Nigerian Banks Are Still Sound But… – Chukwu

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Johnson Chukwu, Managing Director and Chief Executive Officer of Cowry Asset Management Limited, is a household name in the nation’s financial sector. His passion for financial matters has taken him far and wide as a banker and financial consultant. He spoke with Daily Trust on the state of the nation’s economy, the financial sector and other issues. Excerpts:

The nation’s economy is currently dwindling partly due to the crash in international price of crude oil. How did we get here?

We got here because when we had the opportunity to diversify our economy, we did not. Nigeria’s economy has been a monolithic economy since when we had oil which, instead of becoming an economic propeller, became a curse to other sectors of the economy. In the ‘60s, we had the groundnut pyramids in the North, palm produce in the South East and the cocoa plantations in the West. Unfortunately, all these resources vanished when we had oil. We are where we are basically because of failure on the part of the leadership of the country to sustain a broad-based economic policy in the face of cheap income from oil export.

There have been calls by experts in some quarters for Nigeria to further devalue the naira in the face of harsh economic conditions. Is this the right way to go?
The arguments for and against devaluation of the nation’s currency are both sound. The major challenge is that when you have a product whose demand is at variance with supply, one or two things can happen. One of these is that you have to allow price to equal demand and supply, and allow market forces to determine the price of the commodity. If the price goes up, the number of people buying the product would come down. So, the demand would come down. It will get to a point where demand and supply will be equal. This is what is called equilibrium price. If we devalue the currency, it will get to a point that a lot of people who consume imported goods will no longer do so because those things would have become expensive. That is one aspect of the argument.
The other thing that could happen is that if you have a demand and supply situation, you can adopt a rationing system. In that case, you allocate the scarce resources using other parameters you think are equitable. But I will tell you that embedded allocation is fraught with corruption and unfairness. That is why I think we need to adjust the naira further to attain better level of equilibrium. But you don’t just adjust the naira in isolation; it must be an all-encompassing economic policy so that as you are adjusting the naira, you are also stimulating local production of goods. There should be local subsidy for those products because when you talk of devaluation, it must go with stimulus package geared towards producing local substitutes of imported goods.

How would you explain the prevailing high interest rates charged by banks and the low performance of the real sector in the nation’s economy?
Economic agents are rational and therefore will put their resources where they would either maximise their returns or minimise risk. What is happening today is that it is attractive for banks to lend to the Federal Government because the yields on the Federal Government bonds are high. At some points until recently, returns on treasury bills were 17 percent, while returns on government bonds were 20 percent. So it makes sense for banks to invest their money in those instruments that have minimal risk of defaults and good yields. What you are seeing today is that the Central Bank of Nigeria has adopted expansionary monetary standard. The bank is gradually introducing, without announcing it, some level of quantitative reasoning. The injection of liquidity by the Federal Government to pay loans owed by the state governments and the fund given to state governments to pay workers are some of the quantitative reasoning. Beyond that, the CBN has stopped Open Market Operation geared towards reducing the amount of liquidity in the system. Once the Federal Government borrows at double digits interest rates, the banks would be compelled to lend money to the real sector. That’s why we say in economic terms that when the government is very aggressive in mopping liquidity from the system, it could crowd out the private sector.

Small and Medium Enterprises (SMEs) frequently lament their inability to access credit facilities from banks. How can this challenge be overcome?
There has to be collaboration between the Bank of Industry and the federal and state ministries of finance to set incubation centres that can bank-roll the SME operators to enable them grow into conglomerates. The federal and state ministries of finance should provide guarantee schemes to SME operators that have shown some level of commitment. It could be through the Bank of Industry which could do partial risk guarantee of the lending that commercial banks give SME operators.

What is the economic sense in the Treasury Single Account (TSA) being promoted by the Federal Government?
The TSA is just a concept of efficient cash management where the Federal Government or any account holder closes all his balances into a single balance account. The system makes government to enjoy optimal returns on its cash balances. When government has multiple accounts, some unpatriotic officials use that opportunity to invest government resources with banks and ensure that government earns minimal income, while they earn some margins for their own interest. Some other officers will still go and borrow and make government pay interest on loan when it has balance on credit in other banks. Beyond the fact that we are going to reduce the level of government borrowing, TSA will improve government revenue balances as well as reduce instances where people abuse their position by taking pecuniary benefits for rewards that could have accrued to the government.

How do you see the Bank Verification Number (BVN) exercise conducted recently by banks in the country?
The BVN idea was poorly conceived. People had got weary of data capturing, having done similar thing for phone SIM card registration, voters registration, national identity card, international passport, etc. That’s not the way to go about it. I think we should have a harmonised and centralised identification management system. It is not rocket science that by now, Nigeria should have a national identification system that gives each citizen unique number. The present disjointed data management system is inefficient, not optimal, costly and inconvenient. The Federal Government must take a critical look at the situation.

There is an ongoing controversy over the state of some banks, with insinuations of distress. The CBN has waded in, saying that no Nigerian bank is weak. As an insider, what is your honest assessment of Nigerian banks, and are the banks over-regulated or under-regulated?
The truth is that in the last three to six months, we have seen deterioration in banks’ assets. That is an indication of a weakening balance sheet but not a threatening balance sheet. In effect, Nigerian banks are still sound but the risk assets are gradually weakening which is something they need to take immediate measures to arrest, in collaboration with the CBN. The banks have gone through a lot of headwinds in the recent past, particularly because of multiplicity of CBN’s regulations that are coming out almost every period. A situation when rules change almost on a daily basis is not good enough for any business sector. I think as it stands today in the realm of managing liquidity in the system and foreign exchange, the banks may be suffering from over-regulation by the CBN.

Sanctions were recently applied on some banks, specifically Skye Bank, UBA and First Bank, for allegedly flouting the order on TSA. Are these sanctions justified?
I am an apostle of discipline but I believe sanctions should be known in advance. Infractions should have defined sanctions attached to them so that when you breach the rule, you will know what awaits you. Indiscriminate fines on alleged infractions are not right. Imposition of sanctions should not be at the whims and caprices of any regulator.

What is your take on the proposed bill to empower the Nigeria Deposit Insurance Corporation (NDIC) to co-regulate the banking sector with the CBN? 
There is a concept that you cannot have two captains in a boat. There is no reason why banks should be subjected to regulation of the CBN and the NDIC. NDIC is a deposit insurance company whose job is to insure the deposits and liabilities of the banks. The bill came up during the last National Assembly and I think it had died a natural death.

Why did you float Cowry Asset Management Limited after leaving the banking sector?
Cowry Asset Management Limited commenced as a result of ideas by a few of us who felt that there was a huge gap in terms of service delivery to the teeming Nigerian investors that were looking for opportunities to invest. The concept was actually conceived as far back as February 2005. It started operations in 2006 as a stock broking outfit. We commenced with stock broking because we realised that the economy had started to show signs of growth and a lot of Nigerians were beginning to show interest in the capital market. We were among the first to create online trading platforms. We also realised that there were other aspects that needed improvement in quality standard like issuing house and portfolio investment and then we sought and obtained licence from the Nigerian Stock Exchange to go into these areas, and we have been doing these since. We have branches in Abuja, Owerri and Port Harcourt. Beyond our current status, we are working to be a global financial institution of African origin. Today, we are almost a one-stop financial institution.

The Security and Exchange Commission (SEC) recently suspended your company over an infraction. What really happened and how did you resolve the issue?
The suspension had to do with Zamfara State government bond. We agreed with SEC that we were going to make payment for the bond on August 21, 2015 which was Friday. By August 25, which was Tuesday, SEC had not got evidence of our payment, so they suspended us. But the following week, we provided evidence of payment and SEC lifted the suspension. They suspended our issuing house licence because it was what we used for issuing out the bond.

So, you really committed the offence?
Yes, I’ve just said it. We gave a timeline by which we would have made payment for the bond, but they did not receive evidence of our payment. But when they received the evidence the following week, they immediately lifted the suspension. As I said earlier, I am an apostle of sanctions which must be well defined beforehand, and we were rightly sanctioned.

Why is Nigeria’s stock market still dominated by foreign investors?
The reason why we still have dominance of foreign portfolio investors is because the retail market is inactive. The CBN rules made three or four years ago made it difficult for banks to lend to portfolio investors in the stock exchange market. Another reason is that the return on fixed income instruments, particularly Federal Government instruments have remained very unattractive and therefore portofolio investors are underweight in equity.
What advice do you have for young entrepreneurs and school leavers who want to establish on their own?
I believe in the concept of grooming and my approach is that a young graduate should find out what his passion is. Having done that, he needs a mentor that will help him to shape the raw energy and passion he is imbued with into a usable format that would make him achieve his life objectives.

What is your philosophy of life?
My philosophy of life is that one should be upright, simple and honest; one should find something exciting to do, without giving much importance to material value.