Okonkwo: Nigerian Banks Have Requisite Human Capital
The Managing Director/Chief Executive Officer of Fidelity Bank Plc, Mr. Nnamdi Okonkwo, in this interview on ARISE TV, the sister broadcast station of THISDAY, spoke on the recently introduced Real Sector Support Facility as well as on a wide range of iss
Some have said the Central Bank recently introduced the Real Sector Support Facility (RSSF) because the bank did not have the capacity to lend to the critical sectors of the economy. What is your take on that?
Well it is interesting for them to have said that. Banks, in every situation that has to do with the economy, would take the bashing. I find it interesting that they talked about the internal capacity of banks. Talking about capacity, I think we need to break it down to what we mean about that. I will take it from three perspectives. What do banks do basically? Financial Intermediation. So, we take money from the surplus segments of the economy and pass it on to the deficit segments. Basically, we take deposits and give loans. Now, do we have capacity to do this? Yes, but there are other dimensions. Now, we take it from the liquidity perspective, which means that you are liquid enough to continue in this financial intermediation process. If I go to liquidity, what that is simply talking about is your ability to have enough liquid funds to continue to lend. And that is why the Central Bank has liquidity ratio for banks. We also have the cash reserve requirements (CRR), which is also a liquidity management tool. Excess liquidity in the system portends danger. For instance, it can make a lot of funds available for people to speculate in the foreign exchange market and there could be pent up demand for foreign exchange which can lead to devaluation. So, in terms of liquidity, Nigerian banks are liquid, which in the first place, was why the issue of CRR came about. CRR simply means that for every one naira from deposit that you keep as a bank, the central bank keeps 22.5 per cent. And over time, this fund has built up and banks have been agitating for its release so that we can carry on with our business. The regulator obviously, was resisting that for a while. And part of the federal government’s Economic and Recovery Growth Plan (ERGP), is to make sure that lending in the real sector, especially manufacturing and agriculture is improved. And the issue became challenges like interest rate and so on. Now, the central bank came up with this creative way to say ‘banks, if you want me to give you some of your liquidity, I will do so on the condition that you extend long-term loans to manufacturing, agric and the real sector.’ And for that reason, they pegged the loan at nine per cent. So, instead of having these funds sterilised at the CBN at zero interest rate to the banks, it is a stimulus for banks to go ahead and lend our funds with the central bank at nine per cent, minimum tenor seven years and then you give moratorium of two years. So, from liquidity perspective, you can see that the banks are liquid enough. Now, if I go to capital adequacy, the Nigerian banking industry, the capital adequacy ratio average shows that we have the capacity, of course, they may be one or two players who occasionally might have challenges in that area. But the regulatory framework for regulating banks ensures that at every point in time , the regulator keeps an eye and makes policies that continues to make banks strong enough in terms of capital adequacy ratio. If you recall before the end of last year, the central bank came out with a rule that if you do not have the required capital adequacy ratio, you cannot pay dividend. So, that forces you to retain more earnings to build up your capital buffers so that you continue to lend safely. Capital adequacy ratio as you may know, there are different requirements for different categories of banks. For the tier 1 banks, it is 16 per cent, for any other bank with international banking licence, it is 15 per cent and for banks that have only national banking licence, which means they are operating in Nigeria alone, that is 10 per cent. So, if you look at it, you would see that from regulatory framework and from the individual banks’ capacity, we have the capital adequacy ratio to continue to lend in this area.
Did you get a sense that, that was one of the areas in which you felt there was lack of capacity?
I wanted to speak about it from three points. People have to first of all understand what banks do. Now, we have talked about capital adequacy ratio. The next one I would like to talk about is when you are the manager of other people’s funds, do you have the human capital capacity to do that? And my answer is yes, in the Nigerian banking industry. I would tell you why. Most of us running banks today, started in the late 1980s and early 1990s, when merchant banking was the main thing and merchant banks were the banks who used to lend mainly to manufacturers and the real sectors. The traditional banks in those days especially the big four, if you notice, they were all so heavy in agriculture and had the competence, track record and history of lending to that segment. So now, most banks have grown especially with the recapitalisation of 2004 and the shake-up of 2008. So, the industry is in a stronger position today to lend. But the reason you would not finance manufacturing businesses before now goes beyond banks’ capacity from that perspective of human capital. The risks, how about the general macro issues that would hamper a company’s ability to complete its asset conversion cycle and repay your loan?
We have seen bad loans in the bank a lot of times. Now that it is single digit and for two key sectors of the economy, what is making it different?
What is making it different is, imagine somebody who produces plastics and he borrows at 20 per cent and above. He has his own power station and the transportation of his goods, say from the south to the north, is more expensive because of poor infrastructure. By the time he puts together his cost of business, he might just find himself with cost of goods to sale ratio of maybe 90 per cent and this 10 per cent margin is not enough to accommodate other costs. So, he would operate at a cost at a loss. I will give you an example, in the past, when I was in corporate banking in the early days, I used to be in charge of plastics, flour mills and the vegetable oil industries. We had a kind of waving motion in terms of sales in some of those plastic companies. During the rainy season, when their sales drop and you ask them why, they will tell you that people who come in from Chad and other neighbouring countries that buy their goods, stop coming during rainy season due to poor infrastructure. So, at that point, if these companies produce, you cannot really achieve the same kind of volume of sales. Now if cost of producing is that high and disposable income of those that buy is lower, then definitely production in the manufacturing sector would drop. So, what I’m trying to say is that beyond the banks’ capacity, there are bigger macro-economic challenges that hampers lending to the real sector. If you lend money, you expect that money to be returned to you so that you can lend to the next person.
In today’s world, do you believe that the banks still have the capability to work in the agric and manufacturing sector and haven’t lost that competence?
We are actually in a stronger position today to do that but because if you lend at the rate that you should lend based on your own cost of funds, then it would not be profitable for them. So now you have funds available to lend at nine per cent, which is about 11 per cent drop in cost of funds, compared with about 20 per cent which you would have lent to the sector, which makes it easier for those companies. So, the issue is not capacity for the banks. Now, most banks today meet international standards in terms of practices and human capital development. I’ve worked and run a bank in Ghana, I supervised in Sierra Leone and Liberia and in all these countries, I can say Nigerian banks have demonstrated that we have the requisite human capital. In our days, you do not resume the bank if you do not go through training school for three months and today most of the banks now have their training academies where you develop people. So, we have the capacity in terms of the human resources, capital adequacy ratio and liquidity.
Excess liquidity in the system portends danger. For instance, it can make a lot of funds available for people to speculate in the foreign exchange market and there could be pent up demand for foreign exchange which can lead to devaluation