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| FEATURE ARTICLE |
| Malcolm Fabiyi, PhD | Tuesday, July 25, 2006 |
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[email protected] Chicago, IL, USA 
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COUNTING THE HUMAN COSTS OF SOLUDO'S CONSOLIDATION SCHEME
n the 31st of December 2005, arguably the most ambitious reform program ever undertaken in the Nigerian Financial Sector rolled into effect. That date marked the end of the 18 month consolidation exercise that Professor Charles Soludo, the Central Bank Governor had pioneered. The goal of the exercise was to restore credibility to the Nigerian Financial Sector, and Soludo's vision was to achieve this by encouraging a radical transformation of the ownership structure of Nigerian Banks. The thinking being that the expansion of the shareholder base would bring increased pressures for enhanced corporate governance and greater accountability.
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Reforms of some sort were therefore long overdue, and Charles Soludo must be congratulated for tackling the challenges in the sector head on. The gains of a successful reform program will be immense. With a higher capital base, Banks will have an increased ability to support large capital projects and will be better positioned to make the necessary investments that will support service delivery channels. The long list of accolades that Soludo has garnered over the past year attests to the recognition that many people have of the far ranging implications of these reforms.
In the 18 month period from July 2004 to December 31st 2005, Banks were expected to raise their capital base to N25 Billion from a previous value of N2 Billion. In order to meet this requirement, it was anticipated that many of the banks would be forced to consolidate. Other paths that the reform program hoped to encourage was the use of IPO or Public Share offerings to raise the necessary capital from the individual and institutional investors in the Nigerian market, as well as Foreign equity infusion. By the time the dust had settled, only 25 banks were left standing from a pre-consolidation total of 89.
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In a January 16, 2006 address Soludo disclosed that following the decision of the CBN board to liquidate fourteen banks primarily for their failures to meet the new Capitalization directives, 177 Billion Naira ($1.4 Billion) of depositors' funds were now trapped. Soludo pledged a 100% payout of these funds to the depositors in the 14 dissolved banks within a 90 day time frame. As of the time of writing this article, seven full months after the Soludo consolidation exercise was completed, I am unaware of a single depositor that has received any payment from the NDIC (Nigeria Deposit Insurance Corporation - the body charged under Section 301 of the 1990 Constitution with insuring all deposit liabilities of licensed banks and other financial institutions). A call to the NDIC office in Abuja confirmed the fact that not a single depositor in any of the 14 dissolved banks has yet been paid even a kobo of their deposits, post-consolidation!
The awards Soludo has received tout the success of his Financial Sector reform program, but how can a program be successful when the very people it is supposed to help are languishing? Does The Banker Magazine which declared Soludo "The Banker's 2006 Global Central Bank Governor of the Year" for what they called "The emphatic on - time success of the plan and the early positive outcomes" realize that over 7 months after the terminal consolidation date of 31st December, not one single depositor in any of the dissolved banks is yet to be paid, even when a commitment to payment within a 90 day time frame was made by the reform architect?
As an economist, and a reasonably accomplished one at that, Professor Soludo is well aware of what the concepts of opportunity cost, and the time value of money are. Why are these depositors yet to be paid? Has the process been derailed by unexpected legal wranglings? Is the NDIC insolvent? Was the reform program based on a fundamentally flawed estimation of how long the legal process of liquidating the banks and making payouts to depositors would take? Or, have these depositors not been paid because no one cares? The last point is one which I will assume to be downright impossible. No one can be so callous as to sit by idly while hundreds of thousands of people suffer the privations and disruptions imposed by a freeze of funds. The scholarly CBN Governor might be many things, but an insensate fiend he hopefully is not. If the NDIC was insolvent should Soludo not have concentrated on shoring up its base and ensuring that the institution was capable of meeting its obligations to the depositors before the revocation of the Banks' licenses, and not after? The excuse that the process of paying the depositors has been affected by the court case instituted by Directors of eight (8) of the 14 dissolved banks to challenge the revocation of their licenses is untenable. That excuse would be plausible if depositors in the other six (6) banks whose Directors have not instituted any legal challenges to the revocation of their licenses had been paid. The fact is that they have not. Whatever the reasons are for the failure to pay the depositors, the reality is this; it does no one any good, least of all the nation, for this situation to continue the way it has for the last 7 months.
We must attempt to place a cost on this misadventure so that we can better appreciate what price the nation has had to pay. By Soludo's own account, there is about $1.4 bn trapped in the banks. In order to establish how much having those funds being out of circulation is costing the nation, we must establish how much would have been earned if it had been made available for use in the economy instead. Let us determine first of all what that money ought to have yielded in returns. Now, remember this - banks do not lock money up in vaults and merely hand them over to you once you make a withdrawal. As soon as you deposit the funds, the banks immediately make those funds available to others as loans. In Nigeria, the annual interest rate for many categories of loans is about 21%. What this means is that in the seven months that have elapsed since the dissolution of the banks by Soludo, the least amount that these 'frozen' funds would have generated would be about $180 million. And this is the minimum amount realizable! The people to whom the monies are loaned, will typically undertake creative endeavors that will yield returns in excess of the bank's loan plus interest. These returns, should in principle, therefore be higher than the 21% interest rate imposed by the banks, otherwise they will be operating at a loss. So, at a minimum, there is a sum of about $180 million that the Nigerian economy has lost because of Soludo's policies. In the language of economics, this amount is the alternative foregone.
We are talking of monies that are in the region of 2% of GDP, tied up in the Banks with little prospect of 'emerging' anytime soon! To understand the scale of the crisis, imagine this: the Obasanjo government's raison d'etre for all of its reform programs has been to make Nigeria attractive to foreign investment in order to grow the economy and provide jobs. But all of the Foreign Direct Investment (FDI) i.e., funds invested in the Nigerian economy from overseas sources amount on average to between $2-3 billion annually. And these investments are mostly in the Oil & Gas sector, and more recently in the IT & Communications sector. These investments are typically of a capital nature, dedicated almost exclusively to the purchase of new equipment, and to the upgrade and refurbishment of existing ones. These investments are also mostly serviced by overseas firms. In the Oil & Gas arena, it is the Halliburtons and the Schlumbergers of the world that get the contracts, and they duly repatriate these funds back to their home countries. So while we promote FDI, whose major beneficiaries happen to be foreign corporations and by extension foreign nations, we place hurdles in the path of legitimate enterprise by Nigerians. The very enterprise that creates jobs for the local economy is encumbered by those supposed to promote and encourage it!
My point is not that FDI is bad. Of course it isn't. Ultimately, it is these investments that ensure that Oil is removed from the earth of the Niger Delta with less cost (and hopefully with less damage to the environment). Decreasing the cost of production ensures that Nigeria's net earnings are higher. So, my issue is not at all with FDI. My interest is in whose bread is being buttered. Any policy that is purported to have been instituted to better the well-being of Nigerians should and must improve their lives. These funds that are now tied up, trapped, in the labyrinth that lies between the NDIC and the Central Bank are the means by which millions of ordinary Nigerians make their living.
There are a lot of things that this amount of money could do for Nigerians. This amount (a whopping N22 billion Naira) would have employed 310,000 youths at a salary of N10,000 monthly. It could have provided a N15,000 tuition waiver/subsidy for about 1.5 million students! Perhaps we could even use some of the money to get a head start in preparing the Super Eagles for the 2010 World Cup. The list of possibilities is endless. Any of these alternatives would be better than the current situation where these potential returns are simply not being realized. Being the accomplished economist that he is, Soludo surely understands all these issues. So why in heaven's name has he done nothing to make these funds available to their rightful owners? Why has he not moved to inject the Nigerian economy with these badly needed funds?
I have the utmost respect and regard for Soludo's tenacity. However, moving Nigeria forward calls for more than mere tenacity. The costs that are being imposed on the Nigerian economy by the failure to secure the release of these funds makes one begin to wonder whether the necessary thinking went into this program before it was rolled out. It just does not seem that the Bank consolidation exercise was given the same level of follow-through as the debt repayment strategy. That latter program was transparent in terms of the obvious short and long-term benefits that would accrue to the nation from the exercise. But it is becoming increasingly difficult to see the sense in a bank consolidation scheme that has cost the nation at least $180 million in lost net accruals within the first 7 months since it came into effect. In each month that passes without the payment of these trapped funds, the Nigerian economy loses about $27 million per month!
If Soludo had merely been Chairman of some board charged with regulating the Banking Sector, he would be forgiven for being concerned only about the Financial sector. But he is the Central Bank Governor, and his brief encompasses the entire Nigerian economy. In this capacity, it is his duty to ensure that the Nigerian economy is as competitive and as productive as is possible. With an obvious $27 million in potential monthly accruals being lost, I doubt that anyone can conclude in good conscience that Nigeria is better off with the current situation. The numbers simply fail to add up!
The question then is this - whose interests has this consolidation served? Definitely not that of the ordinary Nigerians whose deposits are in the banks! It would be naive to assume that reforms will have no cost. But those costs, if they must come, should not arrive as surprises. A comprehensive and well thought out program must highlight before hand the challenges that lie ahead. There was nothing of the sort. The very people that the program is supposed to help, are the very same ones that are bearing the brunt of the mistakes and errors that were made. As always, it is the ordinary Nigerian that bears the brunt for failures of planning by those who lead them.
So while Soludo goes on his award junkets. While he receives accolades and encomiums for his "reforms," he should spare a thought for Emeka whose spare parts business has folded because of his inability to put forward an advance for his next overseas consignment, and he should consider Mama Rufai who stands the risk of defaulting on the terms of her contract because she has no funds to "mobilize" her sub-contractors back to site.
Malcolm E. Fabiyi, PhD. University of Lagos Students' Union President, 1994/95