November 25, 20019 / Research
The most significant development in the Nigerian financial landscape in the last 100 days was neither the expected action of the CBN on August 14, 2009 nor the far-reaching nature/severity of the pronouncements - as the market was expectant and agreed on the need for a change. The management of information and the consistent/sustained ‘negative’ news cycle have proven to be the most crucial factor in the market downturn. The last 100 days is replete with such gloom and doom that it is a ‘miracle’ the ASI has stayed above the 21,000 basis points.
But can all the problem be placed on the doorsteps of Regulators?
Hector Sants, Chief Executive, FSA while delivering his speech to participants at the 2009 Securities & Investment Institute Conference, on 7 May 2009 said “From evidence available, it has become demonstrably clear that firstly, albeit with the benefit of hindsight, there are some management decisions that have revealed a degree of incompetence, and at times a rather cavalier approach regarding risk management; secondly shareholders and regulators must be careful not to place excessive reliance on senior management judgements; thirdly, the necessary challenge was missing from governance structures, in particular boards, and finally there may well be questions that can reasonably be asked about the openness and thus, arguably, the integrity of firms dealings with regulators, shareholders and their customers.” 1
He could have been talking about the Nigerian operating environment here. This goes to show that what we are experiencing is a global phenomenon and we should quickly move away from the distracting focus on ‘criminalising individuals’ and embracing the task of market and nation building.
Moving from nowhere to somewhere!
Now that we understand that we have a shared problem, can we change the engagement rules? The CBN must rethink its engagement approach if the ultimate goal is to establish a game changer? To have a market, we must have participants.
In or desire to get the banks to become virtuous and disengage from being ‘facilitators of criminal enterprises’ as they have been branded, we have all be made to pay for the changes needed.
Even if the banks are given long enough to reinvent themselves as more cautious, well capitalised, better balanced institutions, it would be very foolish to believe there won't be costs - and most of those costs will probably fall on us, their customers, rather than on the banks themselves and their shareholders. If all banks were to increase their holdings of liquid assets, shrink their reliance on fee based income and lend less relative to their capital resources in one fell swoop, well there would be a collapse in lending to the real economy and we'd be in a fair old depression in no time at all - and the banks themselves would soon find themselves bust”2
Thus, it is obvious that the price we are being called upon to pay must not be indeterminate; for there is a fallacy of composition arising from all banks discovering virtue and prudence at the same time.
Now, Investors in the NCM must confront the inevitable – recognise the cost they will and are paying for engaging in the only legitimate market for building wealth in the country – the capital market. Our assessment of the situation is that there is no cheering news on the horizon, at this date to encourage a different course of action. Quite frankly, it is pure fantasy to believe otherwise. Yet, the story does not have a sad ending.
History has shown us that we cannot leave our cash-cows – the banks to self regulate. If we are going to achieve a turn around of the losses made in the market – we have to transmute from by-standers to active participants in the paradigm shift taking place. Each generation faces its own major crisis. This is ours, and we must rise up to the challenge.
Events in the capital market with a constant news stream of huge losses by the banks play to investors' big fear – the idea that banks have only recognised the losses they can afford to shoulder today, not the defaults that will arrive eventually. We can start here and receives assurances to that effect. We can do more than just sit down and moan.
Finally, 2009 appears it could yet end as it began – with the markets staying south. We must thus set our sights and thoughts on 2010 and make the best of the opportunity to begin again, better informed and wiser. It is a heavy price to pay but one that we can intelligently use to rebuild. Enjoy Reading the 100 days after report.