Breaking the banks

The day the deadline for banks to remit all federal government deposits in their treasuries to the Treasury Single Account (TSA) operated by the government at the Central Bank of Nigeria (CBN) expired, I recall I was on STV News at 10pm providing perspectives on the matter based on viewpoints I have consistently advocated in this column.

TSA, I noted, is an excellent public finance initiative that would improve transparency in the management of government finances and improve public sector treasury management. Ultimately it helps the anti-corruption effort. However I pointed out that it also has implications for monetary policy and overall macroeconomic management as well as for the financial sector. I favoured a more pragmatic implementation in a phased approach not only in order to build government’s own infrastructure and capacity to successfully operate the TSA, but also to avoid contributing to an economic meltdown by removing capital and finance from the economy at a time an informed review suggested the imperative of reflation. Indeed government’s own budget mantra was subsequently that it would adopt a reflationary budget posture to stimulate the economy! So while with one side of the mouth fiscal authorities spoke about fiscal stimulus through funds they intended to borrow from local and international borrowers, on the other hand they implemented a massive withdrawal of funds from the active economy (amounting by government’s own “speculation” to as much as N3.5 trillion) which they proceeded to sterilize at the central bank! On its own part, the monetary authorities at the CBN oscillated from monetary easing to tightening based on tactics rather than strategy!

The TSA or, more accurately, the manner of its implementation by this government is thus a significant contributor, along with the regime’s other policy and economic failings, to the current recession that we are confronted with. We recall that the TSA was initiated under the previous government, which based on sound economic factors settled on a phased implementation, rather than the rushed, precipitate approach its successor adopted. Instead of a sensible debate over the benefits and costs of the scheme and rational policy choices to select an optimal implementation strategy, what we saw as has become the custom was everyone whether farmer, journalist, engineer, or market woman became an expert in how the TSA was going to banish corruption in Nigeria and was the magic wand that would solve all Nigeria’s developmental challenges. The other trend one has observed is that Nigerians judge policies and actions of government by who they think the victims will be! So some people supported the TSA because the banks would suffer, forgetting that it was their sons, daughters and relatives that worked in the banks, and their businesses or employers who were sustained by bank services.

The TSA is not the only problem our banks currently face. I was a banker for over sixteen years rising from legal officer, and then banking officer to Executive Director and I should have a fair idea of how banks generate profits, especially as I have stayed relatively close to the industry in a consulting role. The basic business model in banking is to generate a spread on your deposits i.e. take deposits at a lower interest rate and lend them out at a higher interest rate with the difference being the interest rate spread. When inflation is high as it currently is at 16.5% and possibly rising, getting a positive interest rate spread is difficult because ideally interest rates should exceed the rate of inflation to make sense. With current inflation at 16.5%, a bank should ideally set its lending rate at 16.5% plus its operating costs (which includes generators, security, water, employees, bad loans etc!) plus a profit margin. If banks in a high inflation environment try to recover all these cost elements, interest rates would be so high that many or most loans will go bad! Once the cost of the loan to the borrower exceeds his profits, the loans and interest would not be paid!

So the banks have had public sector deposits taken away suddenly by the TSA; then a high inflation economy has narrowed interest margins and worsened loan portfolios; then a recessionary economy has also worsened their business with employees who are retail customers either less buoyant or losing their jobs, businesses who are consumer, commercial or institutional customers struggling, and most borrowers whether corporate or retail struggling to repay their loans; in particular loan exposures to the energy sector-oil, gas and power have suffered from global oil price collapse and inertia over power sector reforms and slowing sectors-real estate, construction, hotels and restaurants, financial services, manufacturing produce more struggling firms and households; increased resulting bad loans add to loan loss provisions that make the banks even less profitable; until recent FX “flexibility”, scarcity of foreign currency meant very little letters of credit or other trade finance business, so that income line also disappeared from the banks income statements; and because Nigerian trade and manufacturing are heavily anchored on foreign goods and services, most other banking and activity and income in those areas were constrained as well; and finally it was at this time that the industry-wide implementation of a zero-Commission on Turnover (COT) regime (which some of us presciently tested a decade and a half ago but which everyone is now forced to adopt) wiped away the stable COT income line.

It looks almost as if someone is deliberately trying to break the Nigerian banking system!

Our hapless CBN confounded matters when it announced it was excluding nine banks, including some of our larger and mid-sized banks from the foreign currency market because some foreign currency deposits of the NNPC in the banking system had not been remitted to the CBN. It looks to me like the same story we’ve seen since May 2015 – the CBN reading presidential “body language” and putting personal survival above economic growth, macroeconomic stability and now even financial sector stability! What if the CBN announcement had precipitated a run on the nine banks-was the CBN prepared for such an eventuality? The CBN knew that banks don’t take deposits and lock them up in their vaults and with the scarcity of FX the banks were not likely going to repay those NNPC foreign currency deposits easily. A constructive approach would be for CBN, the banks and NNPC to agree sale of dollars to the banks to repay NNPC over a period of time with NNPC having a Naira option on part thereof to fund its domestic operations.

Opeyemi Agbaje