News: Africa Nigeria Banking Industry

New Policy Paper: November 2011

Public –Private Partnership: Will it Fix Infrastructure In Nigeria?
By Olusegun Sotola & Thompson Ayodele

Executive Summary
The decrepit infrastructure in Nigeria and the failure of government to adequately address the challenge has fueled the adoption of Public-Private Partnership (PPP). This is reinforced by the successes of private participation in telecom sector where private provisions have led to accessible, available and affordable services. This raises some questions in the light of known traditional roles of government. While some believe that it is fundamentally antithetical to the idea and philosophy that underpins public governance, proponents of this framework argue that this is the only means through which infrastructural challenge in Nigeria can be mitigated.

The prevailing regulatory framework and the nature of emerging trend in PPP projects diminish the expectations that it might be the ultimate solution to the infrastructure challenges. Controversies, projects failure and abandonment, protests from the public and allegation of corruption have become the hallmark of many of the projects.

The nature of PPP in Nigeria has shown that the politics of introducing PPP projects has clouded the practice of the framework. The PPP arrangement at present is skewed against private sector. It is evident to see public authorities wielding more power and becoming a dominant partner. The snag in this ‘master-servant’ relationship is most PPP arrangements cannot outlive the administration that initiated them.

While PPP can address infrastructure challenges, this is achievable when parties involved have equally shared responsibilities and risks. However, there is a lacuna in the regulatory framework governing PPP at present.
This threatens projects executed under the model. Given the sophistication of issues involved, many state governments have limited expertise to effectively regulate. Relying on firms under PPP for expertise may lead to regulatory capture.

Competition is the best form of regulation. Competition can help to reduce prices and expand access. Access can increase when incomes rise and economic reforms that increase incomes can be expected to increase access irrespective of the nature of PPP. PPP activities should be open and transparent. This must go pari-pasu with mass public education to correct the widely held notion that only government should provide infrastructure.
Globally, government is the driven force for infrastructure projects. This is why private participation is government induced and private sector only participates when there are enabling conditions.

Full Paper is Available at:

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Africa’s future is in the palm of its hand
Ahead of Climate Conference in Durban, South Africa, November 28 – December 9, 2011, the Initiative for Public Policy Analysis, an award winning organization and one of the 2008 and 2010 top 25 influential think tanks in Sub-Saharan Africa today runs this Editorial Opinion in BusinessDay, South Africa.
Africa’s future is in the palm of its hand
Africa’s future is exceptionally bright if it can harness the full potential of its people and its natural endowments and palm oil is set to be a big part of that future…but not when protectionist anti growth activists stand in the way.

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THOMPSON AYODELE and ROGER BATE explain how nations across Africa can enjoy prosperity

http://www.cxpress.co.za/showArticle.asp?aid=4561
CXpress – Plettenberg Bay,South Africa

LAST month, the International Monetary Fund and the African Export-Import Bank made $800-million in credit available to Zimbabwe.

This initiative is meant to help the country restore its ravaged economy.
But for Zim and other nations that lack the basic institutions required to build wealth, simply loaning or giving them money is not an effective strategy for reducing poverty. What’s needed instead are programmes that foster the conditions that cause long-term prosperity and well-being.

A report just released by the Legatum Institute, an independent development think tank, helps identify some of those conditions.
The 2009 Legatum Prosperity Index was developed by a group of 13 distinguished economists and policy experts. The study ranks 104 nations by their level of prosperity.

Of the 15 countries that ranked lowest on the Index, nine are in Africa – even though many African countries, from the small Guinea Bissau to the relatively large Ethiopia, were excluded from the rankings due to a dearth of data. Overall, 55% of Africa’s population, and 90% of the world’s population, is covered by the Index.

Africa’s dismal performance can’t be attributed to a lack of aid. The region received a total of $716-billion in international assistance between 1960 and 2006, after adjusting for inflation. Yet many countries in the region have failed to achieve sustained economic growth. In 1981, 53.7% of Africans were living below the poverty line. Today, that number is virtually unchanged – it’s still above 50%.

While Africa’s poverty has not diminished, other countries have become richer, creating an ever-widening degree of global economic inequality. In 1960, the average person living in Asia, for instance, was poorer than the average African. By 2003, the average Asian was almost 2.5 times richer than the average African.

For policymakers, then, the big question is as follows: If 50 years’ worth of aid hasn’t had much effect, what will?

The Index points the way to an answer. It identifies nine ‘building blocks’ of prosperity – economic fundamentals, entrepreneurship and innovation, education, democratic institutions, governance, health, personal freedom, security, and social capital.

Nations lacking in these areas are at a serious disadvantage when it comes to achieving both wealth and happiness. Viewing Africa through this lens, the nature of the region’s problems becomes clearer.

Look at Kenya, which ranked 95th on the Index. Almost a quarter of Kenyans live on less than $1 per day. The country’s plight is exacerbated by a disastrously high incidence of HIV/Aids, with close to 5% of the population infected.

Traditional aid hasn’t helped Kenya because it doesn’t address the country’s systemic problems. Kenya is plagued by high rates of assault, homicide and theft, due to frequent civil conflicts often caused by its repressive and corrupt government.

Or take Nigeria, which came in at 98th overall. The technology infrastructure in that country is very poor, with less than one personal computer per 100 people. Only 63% of Nigerian workers have attended primary school, and less than a third of the country’s students have a secondary education. Nigerian elections are poorly regulated, and there’s no independent judiciary. The result has been severe political instability that’s crippled this nation of over 140-million.

Contrast the state of these two countries with South Africa which, at 51st, is the highest ranking African country on the Index, and would be higher were it not for its high crime and security concerns. South Africans have relatively robust civil liberties, including the right to freely associate with political and civic organisations; 70% of the country’s citizens report being satisfied with freedom of choice in their daily lives.

SA has exceptional entrepreneurial activity, with over 41,350 new businesses registered in 2007. And the SA school system has one teacher per 30 students – a good ratio relative not just to Africa, but to the world.

Another African success story is Botswana, which ranked 56th on the Index.
Botswana has experienced consistent economic growth over the last few years. In fact, since it gained its independence from Great Britain in 1966, the country’s economy has grown faster than China’s by some measures. Botswana would have ranked even higher if it were not suffering from one of the world’s worst Aids epidemics.

The country’s progress is partially attributable to the fact that it’s relatively democratic? – 84% of Botswanans report that they’re confident in the fairness of the judicial system, and 91% believe that the country’s political elections are honest.

The Prosperity Index makes clear what many already know about prosperity:
in order for any society to flourish over time, people need to feel safe, and have the freedom to express themselves, start businesses, practise their religion, keep healthy, and develop meaningful social connections.

Growth is absolutely vital for Africa. The last 50 years of development policy have shown that money alone, especially money donated, can’t bring the region out of poverty. What’s needed is a holistic approach that focuses on the building blocks that empower Africans to help themselves.

* Roger Bate is the Legatum Fellow at the American Enterprise Institute in Washington, DC. Thompson Ayodele is the Executive Director of Initiative for Public Policy Analysis, a public-policy think tank based in Lagos, Nigeria.

The 2009 Legatum Prosperity Index, available at www.prosperity.com, was released on October 28.

Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompson.ayodele@gmail.com
Website: www.ippanigeria.org
*****Good Public Policy is Sound Politics**********
Tel:01-791-0959
Cell:080 2302 5079

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The financial sector in Nigeria has been in crisis of confidence over book cooking and insiders’ abuse. IPPA Nigeria has predicted this crisis and is again suggesting how best to restore confidence.
The article below is widely published in Nigerian media lately:

Will Moghalu restore confidence in banks?
By Thompson Ayodele

The Central Bank of Nigeria (CBN) has completed the audit of the remaining 14 banks. While some CEOs had been axed and the affected banks get bailout to the tune of N620 billion, it is incontrovertible that the banking sector is suffering from crisis of confidence. Already a vast number of people are unsure if there will not be a re-occurrence of the insiders’ abuse and account cooking.

Earlier this week, Minister of State for Finance, Remi Babalola, maintained that there is a need for the restoration of confidence in the Nigerian financial system so that the sector could play its roles in the economy. He is right. Right now the banking system faces a number of challenges which include stiff competition among players, stakeholders’
expectations and adoption of risk based premium assessment. Restoring confidence does not come by sheer luck. It is achieved through a combination of factors which include those who take key decisions at the apex bank.

Except lessons learnt from this crisis are well absorbed and supervisory activities of CBN are well manned, a crisis of higher magnitude might re-surface in no distant time. Of course, no one would have expected the current happenings in the financial sector given the rate of bank liquidation in the 90s and the recent consolidation. The apex bank needs to ensure banks conform to regulations and be able to nip in the bud whatever problems that surface before they mature. The present crisis therefore is a lesson for everyone on how not to supervise banks. It simply means the regulator should change the way banks are supervised.

Determined to address this, President Yar’Adua nominated Dr. Kingsley Moghalu as the CBN’s Deputy Governor for Financial Sector Surveillance
(FSS) subject to Senate confirmation. If confirmed, he will directly supervise the banks. To nominate is one thing and the ability of the nominee to perform creditably well is another. The real issue now revolves round the ability to effectively monitor and supervise banks so as to forestall future occurrence.

The primary functions of deputy governor (FSS) are; firstly, prudential supervision and regulation of deposit money banks and corporate governance oversight; secondly, managing development finance – policy formulation on microfinance, guaranteeing credit schemes and other initiatives to support economic development through the real sector including agriculture and small and medium scale enterprises, and lastly regulating other financial institutions such as micro-finance banks, mortgage banks, finance companies and bureau de change.

Obviously, these roles are multidisciplinary, and go well beyond the technical confines of traditional commercial banking. Occupiers must be able to discharge this effectively and be able to make robust contributions to policy formulation at board of directors’ level. Informed policies are important at this time to block the inherent gaps in the system and position our banks for competition in the global financial market. The CBN governor has once admitted the apex bank needs to be strengthened in order to be more effective in its roles.

Given previous experience, banks supervision requires individuals who have strong track records of accountability and transparency, risk management, and corporate governance. In addition, such individuals should also be able to bring a high level of credibility to the regulatory role of the CBN. The public policy implication is that it will help to restore the confidence of investors, depositors, and a wide range of stakeholders in the financial sector.

Moghalu’s track record inspires confidence. Aside being a professionally certified risk manager, he has managed portfolio and strategic risk for a Geneva-based global fund with $21 billion in assets under management, redesigned the accountability and regulatory compliance system of the United Nations as a member of a high-level panel appointed by Secretary-General Kofi Annan, led money-laundering and asset tracing investigations against indicted war criminals responsible for Rwanda’s genocide, and has more recently been a risk management and corporate strategy consultant to global corporations, including one of the world’s biggest banks after leaving the UN.

What usually compromises regulator’s effectiveness is the unethical and unprofessional camaraderie that existed between the regulator and the banks. It is quite easy for the regulator to be captured, particularly if those at the helms are mostly from within the industry. With this consideration in mind, it is necessary to ensure that anyone in charge of bank surveillance has no direct affiliation or pecuniary interests in the banks. The nominee’s profile shows he is coming outside of the banking system which will enable him to look at issues objectively and dispassionately.

Above all, crisis like this also requires the need for new regulatory framework. This is because operators may have perfected methods of manipulating the existing regulatory system. Financial crises often expose weaknesses in the underlying regulatory frameworks and the supervision systems that are supposed to reinforce them. This no doubt calls the need for design of structures that will ensure that adequate information is at the disposal of the Central Bank. It behoves the apex bank to be alert to such information and act in a manner that will break the cycle of corporate governance violations that is increasingly threatening the future of the Nigerian financial system.

Around the world, SMEs are the superstructure on which sound and sustainable economy is built. In recent time, there has been utter neglect of the SMEs. The lending practices are skewed against them even with genuine and verifiable collaterals. Experience in development finance, particularly through consistent records of performance and leadership roles in first-rate global institutions, are critical in understanding the importance of SMEs as engine for growth.

Finance is a risky business. Regulation and supervision alone cannot completely eliminate crisis. However, upon his confirmation it will be Moghalu’s responsibility to ensure that sound corporate governance, accountability and simple but stringent reporting standard become the hallmark of our nation’s financial system. This is the surest way in which confidence can be restored.

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Africa’s Foreign Aid Conundrum: Debate Continues
9/3/2009
The debate whether the so-called injection of foreign cash into developing countries in Africa will promote economic growth recently shifted to the European U nion Parliament in Strasbourg, France.
“Instead, we would scrap the Common Agricultural Policy, open our markets and build infrastructure directly in situ: in other words, we’d fund (say) a new highway across Sudan and hold competitive tenders for local companies to build it.”

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Tasks before the new CBN Deputy Governor

August 21, 2009
By Thompson Ayodele

THE Central Bank of Nigeria (CBN) has completed an audit of 10 out of 24 banks, of which only five banks scaled through. Consequently, the Managing Directors (MDs) and Chief Executive Officers (CEOs) of the affected five banks were fired, followed by an injection of about $2.6 billion in convertible loan to stabilize the affected banks and preserve public confidence.

As at now, the government has injected funds and guarantee loans of the ‘Five’. However, this should be seen as a temporary rather than an ultimate solution. Account cooking might actually increase as other banks may risk insolvency in the future, believing that the government can always bail them out when in distress. Injection of funds should be considered a temporary measure pending determination of an exit plan, either through merger and acquisition or failure.

That the CBN governor has acted swiftly and decisively in restoring confidence in the banking sector does not automatically imply that the issues facing the banking sector are now fully resolved. Rather the CBN response provided an avenue to more appreciate the degree of regulatory failure and inadequate corporate governance in the Nigerian banking industry.

The CBN response is a vindication of the positions that have been long expressed by local commentators and public policy analysts calling to question whether all is well with the Nigerian banking sector. For example, questions have been raised as to the actual state of health of the banks, which hitherto had been shrouded in secrecy with guesswork being completely at work.

Even as questions were being raised, both the banks and the CBN have had to debunk the visible indications that accounts of many of the bank might actually be in the red. But one would hesitate discountenance their defense given the billions of Naira in profit that these banks often declare quarterly or half yearly. One wonders whether these banks compete on the basis of such declarations, albeit falsehoods. Many of the banks have won awards within and outside the country, while their ratings had soared higher. The public now knows better. What can be inferred from the CBN governor’s sacking the 5 bank CEOs is an admittance that Nigerian banks tend to be reckless. A great deal of banks’ problems has been traced to unsafe exposure to margin loan. Banks gave out loans in excess of their single obligor limit. Often most of these loans are either backed by inadequate collaterals or dubious collaterals. Although who a particular bank grants its loans to is its business, but it is a core banking practice that must meet some regulatory procedures. In this case, strengthening the quality of credit risk analysis and moderate the size of exposure of individual bank is equally important.

More specifically, the signal that the affected banks were indeed distressed relates to their transactions at the CBN’s Expanded Discount Window (EDW). The EDW enables banks borrow funds for a longer period (e.g.
as long as 360 days) as against the overnight arrangement that was in place previously, which ultimately allowed banks easy access to funds anytime they are in need. According to the CBN governor, the affected five banks accounted for 90% of the whole of EDW transactions, whereas their non-performing loans stand at about 40% of the total for the whole industry. Thus, if five of 10 banks that have undergone comprehensive audit failed, that the remaining 14 banks will scale through is less obvious.

The argument that the signs of distress in the affected banks started only a few months earlier is misplaced. Rather, the crisis reveals severe shortcomings in corporate governance of the Nigerian financial institutions generally and the banks in particular. There seems to have been a systematic cover-up and failure of the regulatory bodies to perform their required functions. Potential bank failures have not been acknowledged.

Credibility has always been an issue in the banking sector. Defective supervision of the banks has brought the crisis of confidence into the banking industry. Also, the apparent unethical and unprofessional camaraderie that characterised the regulators and industry operators has compromised regulators and made effective supervision weak.

The ownership and management structure of Nigeria Banks appears to be structurally defective. This ought to be addressed. Some banks are built around certain individuals (e.g. MDs/CEOs). This provides incentives for such individuals to exercise excessive power in those banks. In theory, shareholders own those banks but it is oligarchy in practice. In Nigeria, such individuals have been seen to be very powerful to the extent of manipulating shareholders. Not a few thought the CEOs actually owned their banks because they were seen competing for political relevance with politicians at the expense of their banks. The role of the regulator has been less obvious in this regard.

The above suggest that the existing regulatory framework have failed to provide the checks and balances that banks need in order to cultivate sound finance and banking practices. Thus the crisis can be seen as a crisis of corporate governance. The appointment of Dr. Kingsley Moghalu as a Deputy Governor (pending Senate confirmation) is expected to put improved corporate governance at the centre of banking practices in Nigeria. In this regard, he will have to rise over and beyond mere slogans and be a problem solver as his profile shows.

Good and improved corporate governance is a key element to the integrity of Nigerian financial institutions and markets, and central to their health and stability. A key task before the deputy CBN governor is to institute a reform of regulatory framework emphasising greater corporate governance in the finance and banking sector. This will involve a set of processes, policies, laws, and institutions to affect the way the banks are directed, administered and/or controlled.

Also, the principal stakeholders will include the shareholders,

management, the board of directors, and the public. An important public

policy element here is to recognise a set of interrelationships among

these stakeholders and the goals for which they are governed. For example,

the corporate governance system should ensure the accountability of

certain individuals (E.g. MDs/CEOs) in individual banks through mechanisms that reduce or eliminate agency problems. Agency problems in the banking industry arises when the banks act on behalf of the shareholders/customers under conditions of incomplete and asymmetric information such that MDs/CEOs pursue own self-interests rather than the interests of those they represent. Independent reports, public disclosure procedures, and public information about the state of health of banks can potentially eliminate agency problems and positively impact on the efficiency and competition of the banks. The ultimate effect is a regulatory framework that enhances public welfare.

Obviously, regulation and supervision alone might not completely make the business of finance and banking less risky. However, through effective corporate governance, it is expected that Moghalu’s office will ensure that taking excessive risks becomes less frequent, less costly, and not a drain on public purse.

Ayodele is the Executive Director of Initiative for Public Policy Analysis, a public policy think-tank in Lagos and a fellow of American Enterprise Institute, a Washington DC think tank.

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Bank CEOs Sack: IPPA Nigeria Vindicated

8/17/2009

In February this year, we published an article in nearly all the dailies about the banks in Nigeria. We stressed that all was not well with most banks as the public was made to believe and that most of the banks’
accounts were actually in red. Last week Central Bank’s pronouncements over some banks have vindicated our position over state of banking industry in Nigeria

“…many of these banks are not as healthy as the public was made to understand by the Central Bank governor. Many of them might possibly have their accounts in the red. But the public was manipulated into believing otherwise considering figures from their annual statements of accounts.”

“Unfortunately, government intervention in the banking sector would ultimately be a reward for some bank chief executives who have become richer than their banks. It is an incentive for the chief executives to continue what brought most of the banks to their present state.”

The full article can be read at:
Blind Optimism Over Intervention in Banks
http://allafrica.com/stories/200902090459.html

Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompson.ayodele@gmail.com
Website: www.ippanigeria.org
Tel:01-791-0959
Cell:080 2302 5079
*****Good Public Policy is Sound Politics**********