The banking sector has undergone lots of reforms in the last two years and this has come at great cost to government. With the relative stability in the financial system, banks are expected to play more pivotal role in the economy in order to justify the huge amount that has been expended to bailout the sector, writes Stanley Oronsaye.
The Central Bank of Nigeria (CBN) has gone to great length to stabilise the banking system. Given the pivotal role of the banks in economic growth and development, a role which has largely been avoided over the years, the CBN? pursued vigorously? the? bailout of the banks.
At the end, the regulator has expended? a huge sum to achieve financial system stability. This comes from the N620 billion initially injected into the eight intervened banks, while the Asset Management Corporation of Nigeria (AMCON) spent N1.725 trillion to acquire the non-performing loans of banks,? and?? N679 billion to recapitalise? another three.
BRIDGE BANKS LAST AUGUST.
This intervention, which was done at the expense of other sectors of the economy, is with the best of intention, to strengthen the banks so that the rest of the economy could? get the positive impact. Thus, with an average capital adequacy of 20 commercial banks now at 17.12 per cent, Nigerian banks are now the most capitalised in Africa. With this comes the expectation that the banks? would play more critical role in the economy. This is even more feasible now, given a number of reform efforts that have been undertaken by the regulator. According to Kingsley Moghalu, CBN deputy governor, financial systems stability, the whole essence of the on-going reforms in the banking industry was to ensure that banks did more to support the real economy by directing their lending to those sectors that were capable of creating more jobs and? strengthening the spending power of Nigerians.
MORE CATALYTIC ROLE
He said it was for this reason that the CBN introduced the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), which was aimed at increasing? lending to agriculture from the current 2 per cent of? the total? lending to 10 per cent over seven years.
The idea was to support lending to the? agriculture sector which currently accounts for 40 per cent of the Gross Domestic Product (GDP) and provides 60 per cent of employment. “The over-arching objective of the CBN is to move the banking system away from a casino-economy characterised by speculative rent-seeking, to one in which the banks play active catalytic roles to drive real economic growth and development,” Moghalu said.
According to him, banks have, over the years, been more focused on rent-seeking or speculative activities such as stock market margin lending, oil marketing and lending to governments to finance fiscal deficits, while ignoring other sectors that would enhance economic growth.
INCREASED CREDIT FLOWS
Analysts also believed that in addition, the efforts of central banks in advanced countries may increase credit flows to Nigeria, and thus strengthen the ability of Nigerian banks to have more positive impact on the economy. This is premised on the attempt to ensure that banks could get ready money in any currency if market conditions warranted such through the establishment of a temporary network of reciprocal swap lines. “The intention of the Central Banks is to enhance their capacity to provide liquidity support to the global financial system.
“These efforts may increase credit flows to Nigeria to enable banks have access to cheaper funding for? the private sector,” stated FSDH, a Lagos based financial investment advisory firm, in its 2011 Nigerian Banking Industry Review and Outlook released last week.
The report added that the CBN may provide incentive for lending to some critical sectors of the economy such as agriculture and manufacturing.? “Also, government’s policy in the area of agriculture and allied business, the deregulation in the oil and gas industry, involvement of the private sector in providing critical infrastructure in power and transportation will throw up financing opportunities for banks.”
SCRAMBLE FOR CASH
Also, as the CBN lifts the interbank guarantees, there is likely to be more competition for deposits as banks scramble for more cash to cover their obligations. Regional Head of Research, Africa at London-based Standard Chartered Bank, Razia Khan, added that the several reforms expected in 2012 were key to Nigeria’s ability to improve its growth prospects and make a meaningful difference to poverty levels. “If realised, the reforms could be far-reaching, ultimately bringing more of the money in circulation into the banking sector, lowering bank costs and improving the transmission of monetary policy.”
According to the FSDH report, the CBN’s other reforms effort, including policy on cashless economy should help to retain more money in the banking system and may help the effectiveness of monetary policy, forecasting that it was in the interest of the banks to begin to consider financing critical sectors. This, the report stated, would “improve earnings due to more reliance on Public, Private Partnership (PPP) in resolving the infrastructural problems in the country.”
Coming from a banking crisis that has cost the government nearly N3trillion to abate, it is only expected that the banks would reciprocate the gesture by providing capital for critical sectors of the economy such as agriculture energy and mining, transport and urban development, as well as the real sector.