STILL MANY HURDLES TO SCALE
The recent indications by the Central Bank of Nigeria ((CBN), of a possible strong rally in supply of long term credit to Nigeria's real sector over the next two years obviously gladdened the heart of key stakeholders in the sector.
Basking on the strengthen of President Godluck Jonathan's economic transformation agenda, the CBN in a recently released 2012/2013 Monetary and Credit Policy Guidelines, hinted that the manufacturing sector may witness a major upsurge in the flow of long term credit to the productive economy.
The President had promised at the just concluded South -South Economic Summit in Asaba, Delta State that he was banking on an economy that would not be based on oil and gas but one that would be anchored on strong manufacturing base. President Jonathan bemoaned the country's current mono-product economic structure that depends more than 80 per cent annually on crude oil sales.
From all indications, government's plan to boost credit to the real sector appears to be a deliberate strategy to strengthen it ahead of anticipated sluggish growth in oil and gas sector due to sustained economic crises plaguing Nigeria's trading partners including Europe and Asia. Part of the overall strategies to railroad the policy was the deliberate plan by the CBN to leave the Monetary Policy Rate (MPR) at 12 per cent at which it closed last year, in the understanding that this would encourage banks and the manufacturers to find common ground to interface in the financial market.
Although the apex bank stated that its tight monetary policy stance of 2011 would be tinted with monetary easing which is an indication that the cautious approach to lending by banks would be moderated in 2012 through 2013, to trigger credit expansion in the economy, the concern of some critics at the moment remains whether banks are in shape to create new risk assets after a disastrous gamble between 2007/ 2008. But the Group Managing Director/ Chief Executive of Access Bank, Mr Aigboje Aig-Imokhuede assured the Nigerian business community at last week's Bankers Committee meeting in Lagos that local banks have the capacity to provide an estimated N800billion needed to unbundled electricity companies to stabilize power supply in the country.
Imokhuede who pointed out for instance that the banking industry had so far packaged an estimated N2trillion into the Mobile Telecommunications sector over the past few years wondered why financing the real sector would be a problem even after the recent banking reform has strengthened most of the institutions. Further, he explained that with an estimated N10trillion loan portfolio at the moment, Nigerian banks are adequately positioned to fund Nigeria power sector and other sectors of the economy without seeking external assistance.
The Access Bank boss added it was against this background that the Bankers Committee had concluded arrangement to launch the new lending principle based on sustainability code in June this year. The impending new lending code which all 21 banks would be expected to subscribe to when operational also spells out stringent environmental requirements which borrowers must comply with to qualify for bank loans. Some of the strategic issues that would be of consideration under the new code include environmental impact assessment of firm's operation in its host community and its ability to pay compensation.
Meanwhile in an attempt to make things work as envisaged, banks have already initiated a competency framework for Nigerian bank workers which would enable them compete with their peers anywhere in the world.
The Access Bank boss said the sustainable principle would assist bank to properly assess the capacity of organizations before granting them large ticket financing particularly in the energy sector.
Commenting on how banks can make stronger impact on the nation's real sector, the Chief Executive of Economic Associates, Dr Ayo Teriba restated the need for the CBN to review its position on the Monetary Policy Rate and urgently reduce interest rate in the interest of the economy. He added that the apex bank should drop its MPR and ease liquidity conditions in the interest of real sector. Taking holistically however, economy experts believe the CBN should find more strategic ways of managing inflation threats without tampering with interest rate since doing otherwise may be injurious to the economic development of the country in the long.
With regard to the outlook for the domestic economy in 2012/2013, the CBN expressed cautious optimism considering that the global demand for crude oil was projected to remain sluggish as the US and Euro zone economies recover slowly, even as crude oil prices are expected to continue to be favourable to the domestic economy. With strong conviction that the agricultural sector would lead Nigeria's economic growth and remain robust within the period if increased public sector funding of the sector is sustained for instance.
It would be recalled that the Federal Government had besides the N200bilion commercial agriculture credit to commercial farmers in 2009 also set aside another N200billion for intervention in the manufacturing sector of the economy. Speaking at the just conclued Offshore Technology Conference (OTC) in Houston Texas, the United States of America, Chairman of the Petroleum Technology Association of Nigeria (PETAN), Mr. Emeka Ene, regretted that a combination of high interest charges and dearth of loanable funds could sink the nation's industrialization programmes thus making financing of local content initiative a day dream for Nigerian stakeholders.
Ene who spoke the minds of several indigenous oil and gas investors in the country was not comfortable with the inadequacy of Nigerian banks' capitalization, stressing that it poses real threat to creation of long term risk assets which investors in oil and gas sector require to execute large ticket projects in the industry. He also warned that real growth for local firms in local content initiative would only come when banks are fully repositioned to provide funds for projects spanning 25, 50, to 100 years and on 'low' profit margin.?
According to him, 'The real challenge for increasing Nigeria's local capacity was not technical know-how but the low capitalization of the industry ,'. ?He pointed out that the practice all over the world was for companies engaged in oil and gas activities to pay marginal rates of interest usually ranging between one or two per cent and it is usually in the long term - 10 years, 15 years, 25 years capital period.
He also complained about Nigerian banks demand of an average of 25 per cent interest for credit given to local companies on two year capital, stressing that such position would be very difficult for Nigerian entrepreneurs to compete with foreign investors.?'Local banks have short term funds that can't cope with the huge finance required in the oil and gas industry.
He said Nigerian companies are stagnating due to inadequate capital to do projects for creditors, urging regulators in the finance sector to inject more funds to boost the capacity of local banks on long term projects. Ene also wants the Petroleum Industry Bill (PIB) passed into law, stressing its continuous delay was having dire consequences on the effective implementation of the local content act stressing that without the PIB law, development of local content act might remain stunted for some time to come.
Besides the dearth of long term capital another critical challenge working against banks desire to lift the nation's real sector to higher pedestal was the slow pace of improvement in infrastructure, particularly power, which accounts for the bulk of expenses incurred by manufacturing firms annually.
Early this year for instance, Standards & Poors, a foremost rating agency noted that after about two years of reforms by the Central Bank of Nigeria, the nation's bank's were now fewer, larger and supporting the economy.
Prior to the reform most of the banks were found to be deficient on the 10 per cent capital adequacy, while the 25 per cent minimum liquidity ratio, while the institutions were heavily exposed to oil and gas and the capital market as well. In addition most of the banks were lax in risk management. Having evaluating the report, the agency said the sector needed a longer regulatory track record before it could stop considering corporate governance and regulatory oversight as to be among its key risks, stressing that the industry and regulation has significantly improved.
The S &P report was however not impressed with loan growth numbers within some institutions have been disappointing, stressing that this may have been necessitated by the poor recoveries and profitability in 2011. The firm observed that although the sector had gone through several excrutiating challenges over the reform period, the important thing remains that regulators have laid solid foundation for better performance in the future.
Also commenting on a research analyst at Stakes Capital Limited, Mr Kehinde Sanyaolu, observed that the Nigerian banking sector has been lean on risk asset creation and not lending to productive sectors of the economy. He pointed out that even lending to oil sector began nose-diving in the wake of the fuel subsidy problem.
But what many analysts know is that the reform in the banking industry did not brush the depositors confidence.
According to Mr David Andori, Managing Director of Lambeth Trust and Investment, the regulators must intensify oversight functions on the banks to ensure that they do not eventually dabble into reckless lending as was the case before 2009, stressing this was the only way it can guard against careless lending.
Following about N75billion injection into Union Bank of Nigeria Plc, by Africa Capital Alliance, recently, the bank which has since reconstituted its board said it now has a capital adequacy ratio of about 19 per cent as against the 10 per cent mandatory industry requirement, thus putting it in a stronger stand to deliver more services to the economy.
Despite doing a couple of large transactions in the economy, management of Fidelity Bank for instance, is making no pretences at all about its willingness to handle more large ticket transactions that would further deepen the economy and create more jobs.
After financing three key multimillion dollar transactions including the GZ Industries in Agbara Ogun State and the Independent Power Project for Lagos State Government and the first two indigenous oil platforms for Mobil Producing Nigeria and the Nigerian National Petroleum Corporation (NNPC), Nigerian business community are however not in doubt as to the capacity of the bank to support the real sector in the unfolding scenario.
According to the bank's managing Director, Mr Reginald Ihejiahi, the bank's capital adequacy ratio (CAR), which measures an institution's financial strength and capacity for future expansion, was 30per cent which stands above the regulatory minimum of 10 per cent. Ihejiahi explained that this provides Fidelity Bank sufficient strategic liquidity to implement its expansion strategy and build capacity to grow shareholders wealth.
In the same vein, liquidity ratio, which measures a bank's solvency and ability to meet maturing obligations, stood at 51.99 per cent as at December 31, 2011, above regulatory threshold of 30per cent, thus providing liquidity and headroom for credit expansion just as its lending recovery peaks with improved recovery machinery.
In the same vein, the Assets Management Corporation of Nigeria (AMCON) said it invested a total of N1.7 trillion for the purchase of Non-performing assets of banks including the three nationalized banks.
AMCON Chief Executive Mustafa Chike-Obi said the investment was government's strategic move to foreclose the collapse of some of the banks considered insolvent then, stressing that the institutions are now in the right mood to service the economy for sustainable growth. He explained that the corporation has so far injected about N300billion into Bank PHB, now Keystone Bank to soak its heavy exposure to public sector liabilities, stressing that without this the bank would have been liquidated while depositors' funds would have been lost in the wake of the development.
Similarly, Ecobank transnational was believed to have paid an estimated N38billion for the ordinary shares of Oceanic Bank, and N16.5billion for its preference shares to assume total control of the institution.
Having recapitalized the institution, the apex bank believes that what was now left was it to build risk management capacity, through continuing education and training programmes for staff, management and members of the board of financial institutions. That also explains why Deputy Governor, Financial System Stability, CBN, Dr. Kingsley Chiedu Moghalu,said in Lagos recently that the importance of training was underscored by the supervisory role of boards in understanding and monitoring risk taken by financial institutions in their operations.
He noted that viewing risk management across the organization's different functions minimizes the possibility of overlooking other risks. According to Moghalu, a silo view of risk management may allow gaps in control to persist, with no one assuming responsibility for a risk, or may allow conflicting internal controls to develop.
'The developments in the financial market place, globalization, and complexity of banking products and services, advances in technology, and the overall pace of change have increased the volume and complexities of risks facing financial institutions over the last two decades.'