OUTSIDE THE BOX
BY ALEX OTTI
“It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.”–Adam Smith(1723-1790)
There is no better way to illustrate our essay today than through the popular biblical parable of the talents. According to the parable, a certain master, on getting set to make a long trip, decided to give talents (the form of money at the time), to his three servants, each, according to his ability. The first one he gave five talents, the second, two talents and the third, one talent. Off he then went on his journey. The first servant put his five talents to use. He traded with them and made a profit of five additional talents. The second one similarly traded with his and made additional two talents. However, the third one instead, dug the ground and buried the one talent he was given.
The story did not end there. Their master came back from his trip and invited them to give account. The first servant reported that out of the five talents he was given, he had made a profit of five talents. The master was very happy and blessed him. The second servant in like manner reported a profit of two talents on top of the original capital of two talents. He was equally blessed by the master for a job well done. As it is usual with failures, the third servant started with some long stories of how the master was a very hard man who would want to reap where he did not sow. According to him, he did not want to take any risk with his master’s money and therefore buried the talent in a hole. He returned his master’s single talent to him.
Expectedly, the master became very angry with him and tongue-lashed him for lacking in wisdom, questioning that if he could not do any business with his money, instead of burying it, he should at the minimum, have deposited the money in the bank for interest. In his anger, the master asked that the third servant be dispossessed of the money and given to the first servant who had returned 10 talents. Incidentally, that parable is the source of the popular albeit debatable quote thus, “for unto him who has, more shall be given and from him who hasn’t, even the little which he has, shall be taken from him and given to he who has, so that he shall have abundance”
Before going further let me issue a caveat that we are by no means discouraging people from banking their money. On the contrary, we want people to not only bank their money, but ensure that such funds are put to work for them and the larger economy.
In our last intervention penultimate week, we had argued that the Nigerian economy is underperforming when compared to many smaller African economies. Comparing Nigeria’s GDP of around $445b with South Africa’s GDP of $370b and GDP per Capita of $2,300 and $6,300 respectively, we would see that the difference is clear. Again looking at the current budgets of Nigeria and South Africa, with Nigeria’s $34b and South Africa’s $125b and expenditure per head of $170 and $2,155, respectively, there’s no doubt that we are not ‘classmates’, even if we sit in the same class. A simplistic explanation for this would be the difference in population. That is a no-brainer as we know of countries with even larger populations that are doing very well. The major problem is the economic contribution of the population. Assuming we improve the contribution of each of us to match that of South Africa, our GDP could easily be $1.3 trillion. Now, is this possible? The answer is a resounding Yes, but with the proviso that we must begin to do many things differently. Any country dealing with the challenge of low productivity cannot be well positioned in the comity of nations. That is the reality of where we truly are. The only way we can get out of the quagmire is that we take deliberate steps and implement decisions that will increase the tempo of economic activities in the country. We are not unaware of the challenges of infrastructure deficit which has held down a lot of initiatives, but we must also creatively work round those, just like the few successful businesses in our economy have done. Those challenges in themselves can easily become opportunities.
Recently, the Central Bank of Nigeria gave a directive for Deposit Money Banks in the country to improve on their loan-to-deposit ratio to 60%. A month later, the regulator jerked up this minimum target to 65%. The logic behind the directive was to encourage the flow of credit into such sectors as the SMEs, Retail, Mortgage and Consumer Services. To enforce this directive, the Central Bank came up with a penalty of debiting the accounts of defaulting banks by 50% of the shortfall. These sanctions have already been applied on non-compliant banks. We have heard some grumbling from certain quarters about how it is not the job of CBN to force banks to lend and how this action can lead to the creation of bad loans.
We are of the opinion that not only is there nothing new about this directive, the directive is also not out of place. This is because the average loan to deposit ratio between 2005 and 2010 was 74.33%, a clear 10% over the recent minimum limit prescribed by the regulator. Bear in mind that the banks were not compelled to achieve these results in those days. It was not until 2013 that the average loan to deposit ratio in the industry dropped to an abysmal 38%, but since then it has continued to go up. The only difference is that while in the past, individual banks chose their loan to deposit ratios, now they have to comply with a stipulated regulatory minimum. The growth of the economy, is dependent on the availability of funds for investments in the real sector. It is also true that to the extent that there are less risky outlets that guarantee good returns, rational-thinking banks wouldn’t prioritise lending and we believe that is one of the reasons that the CBN is wielding the big stick. More results would be achieved by lowering the monetary policy rate, which is otherwise known as the risk free rate. This would naturally force down the rates on government securities and make them less attractive to banks and ultimately bring down interest rates generally. It is a known fact that some otherwise good businesses cannot survive the high interest rate regime prevalent in today’s market.
I know that someone would ask if I am making these suggestions because I am no longer in the banking industry. I will therefore depart from my tradition of not personalising my initiatives on this column and discuss what took place during the course of my own banking career. We took a decision to lend to the micro, small and medium scale enterprises (MSME) and it not only paid off, it also exposed the lie that lending to that sector of the market was prone to high rate of default and losses. At that time, we created credit products that fit into the MSME markets and deployed massive loans to them. We automated most of the processes being that the number of customers in this sector were very high and the amounts were small. This was one of the key success factors as it made for diversification. We found out that most small players were generally honest and when they didn’t pay, it would be more because the business failed and they therefore could not pay. There was a very low incidence of refusal to pay. This was quite unlike our experience with many high profile “businessmen” who would dress up in the morning with beautiful briefcases and beautiful proposals and come to the bank to borrow with the sole intention of not paying back. They were the ones that would be able to hire the best lawyers, take undue advantage of the loopholes in the law and can decide to keep the bank in the court for 10 years or more. By the time the bank would have been thoroughly worn out, it would abandon the case. The small players on the other hand were happy to get assistance from the bank and would want to build a good record to be able to get more assistance from the industry in future. On our part, we reciprocated the goodwill gesture of these smalltime borrowers in any way we could. To strengthen their businesses, we set up clinics that provided assistance in terms of advisory and handholding services. These included workshops focusing on how to keep their books properly, differentiating between personal funds and business funds, choosing appropriate capital structure and hiring the right personnel, as well as using the appropriate technology in their operations. One of the foremost business schools in the country partnered the bank and we were able to provide these services to the customers on a pro bono basis. At the end of the day, we had a large network of MSME customers whose loss rates were relatively minimal. In consequence, that fetched us international recognition and foreign grants and assistance for pioneering the efforts of supporting MSME banking.
The whole essence of this intervention today is to examine ways of improving on the productivity and output of the country and significantly grow our GDP, create jobs, reduce the level of poverty and generally improve physical security in the country. As Albert Einstein, the great physicist and philosopher once said, “The definition of insanity is doing the same thing over and over again, but expecting different results.” Our sincere opinion is that the funding for some of the initiatives that will help this economy exists in this country. It is just that we are stuck in some of our orthodox approaches that have so far not produced appreciable results. If we are to relate this to our opening paragraph, just like the parable, we seem to have buried our talents and are therefore struggling in virtually every sector of the economy. Looking at the micro, person-to-person level, it is clear that some of our young men and women roaming the streets looking for non-existent white collar jobs, can become entrepreneurs. Believe me, this is not rocket science. Oftentimes, the problem is not lack of funds but instead lack of vision and conviction. Looking around one, so many needs can be identified that can be met easily with products, but the challenge is always about taking the first step, a move that is often lacking because of the fear of failure.
The barriers to entry into making basic products are not that much. Because they are basic, sometimes, the margins can also be small, but with capacity expansion and larger volumes, returns would naturally improve. As we move up the ladder, there are so many of us that keep large deposits in the bank. And don’t get me wrong, there is nothing wrong with keeping large balances in one’s deposit accounts. The only issue is what alternative use the funds could have been put to for the benefit of society and the owner of the funds. Again, going back to the parable we started with, note that the master had recommended keeping the talent in the bank for the third servant rather than burying it. That wasn’t the best use for the money, but rather the master’s worst case scenario.
There is a whole lot we can do with the money available to us rather than leaving them idle in the banks. We must ensure that our money does not become lazy. Beyond the low hanging fruit of agriculture are other infrastructural deficit areas. Power is a very big deal in a country generating no more than 5000 megawatts of power for everyone. Recognising the legislative challenges and the huge investment outlays required, there are yawning gaps in the area of renewable energy like solar, wind and bio mass. We believe that where to invest funds in a low productivity and densely populated country like Nigeria should not be a challenge.
While encouraging everyone who has some funds to boldly channel their money in the most productive activities to create momentum in the economy, we call on the banks to also come out stridently to support the growth of the economy by ensuring that the funds deposited with them are put at the disposal of genuine businesses that would create jobs, add value to the economy and reduce social tension in the land. After all, banking is traditionally, all about collecting money from areas of surplus and making it available to areas of need at a rate higher than what the depositors are paid, thereby leaving a margin for the bank. We must sweat our money and let it warm us. We must also ensure that in the end, we all, including banks, customers, business people and so on, grow our talent or it will be taken away from us and given to those who know how to grow theirs.