raise the AMCON levy on banks which according to him, would exert further pressure on industry bottom lines, as AMCON’s fee as a proportion of total operating expenses rose from 4.6 percent in 2012 to 7.6 percent in 2013, and is expected to cross 10 per cent in 2014.

We had earlier warned on the need for corporate governance code for all acquirers of privatised power assets because of our observation that they have concentrated on fending for themselves and behaving as if there are no rules governing their operations; Also, it was observed that some of them spend millions of dollars on frivolities ranging from purchase of expensive cars and jeeps, paying bogus housing allowances, to the appointment of board members who incidentally are their family members without any relevant expertise which is against the provisions of the companies and Allied Matters Act as amended, which states that the members of the committee should be independent.

Therefore, government should be proactive and not wait until there is a problem before they begin the usual fire brigade approach to solve it. Beyond the code of corporate governance proposed by the Nigerian Electricity Regulation Commission (NERC), now is the time to provide adequate supervision of the power firms.