Sharp practices, others dry up Why banks' credit pool



A year after he introduced wide-ranging reforms in the Nigerian banking industry, Central Bank (CBN) Governor, Mr. Sanusi Lamido Sanusi, says the banks have not come out of the woods.

He said the present precarious state of some banks was due to the fraudulent practices of their helmsmen between December 2008 and December 2009.According to him, the indicted banks’ chiefs fleeced the industry of 66 per cent of the sector’s capital and stashed the money in foreign countries, leaving the institutions dry.The aftermath of these sharp practices, he said, is that banks’ credit, particularly to the real sector of the economy, is not growing.Sanusi, who until a year ago was the managing director of First Bank of Nigeria Plc, in an exclusive interview with The Guardian in Abuja, said most of the capital resources declared by the banks before his reform were “fake or bubble” funds.

The CBN boss, who also reviewed his one year in office, said insinuations that credit drought in Nigeria was due to the reforms he initiated on assumption of office were untrue.He said credit availability to the end-users was mainly determined by supply and demand factors, adding that the global financial crunch had affected trends in the local industry.Sanusi said: “I want to place this in context and I don’t like being defensive. In fact, I am not defensive. We will talk of the banks, but let’s first look at the international context, because when people say my reforms, if something happens that is uniquely Nigerian, then maybe you can blame the CBN.” 

Contrary to the widely held view, Sanusi said that demand for credit is not driven by interest rate but by profit expectations.He said: “There is a credit crunch going on in the United States (U.S.) and all over Europe. In South Africa, the year-on year credit growth was negative even though its economy did not have a banking crisis. So, let’s try to understand two things about credit: On the demand side and on the supply side. On the demand side, let us understand that credit is a derived demand. You don’t borrow money for the sake of doing so. You only borrow money if you have something to do with it. Which is why people who think that because interest rates are low, they are going to have credit demand, don’t understand economics. The demand for credit is not driven by interest rate.

“The demand for credit is driven by profit expectations. We had very high interest rates two years ago, but because people knew that they could borrow and go to the stock market, and make an even higher return, they continued borrowing. That’s all that matters. Now, in a general macroeconomic environment, where the real economy is not growing, you don’t have demand for credit.”He said if a manufacturer borrows today, it is because he knows he would produce goods and sell them at a profit. According to him, “if the demand for his products is not there or is weak, what happens? He cuts down on production, that means, he cuts down on his raw materials’ demand. He cuts down on his labour and he reduces his borrowing. Because it does not make sense to borrow if you are going to produce goods that no one will buy. So, first of all, we’ve got to ask ourselves in an environment where there is a slow growth in money supply in general because of weak demand, where is the credit going into? Which is why in all those countries, when they had banking crises, the first thing they did was a fiscal stimulus.”

The CBN boss further explained that the amount of credit that banks could give is driven by the strength and quality of the capital that they have and liquidity. While admitting that there is liquidity in the country, Sanusi said if the banks have no capital, they could not lend. “When we said that banks must have capital adequacy ratio of 10 per cent, it means that for every N10 of every risk weighted assets that they have, which include credit, they must set aside N1 of that. So, if a bank says it has N100 billion capital, based on rules, they can build up to N1 trillion of risk-weighted assets. Now, these banks grew over two, three years, and they grew on the basis of a claim that they had raised capital during consolidation.” 

Turning to the era of banks’ frequent raising of Initial Public Offerings (IPOs), Sanusi said many banks used the exercise to raise dubious or non-existing capital. “It was fake capital. A particular bank, for instance, did an IPO, 88 per cent of which was financed with depositors’ funds, which means only 12 per cent was raised. You won’t see it because at the beginning there was subscription, but what happened? They just arranged with somebody to lend money to stockbrokers who bought the shares and they still went back and bought those shares at N22 and the shares crashed to N3. 

“That was N140 billion wiped out of depositors’ fund. So, if a bank says I have N100 billion capital, and based on that they built several hundred billions of assets, the capital adequacy ratio of 12 per cent or so, that is good, but when you find out that in fact, half of it was not true capital, it means that the credit portfolio that was built in the system in the first place was far in excess of the portfolio that would have been supported by the amount of real capital in the system,” he stated.Sanusi compared the practice to what happened in Iceland, where he said the banks collapsed because half of their capital was financed with debts from the banks’ books. “It was also called bubble capital. So, on the supply side, the banks cannot lend.”

In one year (December 2008 and December 2009), the CBN chief said Nigerian banks lost 66 per cent of their capital, first from bubble capital and from loans that were given but were not repaid, and then from money that was stolen through Special Purpose Vehicles (SPVs).  “People set up SPVs in the name of whoever took monies out of the banks, inferring as loans and then took them out of the country. All of that came out of the banks’ capital. Until you repair the balance sheets of the banks, they will not be in a position to grow loans. And that’s why we establish the Asset Management Company (AMC) because that is supposed to deal with toxic assets.

“It is also supposed to deal with the recapitalisation of the institutions. So, we will address the supply side. We will continue working. The new Finance Minister in particular, has been extremely committed to how we can stimulate aggregate demand; how we can get government to spend more efficiently and effectively. And that will improve the supply and the demand sides. As we work together to build both demand and supply sides, we will get it. But we need to understand that this is not about the CBN reforms. These are the consequences of mismanaging financial institutions. 

“Let me give you the analogy that I use. I came in and was aware that there was a ticking time-bomb in the system, and I had two options: Ignore the time-bomb until it explodes and brings down everybody. The other was to go in and have a controlled explosion or detonation and there would be some casualties, but the casualties would be nothing compared to what would happen if it had gone out (uncontrolled). That’s exactly what happened. So, if you worry about the credit crunch, just ask what would have happened if those banks were allowed to fail.”


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