The Smartest Guys In The Room – A Look At Nigeria 5 Trillion Naira Scam

Those searching far and wide for the causative agent/s of Nigeria recent economic woes – aside from crashing oil prices, can now call off their search. Or better yet, localize their efforts.

As oil prices hit highs in 2012-2014, Nigeria banks (Deposit Money Banks), went on unbridled binge – dishing out huge loans to operators in the energy sector cumulating in over 5 Trillion Naira of poorly collateralized loans.

To understand the economic implications of this bizarre financial excursion, note that;

N5 Trillion is more than all the total reserve money – N4.0 Trillion (as at march 2015) that Banks (Deposit Money Banks) have with the Central bank of Nigeria (CBN) against loss or risk management.

N5 Trillion is almost equivalent to all the physical moneys such as coins and currencies along with demand deposits and other assets held by CBN, known as “Narrow Money” (M1), – N6 Trillion in the same month of March.

N5 Trillion is almost 4 times the total amount of money in circulation – N1.5 Trillion (as at July 31, 2015).

In the mist of a reprehensible carnival of jumbo loans giveaway, the sharks moved in to take advantage of Nigeria's weak regulatory institutions. Major international oil companies (IOCs) operating in Nigeria, emptied the pockets of their local partners and banks, of trillions of Naira, selling criminally overvalued assets, without the regulators and Government any wiser.

To gain a better perspective, consider one of the crazy deals; when ConocoPhillips – a seasoned player in the oil industry sensed that oil prices at was at its zenith or upcycle in 2013-14, it got Oando – a local rookie in that sector, to buy its assets in Nigeria for a whopping $1.5 billion and “made an after-tax gain of approximately $1.1 billion  on the sale” according to its bragging to the Wall Street Journal July30, 2014.

Many other local players engaged in similar assets purchase. Following the herd mentality, suddenly, every Bayo, Okoro, Sanni, rushed to acquire these over-priced oil assets from IOCs, even without any appreciable knowledge of how the industry operates, or due diligence that may have exposed of the pitfalls of buying at the upcycle of any market boom.

Far worse and ruinous, was the greed and unprofessional manner Nigeria banks pulled out all the stops to empty their vaults in financing these deals, without taking any measurable discretion to risk assess the deals.

According to a report in vanguard of Jul 7, 2015 “Data on nine of the listed banks compiled by Sweetcrude, revealed that the banks gave out a total of N4.668 trillion to energy firms in two years, broken down into N2.01 trillion in 2013 and N2.656 trillion in 2014” First Bank Nigeria Plc – one of the Nigeria foremost banks is leading the pack with about N1.5 trillion in loans exposure to the oil and gas sector in 2013 and 2014 alone.

Anyhow you look at it, indigenous oil companies that acquired these assets at the top of the upcycle of oil price swing may have unwittingly plunged Nigeria banks, and the entire country into another round of financial crisis, perhaps even worse that previously experienced in 2008 as their loans become a toxic mess of non-performing burden.

Already, tremendous financial stress faults is showing up in the system. Nigeria top banks such as First bank with oversized exposure to these toxic oil and gas loans (up to 47 percent of its loan book – estimates Afrinvest), recently reported its “after-tax profits were down 82 percent, while the bank's non-performing loan ratio shot up to 18 percent in 2015 from 3 percent the previous year — in nominal terms the bad loans increased by 445 percent year on year”- according to the Financial Times Fast FT of April 26 2016. And there are many who believe that under-reporting of the enormity of financial imperilment by banks is common, masking the severity of the coming financial tsunami.

But why should you care?
When banks take your money as deposits and lend it out as loans, how they parcel out these loans for risk-returns considerations is only partially regulated by the CBN. In anticipation of juicy returns, banks often stretch the rules when making huge loans to energy sector operators.

When these heavy loan borrowers e.g., those that bought oil assets from IOCs, cannot service or pay back the loans, you have a financial crisis in terms of unmanageable non-performing loans, and consequently, the banks become distressed and fail, and your money is lost. When this happens, everybody suffers, no matter the economic spectrum you inhabit.

As Nigeria navigates one of her worst economic conundrum in recent years, the recent upswing in crude oil price ($45 as at April 27 2016) is a shot in the arm for economic turnaround. However, while economic boom and bust cycles are bound to happen, what is important is whether the “smartest guys in the room” have learnt their lesson from the recent rip-off by majors IOCs; Buy low. And Sell high.

Written by Emma Adoghe.