Credit squeeze: The fire next door?


By Bukky Olajide and Tosin Fodeke


Before she even made the call to ask her bank for a petty loan, she had already known the answer. It was going to be no, 'but anyway, you never can tell', she said to herself.



Funmilola Davies (real names withheld), a corporate worker and a business owner, called the customer care department of her new generation bank to ask for a loan. "We will give you the direct number of our marketing manager in charge of the categories of loans that you are asking of (not high net worth) said the Customer Affairs Unit.



"We are sorry," said the manager, adding that these days, we have placed embargo on loans. But, Davies argued: "this is the second time since I moved my salary account (an important requisite for loan granting) to your bank that you will refuse me, despite all the campaign that you are into consumer banking."



This was just one of the many refusals for petty loans of the people who spoke to The Guardian.The intermediatory role of any banking sector in a country will be weighed vis-ˆ-vis the level of development and growth of a country.Its appropriateness as the prime mover of the economy lies in the availability of investible fund, which will serve as a key factor in the growth process of any economy.



Developed countries are so called partly because of their efficient mobilisation of financial resources and the allocation of such for productive investment.Therefore, the importance of the banking sector in this sense will dictate that soundness must be the word for any country's banking industry.



Consequent upon the backlash from the on-going banking reforms in the country, credit lines seem to have dried up or so it appears if the people's cry is anything to go by.Speaking with The Guardian on the state of credit lines, a public analyst, Mr. Jide Ojo, observed that the impact of credit crunch on the economy was negative and unhealthy as there was need to grant credit facilities to businesses in order to stimulate the economy.



According to Ojo, many of the big businessmen and women, contractors and manufacturers, who need credit support to keep their businesses alive have had to scale down their activities leading to job loss.His words, "there is need to stimulate the economy through sensible, well collaterised loans to the relevant sectors of the economy so that more employment opportunities can be generated and through that, can reduce poverty.



"The federal, state and local governments also need to pay their debts to local contractors so that many of them who owe banks can play back their debts and banks in turn can have adequate liquidity from which they can loan to their customers.Ojo also commended on banks' lending rate, saying that they must fix a reasonable lending rate. This is because high lending rate will scare away potential lenders while those who may be courageous to borrow at high interest rate may have difficult in paying back," he said.



Ojo recalled that before the sack of the eight bank managing directors in August and October last year, credits were being given indiscriminately to bank customers.Unfortunately, he said, because many of the loan facilities were granted without adequate collaterals while some of the beneficiaries also defaulted in paying back, it has become increasingly difficult for banks to grant further loans.



The public analyst explained that the fact that N620 billion lifeline had to be given to the eight affected banks means that these banks themselves do not have cash liquidity, hence are no longer in a position to grant loans.His words, "many of them even had to recall loans granted prematurely while others embarked on aggressive marketing including all sorts of save and win promos in order to attract funds.



The prevailing situation now is that, while many of the banks, who were on CBN's life support are still battling to recover many of their previous granted credits on which customers have defaulted in repayment, those who escaped the CBN hammer in 2009 are cautious of granting loan facilities so that they will not face the challenge of recovery," he said.



On his part, the Chief Accountability Officer of XDs Credit Bureau, Mr. Obong Awah explained that lending to small and medium Enterprises (SME) and the real sector means unattractive largely due to the infrastructural and policy challenges faced by them.According to Awah, the government just must come through for these engines of growth by providing an incentive structure that will make lending to them attractive.



For example, he said, pending the resolution of the energy crisis, the government can underwrite part of the cost of providing alternative energy to run these productive enterprises in order to make them competitive."It can also adopt America's Small Business Administration's credit guarantee model, linking the guarantee to properly documented employment generation capabilities. By the time some tax relief is added, credit expansion to the real sector will be stimulated," he said.



Wondering whether the present credit squeeze is going to run through the transition period, Awah stated that it is difficult to say how long the transition will last but it is important that it is not prolonged. According to him, there are just too many variables. Some of the variables mentioned include, how soon the CBN is going to release the promised consolidated Banking Regulations, when the Asset Management Corporate legislation will be passed and the corporate set up; when how is the government going to announce the requisite incentives that will stimulate lending to the real sector.



"Of course, how soon can the politicians resolve the political log-jam that they have driven us into," he said.The financial analyst however mentioned some silver-livings in the sky.His words, "there are quite a number. The CBN seems to be focused in its efforts at properly 'structuring' he entire financial system. It seems to be attending to the agenda with the deserved energy and haste.



"Take for example the issue of the critical infrastructure that credit bureaus provides, the CBN is working very closely with the three licenced credit bureaus to ensure a comprehensive and smooth implementation of the credit reporting regime in the industry.



"This should, to some extent move banks that want to, to commence lending to people with good credit history. Further the credit bureaus' social accountability mechanism will result in improved repayments while providing the lenders the needed comfort to lend. The Nigeria credit market in my view is one with great prospect for the discerning and patient investor," he said.Last week worried industry chiefs, who alleged that the banks have shut almost all credit lines to them, feared that the state of the manufacturing sector might worsen in fiscal 2010.



In their assessment of the national economy and the impact of the ongoing reforms in the banking sector, the firms' chiefs told The Guardian that unless policies that favour the manufacturing sector were adopted by the Federal Government, the current credit squeeze may force them out of operations.They lamented that the Central Bank of Nigeria (CBN) reforms in the financial institutions had weakened the capacity of banks to fund the real sector.



Speaking separately with The Guardian, the operators stated that credit lines from banks to them had almost dried up.The firms' chiefs however accused the banks of ignoring government's directive to give priority to funding of the real sector of the economy.



The President, Manufacturers Association of Nigeria (MAN), Alhaji Bashir Borodo said, "the directive by the Federal Government to the banks to make lending to the real sector of the economy a priority has not yielded much fruit. This is because the banks are still trying to get their bearing with the ongoing reform and as such, they have virtually stopped lending.Their major pre-occupation has been how to recover the funds outside. The banks are even stricter now in lending to manufacturers, particularly the small and medium scale enterprises (SMEs), which do not have adequate collateral, for fear of entering into bad debt."



To the chairman of Ecobank Plc, Chief John Odeyemi, in the past six months when the CBN embarked on the reform, lending had ceased, while government was only able to implement the budget by about 50 per cent."This means that government is not spending, so the people are not getting what they need, and the banks can't spend because of the toxic assets and the direct influence of CBN on lending," he said.



Odeyemi noted that in spite of the unpalatable development, most banks were yet to meet the conditions of the CBN that would enable them to start lending fully."You can therefore imagine the level of the constraints. Public funds are not coming, banks' funds are not coming, and these are the two major sources of generating money for the economy."He therefore urged the CBN to "heavily energise and persuade" the banks to move the economy forward.



"The public needs to stop being docile. Stakeholders need to talk to their representatives in the National Assembly and the Executive arm of government so that money can move to all sectors of the economy. That is why fuel crisis has persisted; housing development country-wide is stalled; agriculture and real sector financing is also stalled. So, it's a chicken and egg situation."Also, the President of Lagos Chamber of Commerce and Industry (LCCI), Chief Femi Deru appealed to the CBN not to be contented with introducing reforms but to focus on their successful implementation.



According to him, with the prevailing difficulty in accessing loans from banks, many questions are begging for answers."The CBN produced a long list of bank debtors. Have they paid? What is the update on banks' debt profile? Are our banks giving out loans to the right people? There are stipulations, for instance, of how much a bank can give to a small business, is this being complied with? We've had credit officers in some banks, who said they could not do their jobs appropriately because their hands are tied because of their bosses' personal interests? How can this be addressed? These are some of the questions begging for answers. We need transparency in our banking system."



Deru insisted that banks were hiding under the guise of confidentiality to perpetrate questionable activities."For instance, the Bank of Industry said it would not tell us the beneficiaries of the textile funds. Yet, we will like to know those who benefited from the funds, just like former Minister of Finance, Mrs. Ngozi Okonjo-Iweala, once gave a list of funds allocated to local councils. When you know who gets what fund, you are able to monitor their spending and ask necessary questions. But when banks claim confidentiality, it's difficult to know whether businesses are satisfied because you don't know who is getting financial assistance"



He continued, "you can see what the CBN audit has revealed: that there were atrocities in banks and that sectoral assistance to manufacturers and other businesses as stipulated by regulation were largely not followed. This reinforces my demand for transparency in our banking operations." But the Managing Director of Ayoola Food Limited, a Lagos-based firm, Mr. Segun Olaye said the reform in the banking sector does not necessarily imply that the sector operators should find it very difficult to access funds from banks if the banks were doing the right thing before.



He said the banks were giving loans largely to their cronies rather than to genuine operators, which made the loans turn out to be bad debts.The way forward, Olaye added, is for banks to grant loans to genuine applicants with adherence to due process.



While admitting that, generally, the global economic crisis had reduced banks' funding ability, he, however, insisted that banks could not afford not to support businesses.According to him, "even overseas, banks are not giving out loans as much as they previously did because of the global crisis. But, our problem here is that our banks gave out most of their funds to cronies, to whom they lost much of their funds. But overseas, they experience minimal risk because loans are given based on collateral. So, our banks must now be very sure of applicants' collateral before giving out loans. They can't stop giving out loans. They must continue to give out loans, but after doing proper checks. If they refuse to give loans as some are doing now, businesses will crumble and the economy will be seriously affected."



Corroborating Olaye, LCCI's Director-General, Mr. Musa Yusuf, noted that banks had become more risk averse as a fall-out of the losses incurred from their bad-debt profile as revealed by the banks reform. Yet, he said banks must still take some risks and give out loans because when they choose to be sure that there is absolutely no risk before they give out loans, they are no longer in business, because business itself is a risk.



He added, "the truth is that our banks are becoming too sensitive to risk taking. They are becoming more risk averse. They have taken credit management to its extreme, yet risk asking is part of business. There is no doubt however that they also have liquidity challenge. So, the CBN should also shore up their liquidity to enable them support business the more."



Meanwhile the Federal Government has rejected fuel importers' request to issue banks promissory notes to enable them bring in more products.His funds paucity, the importers had rushed to the banks for short-term credit facilities to enable them saturate the Nigerian market with Premium Motor Spirit (PMS) or petrol, which is now in short supply nationwide.



The banks, which appeared to have learnt a lesson from the last Central Bank of Nigeria's (CBN) rejig of the sector over bad debt syndrome, have insisted on promissory notes from the importers. But the government, expected to issue the document, has declined, arguing that it is a non-negotiable condition that the importers must meet.The government's stance has however caused anxiety among industry players, who told The Guardian that the current fuel scarcity, which has entered its third month, may linger.



A fuel importer confirmed to The Guardian at the weekend that the banks had continued to request for promissory notes from oil firms to curtail the recurrence of the bad debt saga.The promissory note is positioned to guarantee payment of the loans obtained within a specific period-usually 45 days.



The importers, according to the source, rely on the facility for full-scale importation of products to complement that of the Nigerian National Petroleum Corporation (NNPC).It was learnt that efforts by the marketers to woo the Federal Government to provide them promissory notes through the CBN or the Ministry of Finance have hit the rock.



The source said, "this document is very crucial in the process of importation. The banks can no longer take the risk, and the marketers do not have other sources of funds to bring in products. So, we are in a serious problem."Nevertheless the servicing of the loans lies mostly on the willingness of the government to pay up the subsidy claims that is meant to cushion the cost of importation of products.



"So, we appeal to the government to consider this option in the interest of Nigerians and the national economy," he said. But the government has absolved itself from the matter, insisting that it could not wade into it because it is a case of business ethics, which must not be breached. Meanwhile, the financial system in Sub-Saharan Africahas been described by the International Monetary Fund (IMF). as shallow.



While the financial market structure and degree of development vary significantly across Sub-Saharan African countries, "South Africa is the only emerging market in the region that has a well-developed financial system with a full continuum of market segments that are interconnected and integrated with global markets"



For South Africa, the financial system includes subsidiaries of foreign-owned banks and insurance companies, large domestic financial conglomerates, asset management firms, insurance companies and pension funds, many with significant cross-border operations in Sub-Saharan Africa and other regions and non-resident and institutional investors (pensions, insurance, ledge funds) that invest heavily in equities and debt markets.



Nigeria belongs to a 'frontier market countries.' This group has less linkages between financial segments and with global markets, foreign investors have increasingly participated in local and debt markets. Although, in these markets, financial products are becoming increasingly sophisticated and this group has made initial forays in accessing international capital markets, the decline in equity prices has an impact on banks in terms of credit risk when customers have been actively engaged in borrowing for equity purchase directly.



The IMF in its Regional Economic outlook on Sub-Saharan Africa for 2009 observed that this behaviour greatly limits the customers ability to raise funds to increase their tier I capital when they need it, and their ability to deal with large shocks while currency deprecations affect bank balance sheets directly when there are currency mismatches.



According to the IMF, the hardening of terms and reduction in lending volumes especially for trade finance affect the liquidity of banks, especially when rollover risks are major or when maturity mismatches are large. "Together, these development reduce banking system liquidity, curtailing banks' capacity to lend and reducing the buffers they have available to deal with liquidity shocks," said the IMF.



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