A few months ago, i wrote an article pleading with the then Governor of the Central Bank of Nigeria (CBN) to allay our fears about the state of our banks. Alas Professor Soludo did not do much to calm my nerves. Since my plea, a new Governor, Sanusi Lamido has taken over the leadership of the CBN from Soludo whose term expired in May.
On 14th August, less than 3 months after taking over, Sanusi Lamido acted decisively to deal with the uncertainty hanging over the banks by sacking the Managing Directors of Afribank, Finbank, Intercontinental, Oceanic and Union Bank. In his view these 5 banks pose a serious threat to the financial system and the management of the banks have acted in a manner detrimental to the interest of their depositors and creditors. The CBN was forced to act to save depositors and restore confidence to the banking system.
In my view, this is a welcome development. In a time of crisis, there is often a need to show leadership and act decisively. For almost a year, the 5 banks have been suffering from illiquidity, surviving on the Expanded Discount Window and interbank borrowings. As the Governor said, three of the banks were very important to the banking system and something needed to be done before they lead to a collapse of the financial system.
The Governor’s actions required courage. For there are vested interests that would have done everything possible to stop this decisive action. However, the actions of the CBN are in order and are in the interest of depositors and long suffering investors. Some of the actions of the banks were shocking. Take Intercontinental bank for example. The bank loaned out more than thirty four billion Naira to three companies they themselves called “fringe” players in the downstream sector of Oil and Gas. It is shocking that such huge sums will be loaned out to three companies that have no significant record of success to speak of. Where was the risk management?
Then there are the billions loaned out to speculators on the Nigerian Stock Exchange (NSE) in the form of margin loans. The value of the securities have since collapsed by more than 70% in some cases. In the process trillions of Naira vanished.
The management of these banks have shown themselves not capable of managing the growth experienced by the banks. Within three years the five banks have frittered away more than three hundred billion Naira in fresh capital. The CBN did the right thing by sacking the managers. Something needed to be done to save what is left of the banks.
Depositors should remain calm. The CBN has injected over 400 billion Naira to save these banks in an unprecedented move backing its words that no bank will be allowed to fail.
It is my hope that these actions by the CBN will restore confidence to the system, reduce the cost of funds and lead to recovery of the economy in general.
Showing posts with label Random Musings. Show all posts
Showing posts with label Random Musings. Show all posts
Sunday, August 16, 2009
Thursday, March 26, 2009
Capping of Interest Rates
The Central Bank of Nigeria (CBN) issued a circular on 23rd March 2009 on bank interest rates. The CBN was concerned that interest rates have gone out of hand and something needs to be done. To address this, the Bankers Committee met on 21st March (a Saturday) to discuss. The circular was to communicate the decisions taken. The key ones were:
1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).
The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?
In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.
I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.
Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.
The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.
1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).
The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?
In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.
I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.
Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.
The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.
Tuesday, December 16, 2008
2009 Budget
The President presented the 2009 budget to a joint sitting of the National Assembly on 3rd December. The benchmark oil price used was $45/barrel. The Federal government will spend N2.87 trillion from a projected revenue of N1.78 trillion. Consequently, the estimated deficit is N1.09 trillion.
The deficit could be financed via several means which include the devaluation of the Naira and internal and external borrowing. Since the announcement of the budget, the Naira has depreciated from N120 to $1 to N140 to $1 a decline of more than 16.5%. The market is therefore anticipating a devaluation of the Naira in 2009 hence the sudden increase in demand of dollars in the Foreign exchange market. The Central Bank has since jumped in to “defend” the Naira. How long this defense will last is anybody’s guess. However, it is safe to assume that unless oil prices rises above $65/barrel, the Naira will remain at N140 to 1$ or fall further.
The budget does not offer much hope for the capital market. The Federal government needs to borrow to fund its deficit. It is quite obvious that banks don’t have much to lend, since a large chunk of their loanable funds are trapped in the comatose Nigerian Stock Exchange (NSE). This further tightening up of liquidity means interest rates will not ease up anytime soon.
As the Naira depreciates, inflation is likely to go up further reducing purchasing power and Naira liquidity. This will lead to less cash being available to individual investors to speculate on the NSE.
The various State governments will soon present their 2009 budget. Just like the Federal government, most of the states will be running a huge deficit in 2009 which will largely be financed through borrowing. The outlook for 2009 can therefore only get worse.
My conclusion from the above is that 2009 will also not be all that rosy for the NSE. The 51% decline so far recorded in 2008 is not likely to be repeated in 2009. However, I don’t expect a more than modest gain. The Index will probably not recover to its early 2008 level until in 2010 or beyond.
The one thing that could change this rather gloomy outlook is a change in oil price. If the average oil price for the year ends up being above $65/barrel, then the capital market might benefit from spill over effect. We can only hope it does.
The deficit could be financed via several means which include the devaluation of the Naira and internal and external borrowing. Since the announcement of the budget, the Naira has depreciated from N120 to $1 to N140 to $1 a decline of more than 16.5%. The market is therefore anticipating a devaluation of the Naira in 2009 hence the sudden increase in demand of dollars in the Foreign exchange market. The Central Bank has since jumped in to “defend” the Naira. How long this defense will last is anybody’s guess. However, it is safe to assume that unless oil prices rises above $65/barrel, the Naira will remain at N140 to 1$ or fall further.
The budget does not offer much hope for the capital market. The Federal government needs to borrow to fund its deficit. It is quite obvious that banks don’t have much to lend, since a large chunk of their loanable funds are trapped in the comatose Nigerian Stock Exchange (NSE). This further tightening up of liquidity means interest rates will not ease up anytime soon.
As the Naira depreciates, inflation is likely to go up further reducing purchasing power and Naira liquidity. This will lead to less cash being available to individual investors to speculate on the NSE.
The various State governments will soon present their 2009 budget. Just like the Federal government, most of the states will be running a huge deficit in 2009 which will largely be financed through borrowing. The outlook for 2009 can therefore only get worse.
My conclusion from the above is that 2009 will also not be all that rosy for the NSE. The 51% decline so far recorded in 2008 is not likely to be repeated in 2009. However, I don’t expect a more than modest gain. The Index will probably not recover to its early 2008 level until in 2010 or beyond.
The one thing that could change this rather gloomy outlook is a change in oil price. If the average oil price for the year ends up being above $65/barrel, then the capital market might benefit from spill over effect. We can only hope it does.
Thursday, January 24, 2008
On Blogging
I have always wanted to write. I joined a writers club in my home town at 15 but had to drop out after joining a university in another city. Since then, I have written a few pieces but without a medium for publishing, the motivation to write often was none existent. Along came blogging.
I discovered blogging in 2006 but it was only in 2007 that I created a blog for myself. A blog provides the medium to express oneself. Hopefully some readers will find the blog worth visiting.
A writer can only grow and improve by writing. A blog provides a great medium for the would be freelance writer to test the market.
My resolution in 2008 is to post at least one piece on my blog every month. I am sure the adventure will be worth while.
I discovered blogging in 2006 but it was only in 2007 that I created a blog for myself. A blog provides the medium to express oneself. Hopefully some readers will find the blog worth visiting.
A writer can only grow and improve by writing. A blog provides a great medium for the would be freelance writer to test the market.
My resolution in 2008 is to post at least one piece on my blog every month. I am sure the adventure will be worth while.
Monday, December 31, 2007
Good Bye 2007
What a year 2007 was. On a personal level, it was a very satisfying year. I was in good health, got promoted, bought a brand new car for the first time in my life and did extremely well in my investments. A good year all round. Thank God.
Nigeria did well politically. Obasanjo handed over to Yar’Adua peacefully. But that is where the success ends.
Unfortunately, Yar’Adua appears to be too slow in getting things done. We are not expecting miracles but as the Hausa people say “Jummah da za tai kyau tun daga Laraba ake ganin ta” meaning good things are noticed well in advance. From what we can see, Yar’Adua has a tough task. He is surrounded by a lot of incompetent people, who cant deliver on his seven point agenda.
No progress has been made in addressing the power crises. In fact, as I write, I have no electricity from PHCN. The last one week like most of the year was spent in darkness courtesy of PHCN. The security situation has not improved and most of the corrupt ex governors are still roaming the streets.
So what do I wish for in 2008? Here is my wish list:
1) Continued good health and Iman
2) A return of 25% for my portfolio
3) Electricity from 7pm to 7am daily
4) Better security for all Nigerians
5) Corrupt governors locked up
6) Increased accountability from elected officers
I pray my wish list will be answered.
Good bye 2007 and welcome 2008.
Nigeria did well politically. Obasanjo handed over to Yar’Adua peacefully. But that is where the success ends.
Unfortunately, Yar’Adua appears to be too slow in getting things done. We are not expecting miracles but as the Hausa people say “Jummah da za tai kyau tun daga Laraba ake ganin ta” meaning good things are noticed well in advance. From what we can see, Yar’Adua has a tough task. He is surrounded by a lot of incompetent people, who cant deliver on his seven point agenda.
No progress has been made in addressing the power crises. In fact, as I write, I have no electricity from PHCN. The last one week like most of the year was spent in darkness courtesy of PHCN. The security situation has not improved and most of the corrupt ex governors are still roaming the streets.
So what do I wish for in 2008? Here is my wish list:
1) Continued good health and Iman
2) A return of 25% for my portfolio
3) Electricity from 7pm to 7am daily
4) Better security for all Nigerians
5) Corrupt governors locked up
6) Increased accountability from elected officers
I pray my wish list will be answered.
Good bye 2007 and welcome 2008.
Saturday, October 6, 2007
On Making a Contribution
I recently read a speech given in June 2007 by Bill gates on graduation day at Harvard University. It was a great and inspiring speech. It moved and inspired me.
For long I have always wanted to make positive contributions to my community but I have found the issues too daunting and complex. Gates awakened me to the fact that the significant inequities in our societies are usually too complex and as such people who care get intimidated and give up trying to make a difference. Gates went on to propose a three point strategy to cut through the complexities:
· Identify the problem
· Identify the solution
· Implement and measure the impact of the solution
According to Gates the most essential and probably the most difficult part is finding the solution to a problem. Most Nigerians will agree with this as we can list the myriad of problems facing us but we cannot seem to find solutions that work.
As a female from Northern part of Nigeria (Kano) I have always felt that the biggest inequity confronting my local community is the lack of quality public education. In this modern age, I believe that no society can move forward when a majority of the citizens have no access to quality basic education (primary and secondary school). It is only through making available quality education to all, that those brilliant minds that could solve our biggest problems can be discovered and nurtured.
Today, thousands are denied access to education while an even bigger number spend time in our public schools without learning much. Recently I visited a public secondary school in Kano metropolis. Most of the classes in the school have over 80 students. Over half the students have no chair or table. Majority of the students don’t have any textbook to speak off and the school library is a joke. No meaningful learning can take place under such conditions and in fact no meaningful learning is taking place in this particular school.
How can we change this? How do we enlighten and encourage parents to send their children to school and to take an active part in their education? How do we get the best out of the money set aside by government for education? How do we get the government to increase funding for education? These are some of the problems that come to mind.
Improving the quality of our public schools is a long, tough and continuous battle. However, it is a battle worth fighting.
A few months ago, the Federal Government called on Nigerians both individuals and corporate bodies to “adopt a school” in order to help the government in addressing the public education crises. While addressing the crises will require more commitment from government, the “adopt a school” approach could yield unexpected dividends.
On my part, I have decided to heed the call of the government and adopt a school. I have already identified a secondary school within Kano metropolis to adopt.
I encourage all readers of this piece out there to try to do something positive that will impact on their communities. For in Nigeria of today, anybody reading this piece is privileged and “to whom much is given, much is expected”.
For long I have always wanted to make positive contributions to my community but I have found the issues too daunting and complex. Gates awakened me to the fact that the significant inequities in our societies are usually too complex and as such people who care get intimidated and give up trying to make a difference. Gates went on to propose a three point strategy to cut through the complexities:
· Identify the problem
· Identify the solution
· Implement and measure the impact of the solution
According to Gates the most essential and probably the most difficult part is finding the solution to a problem. Most Nigerians will agree with this as we can list the myriad of problems facing us but we cannot seem to find solutions that work.
As a female from Northern part of Nigeria (Kano) I have always felt that the biggest inequity confronting my local community is the lack of quality public education. In this modern age, I believe that no society can move forward when a majority of the citizens have no access to quality basic education (primary and secondary school). It is only through making available quality education to all, that those brilliant minds that could solve our biggest problems can be discovered and nurtured.
Today, thousands are denied access to education while an even bigger number spend time in our public schools without learning much. Recently I visited a public secondary school in Kano metropolis. Most of the classes in the school have over 80 students. Over half the students have no chair or table. Majority of the students don’t have any textbook to speak off and the school library is a joke. No meaningful learning can take place under such conditions and in fact no meaningful learning is taking place in this particular school.
How can we change this? How do we enlighten and encourage parents to send their children to school and to take an active part in their education? How do we get the best out of the money set aside by government for education? How do we get the government to increase funding for education? These are some of the problems that come to mind.
Improving the quality of our public schools is a long, tough and continuous battle. However, it is a battle worth fighting.
A few months ago, the Federal Government called on Nigerians both individuals and corporate bodies to “adopt a school” in order to help the government in addressing the public education crises. While addressing the crises will require more commitment from government, the “adopt a school” approach could yield unexpected dividends.
On my part, I have decided to heed the call of the government and adopt a school. I have already identified a secondary school within Kano metropolis to adopt.
I encourage all readers of this piece out there to try to do something positive that will impact on their communities. For in Nigeria of today, anybody reading this piece is privileged and “to whom much is given, much is expected”.
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