"The moment we [Africans] lost our languages was also the moment we lost our bodies, our gold, diamonds, copper, coffee, tea." - Ngugi wa Thiong'o

27 April 2014

Bank Lending, Risks and Crisis Management

Bob Hope (1903 - 2003), a comedian and film actor stated, “A bank is a place that will lend you money if you can prove that you don't need it”.

However, how can one prove that he does not need the money in order to get a bank loan? A tall order I suppose, but very simple; demonstrate to the bank that you indeed need their money to make more money for them. As selling money for a margin is exactly what banking is, a greedy banker will lend without due care, while the astute manager will consider your business plan, the risks and ways of mitigating them, before lending.

Although bank lending must be Safe, Liquid and Profitable, it should also conform to the bank’s ethical and environmental policies. Such policies usually include the bank’s risk averse and appetite. While lending is all about risks, Credit and Moral hazard risks are two vital risks inherent in bank lending that are of great concern to bankers. A moral hazard risk is the deliberate action of a borrower to utilise a loan for other purposes. For example, instead of executing the project that requires the loan, the borrower will buy fleet of cars, resulting in his inability to repay the loan, thus creating credit risks.

Besides, how would a banker control these lending risks? The short and simple answer is to use the services of professionals. Really, in the Nigerian banking industry, all sorts of people masquerade themselves as bankers, for the simple reason that they count money in the banking halls. If counting money is a criterion to be a banker, then, the Alaba traders, who count money faster and more accurate than most of the banks’ counting machines, should be bank managers.

Yet, a qualified banker will evaluate financial and non-financial analysis of a loan proposal. Apply relevant lending acronym like C.A.M.P.A.R.I., where the letters stand for Character of the borrower, his Ability to execute the project requiring the loan. In addition, Means/Margin is how much of the borrower’s personal money is available for the project. The Purpose for which the loan is required is important. The Amount required by the customer and Repayment must be considered before taking collateral which is the Insurance against credit risk. Sadly, Nigerian banks have amassed so much high interest paying deposit, with few credible borrowers. There are no data and credit references to ascertain the credit worthiness of individuals or track fleeing defaulters. Anyhow, the banks must lend, to remain competitive and increase shareholders value. Hence, caution is subverted and to hell with credit/risk assessment. Obviously, the ‘big’ people are the lesser evil, the politicians and their cronies. At least they are identifiable and so, should have the money.

Unfortunately and in view of the recent, bank crisis in the Nigerian banking system, the greedy ‘banker’ (GB) had the upper hand. He had done those things that he ought not to have done and have not done those things that he ought to have done and so, he is hapless. GB’s boss (CBN) is very unhappy with him. The CBN has ‘discovered’ that GB is not fit to be a banker and therefore, has sacked him. Apart from that, he has handed him over to his compatriot, EFCC, to send him to where he belongs, the prison. Strangely, it took EFCC about two weeks to investigate and prosecute GB and his colleagues, while the same agency has been fruitlessly investigating the governors since two years they left office. May be they are hinting on something we do not know.

Nevertheless, I cannot remember if I was in a dream when I had the following dialogue with the CBN. Sir, how and when did you realise that GB was not fit to be in the banking hall. We audited ten banks and GB’s bank was one of the five that failed the test. Did you pick those ten banks alphabetically? NO. Did you know the banks that will fail the test before the audit? I choose not to comment.

What were your major findings with the audit? GB has many non-performing loans in his loan portfolio and thus, liquidity problem. Oga, what is the meaning of non-performing loan? Well, a loan that no longer brings income to the bank and may have become unrecoverable. Is GB’s bank illiquid or insolvent? The value of the bank’s assets is more than its liabilities but it has liquidity problem and cannot meet its obligations.

Additionally, GB’s bank continues to borrow from the money market to finance its cash flow needs. Is there any other measure to stem a short-term problem like illiquidity apart from borrowing? NO. Which means GB’s bank did the right thing by borrowing. Yes.

Some commentators said you sacked GB to serve some Northern interests. I will not say so, but in preparatory to Islamic banking and Sharia law.

You have also indicated the CBN readiness to sell these affected banks to foreigners. Are there interested investors from Saudi Arabia? I choose not to respond, but as a risk manager with an Islamic degree from Sudan, I can assure you that, Sharia finance and law will enhance Nigeria economy. Of course, the greedy south will benefit from its interest free loans and obviously obey the law that comes with it.

Furthermore, the primary duty of the CBN as a lender of last resort is to lend to banks with liquidity problem. However, if the illiquidity continues and their required capital adequacy ratio is affected, then, the CBN must ask the affected banks to recapitalise. There are several ways to handle this without panicking the public and causing more havoc to the economy than intended.

A way is for the CBN to encourage these five banks to merge, raise money by selling off their head offices and branches. Although, the merger will result in job losses but will create a stronger bank, which will lend long-term to other sectors of the economy, thereby creating opportunities for the population.

The governor of the Central Bank of Nigeria should know beyond risk management and Islamic financing. He may have good intentions but the approach is zero. His exuberance has created more doubts and crisis than curing the banks’ illiquid situation.

What the CBN needs now is a crisis manager to remedy the mess they have created. The first duty of the manager will be to explain to the public, the difference between illiquidity and insolvency. The fact that a bank has cash flow problem does not mean that it has failed. He should publish the accurate balance sheet of these banks and the CBN findings that indicted those banks’ directors.

Still, Mallam Sanusi said that he printed the N420bn that he gave to the five banks and would print more if the need arises. Nigerian tribune also wrote that the CBN spent an atrocious N100bn to print N420bn.

What is the need for printing paper money? After all, the Naira equivalents of the banks’ non-performing loans are still in circulation. If the money has grown wings and flown to America, then the CBN should be printing Dollars and not Naira.

In that case, the Nigerian foreign reserve would cater for that. On 01/09/09, a newspaper reported that the CBN withdrew about N50bn from circulation. This shows that Mallam Sanusi printed no money, but said so, to fend off the prying national assembly.

To be honest, I do not want to believe that the CBN printed this N420bn, because no right-thinking governor of any central bank will tell the world that he printed paper money to buy equity from, or lend to, a commercial bank. Those will irredeemably crash that currency for good.

In addition, the CEO of Global Fleet Ltd supported the naira printing by saying that he has been advocating for the CBN to print more money but stubborn Soludo refused. He further likened this kind of money printing to Quantitative Easing (QE) as in the United Kingdom. Mr. Ibrahim missed the point.

QE is not printing paper money but creating virtual money in the economy. The telegraph newspaper of London notes, “Quantitative easing is the modern way to print money. The central bank doesn’t actually have to use a four-Colour press to spew out crisp notes”.
http://www.telegraph.co.uk/finance/breakingviewscom/4175704/Quantitative-easing-the-modern-way-to-print-money-or-a-therapy-of-last-resort.html If you are in doubt, please copy the above link into your browser and read.

More so, a central bank adopts QE, by creating virtual money in the accounts of banks to encourage them to lend to the public in order to stimulate the economy. If the N420bn the CBN said it printed is QE, then what economy is it trying to encourage?

Beyond, assuming any bank is willing to lend, the EFCC has criminalized Nigerian debtors that nobody dares borrow for now. Besides and as of today, it will be easy to pass through the eye of a needle than satisfy banks’ lending conditions.

All the same, be assured that none of the remaining fourteen banks shall taste what the unfortunate five swallowed. If we should follow the trend, the CBN would have to print more than N420bn to rescue other banks; I guess another half of the remaining fourteen.

I am sure, Mallam Sanusi has realised his mistakes, and rather the score is already settled.