World economy

Nigerian P-bomb

As if Nigeria did not have enough troubles to contend with already, there have been some rumours of a possible crash of their entire banking sector, and these needed to be addressed as soon as possible. One thing everybody expects of central banks or their equivalents anywhere in the world is to play a pivotal role in maintaining order and security both home and on the international markets. As such, they only have one “p” word and that is ‘panic’. And Godwin Emefiele of the Central Bank of Nigeria broke that taboo last week. But what does this mean for global and African economy? Are there any reasons to be concerned about the state of one of the largest and richest economies in Africa? Let’s find out.
At first, the majority of investors have either ignored Mr. Emefiele’s ‘momentary lapse’ or have chosen to put some faith behind his assurances that there is “no reason for panic” – which is odd as typically this would be interpreted as a sign to start panicking. It is akin to a passenger plane on which the captain told everybody on the speaker not to panic after a turbulence hit them; it would likely start a mass hysteria. So why did it not happen this time?

The Nigerian Job

Well, for one, Mr. Emefiele has backed his words with actions, such as granting a loan to Skye Bank as well as dismissing its management for failing to keep the capital limit that is required by the regulatory bodies. However, even though this was enough to appease the majority of the investors for the time being, it did not remove the main causes for this lack of funds that started the whole mess in the first place. It seems all the Nigerian Central Bank did was plug a single leak in a very troubled boat that is being rocked by some of the worst weather anyone has ever seen.
The thing is, the economy of Nigeria has been hit hard by the severe drop in oil prices that pretty much funded their growth – or at least the large portion of it. The rest was built on loans, most of which were indexed in U.S. currency, and fewer and fewer of these loans are being repaid as planned. The fact Nigeria has seen its currency lose a serious portion of its value in a relatively short amount of time has not exactly built up confidence in their domestic banking and financial sectors.
In fact, bad loans are in all likelihood going to rise to more than 12 percent this year, which is more than twice compared to what it was predicted it would be in the end of 2015. If a single loan is not being repaid, the one who took it is in some serious trouble, but if 12 percent of all the loans are no longer being repaid, the entire banking sector is facing a serious predicament. It seems there simply isn’t enough money to go around. In fact, this whole problem can be traced back to declining oil prices, as fewer and fewer people and companies can afford to pay their debts.

Money in the Bank?

There have been massive layoffs across 21 banks in Nigeria, with entire branches being shut down for good as well as all the consequences that follow such business practice. Needless to say, the forecasts are not looking good, and analysts do not expect everyone to come out of this. Rather, nobody is going to come out of this unscathed, but a few will not be coming out at all – at least when it comes to banks in Nigeria.
Let us not forget that the whole point of banks is to generate revenue as efficiently as possible, so this reduction in income will inevitably lead to a decrease of public confidence in these banks as well as their liquidity. If a bank is believed to be insolvent, it is as good as actually being insolvent, as it is about to run out of whatever money is still left in there by the scared investors. The thing is, the banking sector in Nigeria as a whole will most likely emerge a lot stronger than it was when the whole crisis started.
In times like this, banks tend to consolidate and fill the gaps left by the banks that had to be liquidated in the meantime. However, this will serve little as a comfort to some of 170 million people living in the country. At first, it seems the worst affected will be the civil servants as well as people living in remote areas who have grown reliant on these banks for electronic payments. Teachers and doctors not being able to get paid and villagers being unable to buy stuff online may not seem like much, but it is only the tip of the iceberg whose size we can only fathom at this point.

Loans and Sharks

In the past month or so, Nigerian naira lost almost a half of its value against the U.S. dollar. Anything up to 20% could have been mitigated via simple bank merger, but 40% and beyond might just be the straw that broke the camel’s back. It is definitely true that weak currency favours export and could potentially help the economy develop, but this scenario does not entail credits indexed in foreign currencies, such as the U.S. dollar.
It is estimated that 42 percent of all the loans in Nigeria are indexed in U.S. currency, and since the naira lost more than 40% of its value, it spells bad news for the debtors. In other words, if you live in Nigeria and you have to repay one of these credits, your rate has just spiked by 40%, and few people can realistically continue to pay that on their current salaries. In fact, several of these banks may find themselves strapped for money, as soon enough there may not be enough currency in them to keep them financially stable.
And with the naira continuing to lose value, there is no end in sight for this crisis. Actually, this whole ordeal is expected to get a lot worse before it gets any better, as the number of problematic loans keeps increasing. If the analysts over at Exotix in London are correct, the worst affected banks are most likely going to be Diamond, UBA and GTB, as they have issued the most dollar loans. So far, there is no talk about recapitalization from any of these banks, although it should be pointed out that Diamond is being eerily silent on this matter.
The Central Bank of Nigeria is rumoured to keep an eye on several banks which might experience some liquidity issues, although no actual names have been dropped as of yet. And several banks “forgetting” to issue their earnings reports for the first half of the fiscal year does not bode well, either.
And on top of everything else, it seems that many of these banks are going to share the fate of some of their debtors, as they too have borrowed in U.S. currency and are now struggling to keep their payments to other banks. The most indebted ones are GTB and First Bank of Nigeria, although it is safe to assume others are not lagging behind by much.
Should this make investors raise their eyebrows in disbelief? Certainly not those who have been selling off the stocks of Nigerian banks since last year. It is those who bought them that need to worry. It certainly is sad to see so many prime picks from an era when the African economy was booming and who were hailed as “African wonders” lose so much of their value after the meltdown that was the global Financial Crisis of 2008.

… Is Fear Itself?

Is fear itself the only scary thing in Nigeria these days? Hardly. However, Mr. Emefiele of the Central Bank of Nigeria is trying his hardest to persuade the general public and more importantly the numerous investors and creditors that Nigerian financial system is going to remain absolutely stable no matter what.
According to him, there is no cause for concern over any of the 21 banks in Nigeria who may be experiencing liquidity and solvency problems, in all likelihood because the government and the central authority remain on standby to keep them on their feet, should the worst case scenario come to be. The apparent lack of need for “panic” or concern that one of these banks might be “in distress” is completely uncalled for. At least for the time being.
He has also urged the numerous and very concerned depositors to “endure” and “go about (their) business”. However, unlike foreign investors who have seen this whole thing coming from a year ago, the ordinary people in fear for their livelihoods are not so easily swayed. Risking everything they own over a vague assurance that they will be compensated at some point has done little to convince them to make this sacrifice for the greater good of their friendly neighbourhood bank.
After depositors stormed Skye bank and only a few months after Nigerian police forces raided three different banks for illegal transactions, it seems the common people have had enough, regardless of results or assurances. From their point of view, any call not to panic results in the same natural effect as in the plane analogy used earlier: they are going to wonder “why is there the need to say it out loud if there clearly is no reason to panic?” – or they would simply panic.

Fear, Distrust and Poverty

Fear, distrust and poverty are a dangerous mix, and by the time Mr. Emefiele elaborates on why is he even talking about panic if it is completely uncalled for in the first place, the mob mentality will have run its course. And the fact that a bunch of “insider loans” these banks gave to several privileged people (their own executives and shareholders come to mind) has recently come to light certainly has not improved the situation. If nothing else, it is looking to become more volatile than ever. Either way, it does not look good; it looks about as bad as you might expect. It looks like a banker took your life savings and spent it by himself, or gave it away to his colleagues and friends.
The key issue here is that stability and feasibility of the entire banking sector is essentially based on public trust. Depositors need to believe their money is being handled in a safe, responsible and professional manner; that they are secure and can be retrieved at any point in time, unless specified otherwise. Once that trust is shattered, it is extremely hard to rebuild. In fact, it is almost impossible to rebuild.
In Nigeria, there is a clear breach of this trust on several levels: banks issued a number of bad loans to people who cannot afford to pay them back. To make matters worse, banks themselves took similar loans that they may not be able to pay back. Three banks were raided for suspected foul play and illegal transactions, there are scandals about executives and shareholders helping themselves to some ‘free’ cash, there is a shortage of money in all banks, their national currency has just lost almost half of its value and the head of their Central Bank is talking about panic. What would you do if you were in the shoes of one of these depositors?

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