Global financial crises and Nigeria’s economy
By Deji Akinso
Deji Akinso
The crisis is global and worst of its kind, since the
Great Depression of 1929, usually referred to as
Black Tuesday. That crisis spread from the United States to the rest of the world, between 1929 until early 1940s. Over 15 million Americans lost their jobs.
The current crisis first became visible in 2008 when consumer spending, which represents close to 70 per cent of the American economy fell dramatically, followed by the abrupt closure of credit markets, thus creating a downward turn in general sales.
The crisis has been described in many ways; some referred to it as melt down, while other people say it s credit crunch, cash crunch or even, cash squeeze. The impact of this crisis on the world economy has started to manifest.
The symptoms
The immediate symptoms were the failure, merger or conservatorship of several large United States – based financial firms; the situation that were later to be felt in major countries of the world, like United Kingdom, Germany, France and Japan.
It started with the mortgage market and later, the crash of the capital markets. Assets values were largely depleted and could not represent their true values.
The possible causes
The sub-prime mortgage problems in the U.SA and United Kingdom prompted the crisis. Sub-prime borrowers got access to mortgage finances when actually they did not have capacity to go through such borrowing. There was serious default to the extent that principal plus interest exceeded the value of underlying assets used to secure such loans. There was decline in value of the collateral used by the banks, when issuing loans. There was increased perception of risk regarding the solvency of other banks within the system.
In countries like Nigeria, where there is no domestic mortgage market to warrant a sub-prime problem as found particularly in the UK and the USA, we got something near it which was called margin trading facility. Here, the sub-prime problem would not be linked but the margin trading facility has left a mark. The capital market was flooded with cash and there was artificial increase in the value of stock. The market attracted ‘hot’ money and this worsened the situation. The Central Bank abruptly stopped the facility and banks failed to renew at expiry. This situation squeezed money out of the market. ‘Hot’ money also left. The scarcity of fund forced stocks to crash heavily.
Another cause is when Central Bank suddenly and unexpectedly raises interest rates or reserve requirements. There are occasions when Central government imposes direct credit controls or instruct the banks not to engage in further lending activity.
Another cause could be traced to cross ownership of banks between Nigeria and other banks. There are three factors involved when global institutions have direct or indirect impact on an economy. The first one is the country’s dependence on oil. Secondly, the margin trading facility; this is something close to the sub mortgage problem and which I already discussed above.There is also the reduced foreign investment and or withdrawal and withholding of our foreign investment as well as the issue of our foreign reserve.
How strong is our financial system?
The soundness of banking and financial systems must be of worldwide concern. The global economy and the international financial system have suffered costly financial crisis.
The country’s economy drew its strength from the recommendation of the Basel II Accord which stipulated strong capital adequacy for banks. The banks consolidation of 2005 was the saving grace else, the current global crisis would have consumed our financial system.
Before the consolidation, the share capital of the 89 banks in Nigeria was not up to the fourth largest bank in South Africa; little wonder that Nigerian banks could not support capital intensive projects pre-consolidation.
The Accord also recommended effective supervision from the country’s financial regulatory authorities like the Centrak Bank of Nigeria (CBN).
Robust risk management machinery is also a must for the financial institutions.
The Nigerian Stock Exchange market
The Nigerian Stock Exchange was very vibrant until early March 2008 when the fortune started to nose-dive. The all share index was at its peak on March 5, 2008, when it peaked at 66371 points, with capitalisation value of N12640 trillion. After that time, the situation changed. The market closed with all share index of 28848.40 points as at 13 January 2009, with capitalisation value of N6382 trillion. Between March 2008 and now, the market depreciated as much as 56.5 per cent and the end is not yet in sight.
The Dow Joe Industry Average (DJIA) of United States brazed the trail. Between October 2007 and October 2008, it depreciated by 40.94 per cent. Dax index of Germany lost 38 per cent during the same period and Brazil BM & f Bovesppa also lost 40 per cent. The government of these countries had gone ahead to arrange bail out for their capital markets.
Our Stock Exchange needs to be re-engineered to put confidence back to the investing public.
The CBN intervention
CBN intervened to reposition the economy and the capital market by putting in place the following policies;
Cash reserve ratio was reduced from four per cent to two per cent, this means that if a bank has N10billion deposit, the bank could only lend 60 per cent of the money, but by lowering the amount to two per cent, the banks can now lend about 80 per cent, which is about N8billion of the total deposit in their vaults.
If the 24 banks have an average of N10billion in their respective vaults, totaling N240billion deposit, the banks can all lend at least N192 billion but that is not the case if the N1trillion expected to be released from the banks is not really available. And that is where the true position of things in the banks must be ascertained.
The CBN slashed monetary policy rate (MpR) to 9.75 per cent from 10.25 per cent.
Cash reserves ratio reduced by half to 2.0 per cent.
Liquidity ratio went to 30 per cent from 40 per cent.
Effect of the intervention
There was stability.
Now that CBN has not continued the injection, rates have started to move up. This pointed to the fact that all is not well with some of the banks. A serious financial engineering will bring some of the banks to their knees
It will be recalled that the CBN injected about N150billion directly into the economy while another.
N1trillion was made available immediately to the economy.
In the last few weeks, the slide in the Naira should be of a concern. The dollar closed at N150 as at 13/01/2009 from N118 three months ago. The end is not in sight. There are speculations that the dollar will hit N200 in the next few weeks.
The above intervention was aimed at easing a persistent cash squeeze. “Interest rates dropped in reaction to the monetary policy committee (MpC's) measures to ease the acute cash crunch,” one banker said. Overnight rates was 20 per cent just before the injection- the highest level this year - due to an acute shortage of the naira currency, which saw banks scrambling for the little that was available to meet their obligations.
It should be recalled that the CBN injected about N150billion directly into the economy while another N1trillion was made available immediately to the economy.
The challenge
While the global financial meltdown persists, there is the need to double-check the health status of the players in the Nigerian banking industry. This is sequel to series of big businesses looking for huge credit facilities and finding it ever more difficult to access such credit lines.
A check on the system revealed that the CBN and the other regulatory agencies need to look closely at what the banks claim they have. Some of the banks may not be healthy.
principles needed to strenghten the financial system
Soundness of a bank is basically the responsibilities of owner managers and concern of the public
The soundness must be linked to sound macro-economic policies.
Framework must include structure to support internal governance and market discipline, official regulation and supervision.
International cooperation and co-ordination, the G8 accord.
Akinso is a Lagos-based chartered banker
CONCLUSION
The CBN appeared to have a vision for banking system that will be responsive to global change in strength, reliability and competition.
Our capital market bear cycle actually began with the decline of oil prices in July 2008 and the decline has continued unabated to date. The earlier withdrawal of the margin trading facility has not helped matters. Although the CBN has ordered it re-instated, the confidence has been eroded and I doubt if most banks would want to deal.
The impact of the consolidation on the economy is the saving grace otherwise our situation would have been terrible if the crunch met us in the pre-consolidation era.
The falling rates in the last 3 weeks needs to be seriously addressed. The naira depreciated as much as 25% and this situation will further put pressure on the squeeze and prices of commodities will go to the roofs. This needs to be addressed.
The consolidation has put confidence back to the banks and that was why the CBN Governor could beat his chest that all is well with Nigerian banks.
Nonetheless, we cannot live in isolation of the global World. Good enough, the World economic powers have resulted to powerful intervention by injecting fund to bail out the banks.
We must start to think of possible bail out.
