Beyond Numbers and External Validations


ayo arowolo Binoculars 0906 705 9433 (sms only)

Several years back, at the time when most of the Nigerian banks and a few corporate organisations were caught with the craze of rushing abroad to purchase awards from some influential financial publications, I had gone to visit a highly placed Nigerian who was the country managing director of a global consulting firm then. He has always been self-effacing and on the quiet side but with impact that could not be overlooked. And I admired that virtue.

I wanted to know why he wasn’t too visible , why he wasn’t a beneficiary of some the awards that were being thrown at people. Two statements he made to address my question have been ingrained in my spirit ever since. “The moment an individual, or an organisation or a country starts to depend on external third parties to validate his or its worth, that individual or organisation or country is doomed’ he said.

And he added: “Ayo, watch those banks and their CEOs collecting awards all over the place; it is  just  a matter of time, they would be out of the system.” It was a like a prophetic declaration in a hurry for self-fulfilment.  One after the other, as he had predicted, the banks started to vanish from the banking landscape. Some of their CEOs were arrested and clamped into detention while their banks were forcefully taken over either by government or by other perceptive investors. Between that time and now, the rough water in the financial services industry has shuffled out more than 100 banks out of the system, leaving fewer than 20 operating at the moment.

The twin brother of that malaise is the obsessive focus  of banks, regulators and investors on  numbers as against what those numbers are supposed to reflect or mirror.  I want to suggest that this tendency only reflects what is happening in the country as a whole; so the banks are only acting to type. Otherwise, what is the sense in the government rushing to the press to tell us how Nigeria has become the largest economy with the highest GDP in Africa, when patients are dying daily in the hospitals for lack of bed spaces; when universities are churning out half baked, ill-trained graduates wrongly equipped to fit into the job placement market; when successive governments have  spent billions of dollars on the power sector with the hope of giving us uninterrupted supply of electricity only  to bring us into thickening darkness.

All is Not Well!

Back to the banks. Regardless of what the Central Bank of Nigeria is saying regarding the health of the banks, the truth is that all is not well with the Nigerian banks. It does not mean they are collapsing; it is even more serious than that. The 5-year survey of the Nigerian banks conducted by THISDAY Financial and Economic Intelligence Unit in association with some leading research firms confirms this: When all the top-line numbers from the results posted by all the 15  banks are put together the obvious conclusion we were able to draw was that all the banks were struggling to keep afloat profitably.  As the table below indicates, all the banks, without exception, witnessed progressively declining profit margins meaning the rate at which they were able to convert their earnings to profit has remained on a  downward slide.

  Also, of the 15 banks surveyed over a five -year period most were not able to post an increasing profit margin and while some recorded inconsistent movements on this indicator. Our survey also indicates that only four banks (UBA: 55.8%; GTB: 44.3%; Access: 37.8% and Zenith:19.6%) were able to create wealth for their shareholders in 2016 when we combined the dividends they paid plus their share price appreciation to get total returns. The rest even created financial erosion for their shareholders. Expectedly this is not surprising because the economy itself has been on a downward trajectory with many factories closing shop while a few warehouses are being taken over by spiritual houses.

What is happening in the banking industry is a perfect reflection of the Nigeria’s economic realities. That the banks are not declaring sterling results is not the issue; the problem is the way they have responded to the economic realities.  I will make few observations quickly and then follow with a few suggestions on what I think the banks ought to do, reflecting the outcome of my interaction with analysts on the state of the Nigerian banking system.

On the Wrong Path

One, most of the banks with the exception of a few have virtually abandoned their core banking role which according to a World Bank report involves “accepting funds from those with surplus (depositors) and lending them to those with ability to use additional funds for productive purposes (borrowers). Borrowers must be able to use the funds to create products or services that generate adequate income to repay the principal plus a usage fee (interest, mark-up) at a rate high enough to provide the bank with interest differential income”. The first transgression by the majority of the 15 banks is that most of their loans are not in production, not in locally dependent businesses but in speculative lending activities that fuel high level of bad loans recorded by most of the them since most of those transactions are usually at high interest rates which make loans to go bad.

Related to this is that while banks charge high interest on those few speculative transactions, the interest they pay on deposit is ridiculous or even punitive making most individuals to look at another direction . Some even put their money under their pillows or even in uncompleted building!  Some had to resort to some ponzi schemes which, of course, have pushed many into financial losses and avoidable sorrow. And when depositors hide their money from the banks, banks will then depend on charges instead of interest income to grow their revenues. As we have seen, most banks have survived by patronising government and its agencies for easy monies. The economy is the loser as banks are not channelling their loans to productive sectors which could create employment and beef up the country’s GDP.

 The third game we discovered from our survey is the across -the- board tendencies of the banks to squeeze salaries and overhead to grow profits. When we computed the ratios of staff cost to the number of employees for the banks, almost all have cut their staff costs to half over the past five years without considering the consequences. Some have continued to sack staff giving all manner of excuses. When banks increase the sizes of their operations and then man those operations with poorly remunerated staff (most even prefer contract staff) what you get is what is happening in the banking halls these days when some tellers don’t even know how to operate the computers in front of them!

Options for Progress

First, the CBN should modify the way it assesses the contribution of the banks. While declaring huge profits is important, there should be a guided enforcement on the banks to perform the role they were set up to perform. Over the years, any time the CBN introduced the policy of getting the banks to fund the SMEs, only few banks responded. In fact most banks preferred to lend the money out to speculative borrowers and pay the penalties for not lending to local businesses as instructed by the apex bank instead of gambling with the SME operators as they are wont to say. The CBN needs to wield the big stick and enforce compliance. I am also assuming that the Federal Government would get its acts together and pursue its new economic programme for there is very little the banks can do without an enabling environment.

Second, banks should get more creative. Rather than being obsessed with declaring huge profits (which is alright), they should come up with creative ways of working with local businesses and assist them develop their small businesses into mega operations that can offer employment. Who says banks cannot deploy their senior officers into the offices of the small-scale businesses and work with them on a continuous basis to grow their businesses.  The economists are needed more in the factories than in the banking halls drinking coffee and wasting their intelligences which can be deployed to help their customers.

This would ultimately pay off. In this regards a few banks have done very well. First Banks, for instance, has been known over the years to support small and medium scale enterprises.  This is obvious when you analyse the destinations of their loans.  The bank’s imprints were visible in a number of projects:  contributions to building infrastructure and improving power generation through lending to investors and off-takers. The bank also participated in financing the new Lekki-Epe Expressway, Tejuosho Shopping   Complex, Aswani Shopping Complex and the financing of the, several housing estates across the nation. The bank has played active role in financing local oil businesses and which possibly accounted for while it was affected the most when the oil sector started having problem.

Access Bank is another bank that is actively pushing its finances in areas which could have ripple effects on the country ultimately. The bank, for instance, is actively involved in  financing most of the infrastructure development of Lagos state. So is GTB which has remained very creative in coming up with platforms for promoting entrepreneurship. Most SME operators also give thumbs up for Diamond Bank for being very supportive of their causes. Heritage Bank though not quoted is another bank to watch in terms of helping to grow the productive sector of the economy. More banks should go in this direction.

The final suggestion  I would offer on how the Nigerian banks can add more value to the economy is drawn from the story of Muhammed Yunus founder of Grameen Bank a bank that specialises in extending micro credits to the poor, as told by Stephen Covey in his highly seminar book-The 8th Habit. Dr. Yunus who holds a PhD in economics was a class teacher in one of the universities in Bangladesh. It dawn on him one day that the theories he was teaching in the classroom needed to be practicalised on the streets near his school campus where people were ravaged with poverty

He tried an experiment one day as he was returning home.  He asked one of the women in  the cluster of the neighbourhood how much it would take to run her small business and he learnt it was not more than a dollar. Then an idea came to his mind. Dr. Yunus put some amount together and gave it as a loan to 42 petty traders. To his surprise, all of them repaid the loan without any defaulting. With that success rate, an idea came to his mind, that he could approach the bank and convince them to partner with him to help develop those small businesses. It will be nice to quote verbatim the interactions between him and the banks:

“I thought of the bank branch which was located on the campus of the university, and I went to the manager and suggested that he lend money to the poor people that I had met in the village. He fell from the sky! He said,
You are crazy. It is impossible. How could we lend money to poor people? They are not credit worthy”. I pleaded with him and said: “At least, give it a try, find out-it’s only a small amount of money,” He said “ No. Our  rules don’t permit it. They cannot afford collaterals, and such a tiny amount is not worth lending. “ He suggested that I see the high official in the banking hierarchy in Bangladesh”. I took his advice and went to the people who matter in the banking sector. Everybody told me the same thing. Finally after several days of running around, I offered myself as a guarantor.

“ I’ll guarantee the loan, I’ll sign whatever they want me to sign, and they can give me the money and I’ll give it to the people I want to”. So that was the beginning. They warned me repeatedly that the poor people who receive money would never pay back. I said: “I’ll take the chance”. And the surprising thing was that they repaid me every penny. I got very excited and came back to the manager and said:” Look they pay back, there is no problem”. But he said: “ Oh no, they are just fooling you. Soon they will take more money and never pay you back.” So I gave them more money and they paid me back. I told this to him but he said, “Well, maybe you can do it one village, but if you do it in two villages, it won’t work”. And I hurriedly did in two villages and it worked”.

 The banker suggested that he should try his experiment in four, five, six, seven and 100 more villages that it won’t worked but it worked. Exasperated, Dr. Yunus looked away from the direction of the bank and invested his own money into promoting micro credit.  As at the time of that report, Grammeen Bank was in more than 46,000 villages in Bangladesh through 1267 branches and over 12,000 staff members and they had loaned out more than $4.5 billion.

The lesson here is that banks can get more creative, deploy their top level staff to the street to locate promising small businesses, put their weight and expertise behind them and work with them to grow. Ultimately, they would be the beneficiaries. The profit may not be instant but in the process of time, they would discover that is the only way to grow their profits on a sustainable basis and thus be in a position to meet their obligations to their shareholders. Speculative lending is not the way up The federal government can also take a cue. Before developing the budget for the year, they should despatch their ministers to the factories, to the farms to find out the real situation of things. They will gain vision on how to run the economy and there won’t be any need for budget padding.
I rest my case.