Future of banking rests on real sector - Sanusi

Sanusi Lamido, Governor, CBN

What does the future hold for the banking industry in Nigeria? The ongoing crisis in the sector coupled with the perennial bank failures in recent decades ...

 have led many financial analysts to raise concerns on what the future holds for the industry in this country.  
 Clearly, Governor of the Central Bank of Nigeria (CBN), Mallam Lamido Sanusi, must be one of those who strongly believe that banking does have a bright future. After all, ever since he assumed office in June 2009, he has been in the eye of the storm as a result of the myriad policies and programmes that the apex bank, under his leadership, has churned out in its attempts to resolve the crisis. 
Mallam Sanusi was the guest speaker at the Business Hallmark's Round Table which took place in Lagos, last Friday, where he spoke on the topic, “ The CBN Reforms and the Future of the Banking Industry” . In his characteristic erudite style, the CBN helmsman delivered a one hour lecture during which he robustly propounded the thesis that only a thriving real sector can guarantee the future of the banking industry. According to the CBN Governor, contrary to popular belief that a crisis exists only in the banking sector, “What we are facing is the crisis of the structure of the management of the economy. We continue to focus unduly on the banking system because the banking crisis is nothing but an amplifier of the crisis in the wider macro economy.”
He contended that even though Nigeria's Gross Domestic Product (GDP) has been growing at an annual rate of 7 per cent in recent years, and that its economy is the second largest on the continent, the present structure and management of the economy made it a hostile environment for banks. His reasons? The manner in which agriculture is practised in the country is so backward and undeveloped that not only is it not commercially profitable for the banks to lend to this sector that accounts for 40 per cent of GDP, but it is also largely unable to absorb the mass of school leavers and graduates produced by Nigeria's defective (because it places little emphasis on the acquisition of technical and vocational skills) educational system. On the other hand, according to the Governor, the sector(manufacturing) that can create both skilled and unskilled employment, and has been proven to be an effective means of reducing poverty, only contributes a meager 4 per cent to GDP because it is hobbled by factors like antiquated infrastructure -especially in electricity power- unfriendly tariffs, government's inconsistent policies, among others. These factors, he disclosed, were responsible for loans to the agricultural sector accounting for just one per cent of total banks' loans and despite their generally acknowledged strategic role in job creation, while Small and Medium Enterprises (SMEs) got only 3 per cent of banks' loans according to current CBN data.  
Explaining how the comatose state of the real sector hurts the banks, Mallam Sanusi contended that contrary to the widely held belief that banks' lending is determined simply by market rates, “it (lending) is driven by the opportunities that exist in an economy for possible employment.” He noted that even when banks are awash with liquidity, they would only lend when they find a counterparty that wants to borrow. The CBN Governor cited the crash of the stock market in March 2008, when flush with funds, banks, instead of lending to the real sector that was in critical need of credit, preferred to speculate on stocks thus leading to the bubble that eventually went burst and the catastrophic collapse of the market. As he put it, “In the absence of the real sector, in the absence of a functioning manufacturing sector, in the absence of a viable and commercially profitable agricultural base, the banks ended up looking for the only areas where opportunities existed and those opportunities were speculation in commodities and speculation in stocks.”
He warned that for as long as the real sector is not stimulated to play an effective role in the economy, banks will keep on facing tough times. Declaring that, “The future of Nigerian banking is linked to the real sector so the task is to move savings and monies into job creation,” Mallam Sanusi, who, expectedly, dwelt a great deal on the causes of the current banking crisis and how the CBN is tackling it, however, warned, “the greatest mistake we can make is to spend our time talking about the problem of the banks. In the banking industry, we have confronted it. When are we going to confront this problem in other spheres of the economy?”
 According to the CBN boss, there was the urgent need to extend the reforms in the banking sector to the cultural and socio-politico life of the country. He revealed that the period between 2003 and 2007, when the nation experienced its highest level of Foreign Direct Investment (FDI) also coincided with the era when reform bodies like the Economic and Financial Crimes Commission (EFCC) and the ICPC were established.
He stated that he never had any doubt that the banking crisis particularly as regards technical issues like recapitalization of the rescued banks, cleaning up balance sheets, and so on, would eventually be resolved. However, he added that realizing that the real challenge lies in reviving the real sector, the CBN was forced to go out of its way to roll out initiatives on how to stimulate it. He recalled that this process started with the retreat held in Enugu in December last year, between the CBN and banks' CEOs, where the banks keyed in into the apex bank's vision of adopting programmes to stimulate the real sector. 
Business Hallmark recalls that an immediate fall out of that retreat was the setting up of a N500billion intervention fund by the CBN targeted at the manufacturing sector but with the power sector particularly in focus. Soon after, the apex financial institution also established a N200billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) fund. Last week it was announced that the CBN had released N130 billion out of this fund to the Bank of Industry (BOI) for disbursement to the beneficiaries at a concessionary interest rate of 7 per cent!
 Commenting on the intervention funds in a chat with Business Hallmark, renowned financial analyst and consultant, Dr, Biodun Adedipe of Biodun Adedipe and Associates, stated that while it is not the CBN's role to stimulate the real sector as this is a fiscal issue which the fiscal authorities are supposed to tackle, but that there was nothing wrong with the apex bank taking up this responsibility. He said, “Ideally, it is the fiscal authorities that should provide such stimulus. But when the fiscal authorities are not coming up with that, I presume that is why the CBN has done this. In which case, monetary policy is playing the role of fiscal policy in this particular situation.”
  The financial consultant who stressed that he completely agreed with the thesis of the CBN Governor that unless the real sector was revived, the operating environment would continue to be difficult for banks, called on the authorities not to waste any more time in fixing the country's antiquated infrastructure especially in the area of power generation.