Sanusi
Lamido Banking Reform And The Quest For Non-Interest
Banking In Nigeria
Writers Articles And Opinions
30 November 2010
By Shafiu
Ibrahim Abdullahi
History of banking sector reform
in Nigeria did not start with Sanusi Lamido and will
certainly not end with him. His predecessor Charles
Soludo came with his own revolutionary banking sector
consolidation, that in the process emphasized growth
over security, creation of mega banks over increase
assess to credit by the most productive sectors of the
economy. His revolutionary increase of capital base to
twenty five billion Naira, with the intention of
increasing banks strength and making them less
susceptible to capital erosion, has indeed created
mega headline creating banks who were buried in the
race to become number one bank in this or that. There
was the liberalization of the banking sector of the
late eighties that helped the emergence of what we
today called the ‘new generation banks’. The after
math of that reform saw the massive collapsed of many
of these newly registered banks, with hundred
thousands of depositors losing there money. The aim of
the reform of making finance more accessible was not
realized for reasons that included lack of co
ordination between theory and practice, politics,
corruption and absent of the enabling environment for
the reform. Far back before then in the seventies,
there was the nationalization of foreign own banks by
the federal military government to achieve the aims of
local control, development of local expertise, as well
as linking the sector objectives with wider government
goals.
Reforms that took place during
global period of reform were less open to resistance
than ones totally out of reality both within and
outside the reforming country. Sanusi reform as it is
now is widely accepted outside the country, some of
the resistances it is facing are coming from within
Nigeria. Assuming office during period of global
economic crisis, a time when Nigerian banking sector
was facing one of the most difficult moment of it
history; one of the first things Sanusi promised
Nigerians was to safeguard their deposit. Many
observers at that time wonder how he could achieved
that looking at the rot in the banking system; not
even that, his sacking of chief executives of some
banks made many to think that the governor was waging
a war that he could not win. Injection of liquidity
into about six of the problem banks followed, that saw
Central bank prompting those sick banks with up to
four billion Dollars of government money. One year
after, the reform cannot be said to have achieved it
objective of getting the system rid of sick and under
capitalized banks. The fear that existed at the
beginning of the reform is still around, only that it
will be said to have subsided.
At the heart of Sanusi reform is
the dismantling of universal banking and it
replacement with commercial and specialize banking
models. That means reverting to the earlier banking
arrangement of separating commercial from investment
banking. Other specialize banking arrangements contain
in the proposal include industrial and primary
mortgage banks, and non interest bank. Also as part of
the reform is the categorization of capital base
according to the sector a bank is operating as well as
the geographical spread of its branch networks. To
check the excesses of bank CEOs, chief executive
officers tenure was fixed to five years in office. In
order to get the system to continue giving loan so as
to sustain economic growth, asset Management Company
was established to buy bank’s toxic assets from these
banks. Despite all these, Nigerian banks are yet to
resume giving credit to half the level they were given
prior to the global economic melt down. But one
optimistic note is the very recent IMF forecast that
put Nigeria among the three highest growing nations of
the world this year. Central Bank forecast has also
put the contribution of non oil export during the
period to be very robust.
One aspect of the reform that I
intend to discuss here is the establishment of non
interest banking, more popularly known as Islamic
banking. The quest for non interest banking in Nigeria
has been on for more than two decades. But there is
yet to be any fully pledge Islamic bank in the
country. Soludo efforts at establishing non interest
banking are commendable, despite the fact that they
have not produced any Islamic bank. What we have today
is a little window in few banks that try to provide
some kind of Islamic banking services. It is argued
that since substantial segment of the country,
especially in the Northern part, are yet to be covered
by the conventional banking system, specialize banking
arrangement like non interest banking will
significantly help in increasing the coverage.
But to me I am seeing this from
another dimension, as some one who have written on and
studied the last global financial crisis, introduction
of non interest banking should be viewed as one of the
many measures to check the excesses of the
conventional banking arrangement. Derivatives, greed,
and especially exploitative interest rate are to many
the major causes of the last global crisis. One major
feature of Islamic banking is the replacement of
interest rate with profit and loss sharing (PLS) rate.
This is done to remove from the system one major
source of exploitation and instability that favor
lender at the expense of borrower. Derivatives like
the deadly credit default swaps (CDS), that Warren
Buffet called weapons of mass destruction, is one of
the many tumors bedeviling the global financial system
that can only be removed by surgery on the system.
Then come greed that inspired many to put there money
in highly risky activities, get rich or die trying.
What ever you called it risk shifting, speculation,
short, or long selling, excesses no matter the form
they take are at the heart of the last global crisis
including in Nigeria.
The current system as it operates
in Nigeria has failed to maintain balance between
conflicting interests of individuals and the society.
Where bank managers will use depositors’ money to
enrich their selves, a far bigger surgery is indeed
required. It is easier to deviate from the laid down
rules on credit issuing where the main requirement is
whether the borrower can pay the required amount of
money borrow to him, instead of his ability and skills
to put the money into the most productive of uses.
With any questionable collateral, lending officials’
can lend money for what ever purpose, as they did
before the collapse. The former banks MDs sacked by
Sanusi were accused of lending money to their own
companies and that of their cronies. Some of these
lending were given for the sole purpose of speculative
investment in shares and properties. But in Islamic
finance, if a borrower applied to an Islamic bank for
finance, the bank would, in principle, decide whether
or not to support the project on the basis of a cost
benefit analysis of the scheme, not on the basis of
the collateral or debenture. And the high moral
standard and the conservative tradition of the Islamic
banking do not tolerate speculative lending.
In the Islamic banking
arrangement, credit creation is not allowed unless it
is trade credit or interest free loan. What is
encouraged are ventures pursued in accordance with
profit and loss sharing principle. This if practice,
has the general tendency of encouraging
entrepreneurship and co operation, instead of
speculative activities and cut throat competition.
Islamic banking unlike conventional banking abhors
injustice and exploitation and seeks to forge human
relationships on the basis of justice and cooperation.
Interest represents, in the Islamic value system, a
prominent source of unjustified advantage. The
substantial part of the non performing loans uncovered
in the aftermath of the Nigerian part of the global
crisis was caused by the problem of the borrowers in
ability to service the debt, which can be linked to
high interest rate. The high rate of interest made it
difficult for use of the money in job creating
enterprises like manufacturing thus skewed the money
in favor of speculative activities, thereby fueling
the crisis. High rate of interest was the major caused
of the third world debt crisis of the 1980s as well as
the Asian financial crisis of 1997/98.
As is always the case, if an
investment methodology is working well then no one
questions it until the first cracks appear, by which
time it is too late. The massive margin lending for
share accusation that was allowed by the central bank
on the binge of the crisis was the major factor behind
the booming trade in the capital market observed at
that time. All you required to get money from any
Nigerian bank at that time was to set aside certain
percentage of the money required to purchase the
shares you needed, the remaining 80 to 70 percent was
provided by the bank financing the purchase. Lot of
people including bank staffs and unsuspecting public
were lured into buying shares of the banks granting
the loans; not minding the performance of the banks
stock and the profitability of doing so. This helped
to boost the performance of these banks shares on the
exchange for a period of time. But when the market
finally collapsed, both the banks and the unsuspecting
public where left with certificate a little better
than junk papers. The people that gained most from the
episode were the managing directors of these banks who
were given the opportunity to quickly sell their
holdings in those stocks; in which case by the
privilege given to them by their insider knowledge
they knew the price would crashed.
Another dimension to the crisis
was the massive speculative activities in the market
for importation of refine petroleum products. Banks
executives together with oil importers colluded in
investing a substantial amount of banks money in the
importation of petroleum in order to make quick gain
for themselves. This was an important source of making
cool money before the crisis, but at the pick of
events the strategy turned sour and banks made massive
losses that two of the banks most exposed to the
business were feared they would collapsed. In most
occasions these oil loans were granted without any
solid collateral and base on flimsy investment
grounds. Greed can make the most professional of
bankers to be no better than laymen with little
background on financial matters. Any ‘rational’
observer could observed at that time that the world
price of crude oil had approached it climax when it
near $150 per barrel; looking back at the history of
global price of crude oil, it was open secret that it
had never reached that height. What were the
fundamentals that explained that increase in the
price? The most important was the booming demand for
energy that was led by China and India. Even though
the global crisis did not originated from those
places, it was clear a year before the crisis that
Chinese economy had over heated and Chinese
authorities were desperately searching for break. When
they finally pushed the break pedal, and the
speculative money coming to the oil sector from the
global financial centers started to reduce, the world
price of crude oil began to plummet.
Coming back to Islamic finance,
the global value of Islamic financial assets is put at
around $1 Trillion, and for the past three decades
Islamic finance has enjoyed double digit growth that
made it the fastest segment of international finance.
Islamic banks have operations in all the major global
financial centers, from New York, London, Frankfurt,
Dubai, to Hong Kong. There are Islamic stock index in
major stock exchanges like New York, Bahrain and
Malaysia; while Islamic bond the ‘Sukuk’ has become
the darling of corporate and government finance, being
used by companies and government in far places like
US, UK, Switzerland, Pakistan, and Malaysia. Nigeria
is losing a lot from its reluctant to adopt Islamic
finance, apart from it economic stabilizing and
distributive advantages, it has the unique advantage
of becoming a major source of foreign direct
investment for Nigeria. For over a decade, Malaysia
has been using that model to make her economy very
strategic in the global financial market, and has been
able to attract billions of dollars of Islamic
investment from the Middle East.
I, absolutely, don’t know what
Nigeria will lose from the introduction of Islamic
financial system; if not the many gains it will
derive. According to an International Monetary Fund (IMF)
finding, Islamic and conventional banks can co-exist
in the same system without substantial “crowding out”
effects. On the religious issue, some of the most
important contributors to the field of Islamic finance
are non Muslim. You are talking of people like
Professors Rodney Wilson, and Volker Nien haus who
came from the European continent. Some other gains to
Nigeria from the system include financial deepening,
that is the increase coverage of the population by the
financial system, increase economic stability because
of reduction in debt to equity ratio in the Islamic
system, and increase in risky capital(equity) because
of replacement of Interest with profit and loss
Sharing.
Islamic micro finance banking
model can perfectly supplement the current effort at
development of micro finance bank in Nigeria. Micro
finance banks were originally conceived to help poor
met their financial needs that would not be attended
by bigger commercial banks. That has been the aim of
Islamic banking, empowerment of the poor who doesn’t
have collateral but are blessed with a viable project
idea. The Islamic finance concept of Qard Hasanah
(benevolent loan) is mean to help the poor that is in
need of assistance without demanding to make any
profit from him. One advantage of Islamic microfinance
over its conventional counter part is when it comes to
interest, conventional micro banks are known for
charging the poor higher rate of interest on the
ground that lending to the poor is highly risky; the
prohibition of interest and it replacement with profit
and loss sharing and mark up modes of financing have
taking care of that problem in the Islamic finance
sector. Islamic micro finance model uses mode of
financing that range from Mudarabah (partnership
between the bank and the borrower) to Murabah (trade
finance in form of working capital loan to leasing).
And an IMF finding has shown that smaller Islamic
banks tend to be financially stronger than
corresponding smaller conventional banks.
One of the many ills of the
current banking practice in Nigeria is the do or die
strategy of deposit generation, where staff are send
out to generate deposit or get fired. This unethical
practice have derived many especially women to
prostitution, another case of neglecting morality in
favor of endless competition to accumulate money.
Most of the money generated
through these means end up been channeled into
speculative activities to satisfy the hunger of the
top executives for quick gain. Where is our ethical
banking practice under which bankers were known as the
most trust worthy people? Today bankers in contrast
are vultures looking for a dead meat to feed on. Under
the present arrangement banks have turned our country
into spendthrift society by means of consumer credit,
whereby banks finance anything from purchase of car,
home appliances, holidays, to election rigging. The
very moment you let banks know that you are earning
big salary or they find out you are keeping a lot of
money in your account, the next moment they start
sending people to sale their consumer credit
facilities to you. Thus, banks instead of encouraging
saving habit kill it. The trillions of Naira assets on
Nigerian banks balance sheet have not translated into
investable funds needed to finance Nigeria’s economic
development. That is why we are where we are today.
The system as a whole is not fit
to take Nigeria to the dream land. Compare the system
with what is found in other emerging economics, in
china the world second largest economy, government
still makes sure that finance is channel to the most
strategic sector of its economy. These are building of
infrastructures, construction of power generating
plants including nuclear reactors, development of the
manufacturing base of the economy, and micro credit.
India, Brazil, Indonesia, and Turkey follow similar
methods. But one cannot for get the efforts of Sanusi
aim at giving more credit out to sectors like power,
aviation, agriculture, and manufacturing, this is a
commendable effort, but is not enough, CBN has to
pressure the commercial and investment banks into
doing the same. Thus, there is need for a special tax
in the financial sector; this is for the sole purpose
of encouraging developmental finance like the ones
undertaking by the development banks, by imposing tax
on speculative and highly risky banks assets more
money will be freed into productive activities to help
the rapid industrialization of the country.
Since the start of the civilian
administration in 1999, there has been gradual killing
of development finance institutions. Institutions like
Bank of industry (BOI), Nigerian agricultural
cooperative rural development bank (NACRDB), Urban
development bank of Nigeria, (UDBN) and National
economic reconstruction fund (NERFUND) have been
pushed to the periphery that you hear little about
them. Both Sanusi and Soludo banking reforms have
focused on commercial banks, therefore, neglecting
these development finance institutions. Even though
one can argue that CBN main job is to regulate deposit
generating banks, but it still has some
responsibilities it owe to these banks. Economic
development will be difficult to be realized without
these institutions, since they were initiated to
assist rapid growth and development, any serious
government economic development agenda must take them
along. Commercial banks and other profit oriented
finance institutions are short termists, while
development finance institutions are long termists,
and the whole process of economic development is long
term oriented, hence, the need for these banks.
Commercial banks can spear headed economic growth only
where profit is to be realized. Lastly, CBN itself
need reform, and this is not the first time this will
be said. As the Ghandian saying goes, be the change
you want to see, CBN need some over hauling and the
time is now.
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