Doing God’s Work

One worry on my mind today is how much good can banks do?  Within an economy in a state of dysfunction, financial markets heading to a tailspin or sustainable jobs needed to keep the nation standing, can a bank still have a moral imperative? How does a bank allocate the resources it keeps in custody between those who out of fear save their money and those driven by creative and illicit greed go for brass rings.   Three Nigerian banks in Nigeria before the end of the year will declare a profit of N100bn. You wonder if that is possible in this economy but as at June 2012, GT Bank has declared N53bn, First Bank (N49bn) and Zenith Bank (N45bn).  These three banks account for 54% of profit in Nigeria’s banking sector. Adding Access Bank of N26bn and UBA with N24bn to that top –tier group shows the profit meter; sorry these one still chase demons of a merger and bloated structure.

The top five banks have 72% of industry profits. If the economy continues in the outlined structure below and banks keep up the frenetic chase, N100bn profit mark by the trio is much more possible. Connecting the dots of the banks’ profit to the rising domestic bonds of government is obvious. The top three banks have N948bn in treasury bills with Zenith Bank leading with N542bn. The CBN risk-free 90-365 day paper which helps banks liquidity  has yields of 15-17%. The top four banks (UBA included) have a total of N1.15tn in government bonds and other securities. Government bonds yields presently range from 16-17% for federal government while the state bonds (guaranteed with standing order from CBN as the allocation is shared) are between 18-20%. The loan book of three banks to private sector reads N2.9tn. Also note that out of the N2.9tn, some banks still lend to states directly as loans (not through bonds which goes through the stock exchange).  A look  into investments which the country is attracting adds another alluring paint to the Nigerian canvas. In first quarter of 2012 while the sticky foreign direct inflows lost 19.7% on the prior quarter to close at US$2.13bn , portfolio investment (the more volatile part of the inflow used in trading bonds and securities ) rose significantly by 181% qOq. With the capital market taking half sinusoidal movement,  government debt is just a sweet okra froth racing into  the bank’s bowels.

So far this year, Debt Management Office has auctioned government debt of N611.27bn at yields of ranging from 2014 to 2022. Also, CBN in July sold a total of N245bn with N65.05b for 91-day bills, N125.40bn for 182-day bills and N60bn worth of 365-day bills.  Despite the profit bucket which this government instruments offer, Nigerian banks still keep interest rates as high as 24%. In developing economy that needs funding for sound infrastructure and manufacturing fortresses to employ its youths, credit to private sector grew from December 2011 to June 2012 grew by 3.6%. With the stock market numbers oscillating between bears and bulls, government bonds with the risk-free label (beg the militants not to shut down oil) is the cash cow for banks. For the bold with the appetite to borrow except the likes for institutional customers like Dangote, NNPC, and Forte Oil which attract low interest rates because of volume, how can 22-24% interest rates be sustainable for business with huge energy costs?  That’s why I wake this morning bothered about the hustle of the Nigerian entrepreneur with government and banks playing the game stacked against his\her social mobility. How do we slow down the banks to lend to private sector and allow the small businesses to thrive?   Though the risk premium for retail customers is the bank’s narrative why lending rate is high but this brings me back to be opening question, how much good will a bank do to help draw people up the pyramid. With Central Bank jokingly tightening liquidity (through the use of monetary policies to raise banks’ cash balance at its vaults which yields 0%), banks  in the beat to maintain profit portfolio, either raise interests rates or focus on non-risk assets (which needs no capital provision) by stalking government bonds. The FBN Capital offer which closed last week  meant to gather retail funds to buy government securities (fixed income) is a sign of the times and things to come. Government wants to slow down with an Eurobond, I think they know in their closet that domestic debts at N6.15tn with such huge borrowing costs is a speedy train out of rails  whose wreck can be foretold.

In the midst of the challenges of nation in terms of infrastructure , N100bn profit emerges, can we say this profit has crossed the line? Will it be safe that banks review lending rates downwards, take some heat and allow the right economy that support private sector expansion  emerge?  Lloyd Blankfein, the Goldman Sachs CEO said he as a banker (after selling toxic mortgage bonds to German Bank IKB and at same time betting against it through John Paulson) is doing God’s work. I mean those kind of workers (moneychangers and bankers) the Biblical one-talent man should have met and given his paltry fund for trading. In Nigeria, the banks and government now worship at same cathedral but this can’t be God’s work, the Leviathan, the comrade of the devil is in our midst.


6 thoughts on “Doing God’s Work

  1. Nice job identifying government as a key factor behind rising interest rates. Nothing a like a big player who is willing to pay whatever for loans to screw things up.

    Asking banks to reduce interest rates? I don’t know about that. Its financially and politically difficult and probably wont happen anytime soon.

    the govt needs to figure out how to limit its participation in domestic markets but that is unlikely to happen either.

    one big mess .

  2. How and why did Government interest rate became high again? One of the achievements of Soludo’s era as CBN governor was bring down the yield on TB. Which forced banks to lend to the private sector which lead to toxic debts in banks books. With the banks with so much money they do not know what to do with, why increase the rate you pay when you can influence it?

  3. ‘How do we slow down the
    banks to lend to private sector and allow the small businesses to thrive?’ ….. and thereby create jobs and boost the economy…if I may add that to it.

    That was a question that gripped my attention all via this piece.

    ”A July 2010 study, “The Importance of Startups in Job Creation and Job Destruction in the US,” by Kauffman senior fellow Tim Kane found that since the 1980s, new startups “create an average of 3 million new jobs annually. All other ages of firms, including companies in their first full years of existence up to firms established two centuries ago, are net job destroyers, losing 1 million jobs net combined per year.” Kane came to the astonishing conclusion, “Startups aren’t
    everything when it comes to job growth. They are the only thing”.”

  4. Wow very clear insight into the banking system in Nigeria for a novice like me. Great work. I hope somewhere along the line the principle of sanity will prevail.

  5. Just had an arguement with a retail colleague yesterday over this…banks don’t support start ups but selling TBs is an almost weekly basis now. Low risk , no risk rather high interest bonds.

    To get the real sector to work in an economy like ours where banks trusting enterprenuers is at its lowest we need more guarantees from CBN for this banks to comfortanly lend money to that sector. Its easier for a camel to pass the eye of a needle than for a nigerian bank to willingly support a start up…

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