By Omoh Gabriel
Mr. Eze Nwagbaraji is a tested investment banker and fund manager who has spent several years in the United States of America’s financial services sector. He has written several articles on banking reforms and capital market operations in Nigeria and the US. Last week Monday, he was guest of Vanguard Editors and answered probing questions on the ongoing banking reforms. His answers provided some new insight into what has gone wrong in the financial services sector in Nigeria and why foreign investors are not likely to put their money in the eight rescued banks in Nigeria.
Excerpts
What is your impression of the economy, is Nigerian on the right track?
THE economy is one that has to be private sector-driven. That is the trend around the world now and that is the global perspective, if things have to work out for the country. How that is done or how it functions is for those who make it happen, people that operate the systems to work out. There are those who think it is working out and there are those who think it should have been done better, when it comes to the economy. So it depends on what you believe and what you think are the best practices especially when you do comparative analysis.
The banks are currently not lending money to businesses and the implication of this is better imagined, what in your opinion are the consequences on the Nigerian economy?
Lamido Sanusi, the CBN governor represents a paradox in banking. For the one year that he has been there as CBN Governor, you know that within the first three months he assumed office, he said that 40 per cent of the banks in Nigeria are in grave situation according to his figure. By that pronouncement, he induced a lull in the money and capital markets in the country. No Central Bank Governor does that knowing full well that the financial services sector is sensitive to information and thrive essentially on confidence.
For me, it is a question of integrity and his exposure to banking. He has been there for one year and I think the question is whether he is competent and well prepared for the job.
It also borders on whether he is a competent banker at the Central banking level. For all of these, time will tell, but at this point in time, most people who understand what global banking is all about will give Sanusi a failing mark.
I think in one of the several articles I wrote for Vanguard, I mentioned this there that within the first three months he came in as Governor of the Central Bank, rather than admitting the failure of the supervisory function of the apex bank, he had issues with the managements of the rescued banks.
These were banks that were under the supervisory purview of the Central Bank, three months after coming into office they were supposedly bad and there was this uproar, that in itself was a major issue that led to massive capital flight to safety and banks in reaction, stopped lending.
Commercial banking is a business, if the enabling environment is not there, they are not going to function well. Compounding this again is also the fact that we are in a third world country. These things are learnt as you go on.
Now, when you come in and you use this stick approach such that you say the banker is a bad banker and I send the police after you, they lock you up or I seize your assets, you scare away smart money whether you like it or not, legally though, there is nothing you can do because for every statement he made so far, I doubt if any one in this country will stand by those statements.
You come in and the first thing you do is to seize bank owners’ assets, CBN as the supervisor of these banks is also culpable because he signs their financial statement every year. I think the courts are currently sorting these issues out and may be with time, we will see, but the damage is definitely there that the Central Bank Governor has the free will to come in and derail the entire sector within such a short period of time. It brings to question his capacity to regulate the bank.
He is coming up with an amended universal banking model, regional bank, national bank and international banking licences, compared to what is obtainable in other parts of the world, will this move get us out of the woods?
Irrespective of the word that is used, that does not translate into function. Whether you call it regional banking or global banking, it is a function of which they are known. What does a bank do? It is the capacity to do that which it is set up to do that determines the level at which it plays within the economy. Again, I go back to the mortgage issue you raised; in a country where loans are given at 25 to 40 per cent, it is a violation of the banking principles and that is because borrowing monies from abroad and in turn, lending it to Nigerians at such high interest rate is because they do not have the capacity to give loans in the first instance.
If they had the capacity, they will not ask for that high interest rate Whatever terminology he comes up with will not solve the banking issue here. The ability of Nigerians to trust the banks or those coming from outside to trust and put their money is a function of how solid they perceive these banks to be. I do not care what you call those banks, the names you call the bank will not solve that problem. Again, there are issues with regulations here, banks everywhere are regulated. The United States financial market is the one that I know very well, we also had bank failure there. The 2008 market collapse that trickled into every other country began in the United States and that is because of the inter-connected nature of global finance .
When your bank receives your deposit here in Nigeria, they do not necessarily invest in Nigeria, they invest in assets available anywhere in the world, so if there is a sneeze in New York, London will catch cold and if the London financial market catches cold, the Nigerian financial market or the one in South Africa is going to be affected. That is the nature of the world’s financial system, money is fluid, whether you call it naira, dollar or yen or whatever, it does not matter.
We now live in a world where irrespective of how you pay, all you want to know is how much it is worth in dollars. I can take your money in Pesos, all I need to know is how much will I change it for.
The global perspective of banking expertise required by the CBN to chart the process is not visible now and if you fail, there is nothing anybody can do about it.
Banking collapse is very common in the United States, but the Government quickly moved in and shored up about 90 per cent of the big banks in the country. Some of them like Citi Group, the government took over majority interest in the bank, they did not talk about selling them. Virtually all the banks that were bailed out by the US Government have paid back the money, except in the case of Citi Group where the Government has sold off more than 50 per cent of its interest to the public, and it actually made profit out of it.
So when you come with words like ‘we will sell off the banks,’ it raises some kind of questions, unless it is your money you are using and most likely, it is not yours. So you will not be able to pull that kind of money out. What this has done is dislocate the market and once that dislocation occurs, it takes a while to do away with this lack of confidence in the system .
Standard and Poor said that Nigeria banking industry is extremely risky and that no investor will buy into the banks except there is government guarantee, is that the true position?
I will explain the reason, I have not seen the Standard and Poor statement on that but I can explain to you the reason . Banks in Nigeria are not owned by the Government wholesale, they are not. Government only has a supervisory role on them, in other words, the license to open a bank is a charter from the government but you and I agree that these are private monies, your money and his money.
Those are the equity owners of these banks. Equity owners have interest in the bank, if you come up and decide that for whatever reason you give, you are going to auction out my interest in a commercial bank, of course you face some legal issue . You cannot expropriate private asset even here, you cannot, that is basically expropriation. I am not familiar whether the Central Bank has acquired any of these banks and extinction of the private ownership interest but I doubt if that has happened.
(Cuts in)The CBN is saying that shareholders have lost their investment in those banks
If it is 100 per cent government asset, it can give it to Mr Mideno , and I do not think they have ever been 100 per cent government asset, you told me that the CBN says the shareholders have lost their interest in the bank. If they are 100 per cent government asset, then if I am the government, I can hand it over to Mr Mideno for whatever agreement we reach, that is quite understandable.
However, if the actual owners of these banks, that is the primary investors, the equity owners, the shareholders, still exist, I do not think there is anything anyone can do to bring in a third party and say you take the bank. The courts are there to stop you . This bad move can be handled by the court.
However, this is the issue though, while this is going on, the issue of confidence in the financial sector is completely damaged. There are a lot of fund managers out there with huge sums of money looking for outlets to invest their funds. They look at existing opportunities and which one will yield more dividend for them. Those who put their own income into these funds expect the mangers of those funds to be intelligent and smart , you just do not take money and put it in a dead end when you know it is going to be involved in all kinds of litigation down the line, so it does not work as straight jacket as one would think. No foreign investor will put money into an investment that is clouded with litigations.
This is why the issue of government guarantee is coming up, if the regulatory authority can make out a case that we are the sole owners of these banks and many of us doubt if that has happened, then they can transfer these assets to a third party but until then, they cannot do that.
What you are saying in effect is that the foreign investors that he is prospecting to buy these rescued banks are not likely to buy because of the legal implication?
Of course yes, the United States Government or the Government of Japan are not going to print the Dollar or Yen and give it to you and say they are private investors.
What you call private investor really are people’s money that is under some kind of management, the manager then make a calculated decision, do I move this money out of New York or London or Tokyo to a bank in Nigeria? There is always an opportunity cost. So this investment guy, if he is sound in judgement, something tells you he is not going into that if the whole environment is clouded with uncertainty because there are other markets and other avenues that these funds can go into. That is basically what we call foreign investors.
There are no governments that will churn out money for you to go and invest in XYZ markets.
So we have to calculate the impact of what is going to happen and what we think is going to happen.
If these funds come from publicly owned corporations, the shareholders of those companies would get rid of the managers if they messed up their system. There are many fund managing companies that are publicly owned, they just manage billions of dollars for third parties. Those people who work in those environments do not mismanage those funds. To take money from London or New York and put it in some investment in Ghana or Nigeria is after a sound decision is reached and you know that the potential for return is higher definitely not in a clouded environment that the result or return on investment will be negative.
Six months after making huge loan loss provisioning, the eight rescued banks are declaring profits, is this normal?
Well, it is not strange and I understand that statement, that is if you wholeheartedly agree with what the Central Bank is saying that the banks have failed, then there is need to question the result; otherwise there is nothing strange in it. They also have public accountants who certify these statements The profit are certified by the accountants for the banks, I have no reason to circum-guess their accountants. Let me use the United States as an example again, we had back in 2008 the subprime implosion which all considered an American deal but everyone else was caught in it.
The Government stepped in and infused funds even beyond banks, the United States Government did not just put money into banks. United States Government owned General Motors, General Electric for example has its corporate bond guaranteed by Government and investments bank like Goldman Sach were licensed to become commercial bankers, they were not into the regular commercial banking but the situation made government to give them commercial banking license.
When the government put all that money into them, suddenly, there was this fight whether Government should take ownership interest in these corporations. I think they successfully took some interest in Citi Group, the Bank of America resisted the move and the government only gave the troubled banks and companies bailout and within a year, about 90 per cent or 95 per cent of them have repaid virtually all that money.
None of them stopped paying dividends, some of them reduced the dividends payout, I think Citi Group stopped its dividends anyway. Majority of them like General Electric for example which is a conglomerate, reduced its dividends, but none of them really stopped the payment of dividends and they paid back those loans to the government. If we take that into consideration and then start to compare that with our situation in Nigeria, again it goes back to the fact that in banking, profit is the bottom line, my instinct is that it is their public accountants who are independent that certified those statements.
So where the Central Bank stands on this is something that people like you have to question, where did CBN get the information that these banks have done so badly that we need to auction them all? I am not going to circum-guess statements made by the bankers.
There is move by the Government to set up an asset management company to handle Toxic assets and I understand that a lot of operators in the oil and gas industry have expressed concern that the project may be abused, how do we guard against the abuse of the project being proposed considering your experience ?
When you use the words ‘toxic asset,’ remember that before they become toxic or before they are handed over to an existing corporation to manage, they must have been taken over from their previous owners. You just cannot get up because I am delinquent on my mortgage then you declare my mortgage toxic.
Before it becomes toxic, the asset must have been taken over by the government, the owner has lost beneficial interest in that property, that is not a new concept. Back in the 80s when the savings and loans system collapsed in the United States, there was a company called Resolution Trust Corporation (RTC). It basically stands for what it means, resolution trust.
They took all those assets, took all the companies, the savings and loans institutions, and found a way to either dispossess the assets and went after the people who messed up things, got some monies back from them and threw it back into the system again.
Toxic asset, the fear that they will be dispossessed of their asset does not come into it because before it gets to that stage, that part of the job must have been done.
In other words, if it is your house for example that Bank X gave you for, if you default on that mortgage, Bank X will go through the process of foreclosure. When they foreclose on your property, they basically own the asset.
So the concept here is that if you take that dead wood asset from these banks and hand it over to a resolution trust, then that bank is free to engage in its normal business and maybe with lessons learnt then, you are now trying to manage those assets in a pool. Now, how you handle it once they are in the pool is what the issue is and that is how the lending comes in.
The shareholders and owners of these banks are still contesting the attempted take over by government, some of them are in court and these are the assets that have been declared toxic by the CBN governor because he said that the shareholders have lost their funds because of the poor trading position of these companies , so you have issues of the quality of assets being before the court of law. Meanwhile, the CBN governor is taking executive action to see that these assets are up for sale…
If they are in court, legally if you buy them you buy them at your own peril. If you are in court, the CBN governor’s statement is not going to make the asset toxic If it is an asset that is in court, and if your lawyers are involved, the first thing they will get is a declaratory judgement from the court to bar anybody from proceeding to sell the asset and if you are using your own money to buy these assets, you will not want to touch them when they are clouded by legal issues. I do not believe that the CBN governor has the power to say that asset x that is in court is toxic. We might be making this statement and again, that goes to the credibility of whoever is making that statement, does he know what he is saying? But if he is surrounded by court action, he will not be able to get away with it.
At what point does an asset become toxic? How does an asset become toxic?
I will explain again, you own a house and the money used to buy the house was given by Bank X under normal circumstances. Loans fail, do not get me wrong, under normal circumstances that should not upset the whole system. Why these things are becoming important is because of the global crisis that affected finance back in 2008. So we now found that there are lots of these loans out there that cannot be serviced . The word, ‘toxic’ is used only when these loans cannot be serviced. A loan that is being serviced is not toxic. 90 per cent of all homes in the United States have mortgage on them, only about 5 per cent of them defaulted. Of course, if you default, the bank will start a foreclosure process, these are legal things.
They will start a foreclosure on you, at the conclusion of that foreclosure, the court will issue an order that you have lost your home.
So the bank will stop collecting money from you for that mortgage unless you pay them off immediately.
Remember your mortgage is a contract for installmental payment . So when they start foreclosure, they will tell you and say we are not going to take your money installmentally anymore so they take you to court. When you run the circle, the court says this loan is ended, now the bank takes this asset back because toxic is associated with loans that cannot be serviced. In other words, may be the guy borrowed more money than the house is worth.
Let’s say he borrowed N2 million from them and the house is worth N1.5million., they will not want to sell a N2 million loan for N1.5 million if they leave it in their books, it is dead wood, that is where the word toxic is coming from. So the government is saying that to help you bankers, we will take these assets you already owned, it is not owned by you anymore, government will take the assets from the bankers and figure out what to do with it. The word toxic is not a magic language
What about the issue of equity of redemption , can this be done during court process?
Redemption can come during the court process, that is why you go to court to extinguish the mortgage.
Like I said earlier, the bank says they will not collect your installmental payment and takes you to court to foreclose, if you show up in court and tell the judge and then say I owe them $5million, here is $5million, the case is ended, that is equity of redemption. The only thing they are contesting is the agreement between you and them over the next thirty years for a mortgage you are not paying.
You can never lose the redemption as long as the foreclosure process is on, once the bank takes ownership of the property, it takes the extinction of your rights, the issue of redemption does not come in any more, you have lost everything about the property.
Will you fault everything Sanusi has done?
Well, I am not saying you fault everything Sanusi has done and I do not think any Nigerian is saying that or any banker with common sense will say that either. The scenario I gave a few months ago is the lady who fries akara , a common staple here. Akara, is like blending beans and putting in oil to fry, it floats all over the place, the woman frying it is going to be soiled with that oil, so if she says if the oil touches her, it goes to jail, there will be no akara. You have to take this thing to the level of correction, these bankers are the ones that know how money flows around the world. Even back in the 1600s and 1700s, at the elementary stage of banking, the government had always fought to be the regulator of bank and you know you cannot go into banking unless the government licenses you to do so.
Nobody in their right senses will defend a dubious banker, however, we also know that the sector is a very sensitive one, they are part and parcel of any monetary policy of any county. You cannot lend mortgages if the banks are not involved, if the government is doing it, they are not going to be too successful at it At least there is no empirical evidence to show us that yet .
So you need to be careful when you go after the bad ones. Nobody is questioning the CBN’s right of power to go after those who loot banks, that is not the issue, the issue is the unwholesome conduct that is causing damage to the sector; that is what the issue is. If I am a banker and I run the bank and I am pocketing all the money, of course you can throw the books at me but that does not mean that the institution is all damaged, that is the point.
The idea the CBN is selling is that the asset management will resolve the bad debts in banks.
Well, we’ll wait to see, but it is most likely a lie, I do not want to use the word structural problem, but for want of a better word, it is a corrective measure that plays on both sides. The CBN itself should be seen to be functioning as a regulator of these banks. If you fail to regulate these banks, they will outsmart you and when they outsmart you, you do not then come in retroactively to say what went wrong. The issue of regulation has always been a contest between the regulator and companies being regulated.
Banks, because of their access to intelligent people, will always outsmart the regulator. The regulator has to fight and this is not only in the banking sector, the Telecommunication set up in this country is simply crazy. The average Nigerian pays 40kobo for every N1 to the service provider so that they can talk on a piece of scrap they call telephone set, there is nowhere else you can do that .
We are talking about banking, the telecommunication companies in Nigeria are the largest receivers of deposit in this country, not banks. My mother, your grandmother all use the telephone on pre-paid services. What is banking if not putting money in there and withdrawing for future use? But tele-communication is like the wild wild west. These guys come here, nobody regulates them, they pat us at the back, they do not invest in any infrastructure here. This is the only system that goes through that, the next you talked about is privatisation but it has not worked . If they want to build the economy, tell the companies to go public and then you figure a way to begin to talk So the quarreling in banking that is regulatory deficiency is very prominent here.
Let us look at the capital market, you are very familiar with it globally, where do you think we are after the bubble?
The damning effect of the global bubble started in 2008, the then CBN governor and some of the bank players were using words like Nigeria has a unique banking culture which insulates it from this global bubble. I remember that I raised some questions then, are these right? Are we so good that we are covered from the financial crisis the entire world is going through? Well, this is the reality here, the capital market, because of the failure to respond when it was necessary to respond, Nigeria will suffer the effect of the global bubble longer. For all intent and purpose, markets in the United States are moving forward.
Of course the bubble brought about a lot of shake up left behind by the event, people with smart money, when I use the words ‘smart money,’ it means that when you take your money and you invest it, you believe it is actually smart money because you are going to put it in some account that will bring value.
This is not money for gambling, even though you are interested in it generating income and there is some level of speculation involved .
Smart money really does not do dumb stuff because those who manage them and work them make sure that they take what is called calculated risk and calculated risk is nothing but some level of confidence in what you are investing in. Capital markets are uniform worldwide, if you do not know, it is because you do not know. You can basically invest in any company in say North America or United Kingdom or Europe from Nigeria, it does not matter.
So if you have access to money and you want to invest, most likely, investing it abroad will be more secure. So that damning effect on the capital market here is going to linger on because of the failure of the authority to respond when it was necessary. That, again, dampened confidence in the system, and lack of confidence in the system leads to low participation in the market. If you do not put that money in there, the operators will not have the money to invest in assets and that is the true reality of the capital market
The CBN has said that the bubble is building up again and there is a whole lot of money going into that sector.
He is the Central Bank Governor, he may be right. I do not have access to the same information that he has but if his comparison is between 2008 and 2010, definitely there is more money now going into the capital market than in 2009 because people now feel that that earthquake has subsided.
Of course, the bubble damaged financial markets all over the world including Nigeria and the ability to respond and come out of it is a function of how fast we responded .
