The Sun News On-line

While the global financial meltdown persists, Nigerian banking industry players insist that there is need to double-check on the health status of the local banks.

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 Central Bank of Nigeria (CBN) and the other regulatory agencies need to look closely at what the banks claim they have.

A source within the banking system revealed to Sunday Sun that what the CBN has done would have worked if truly the banks have what they claim in their vaults.

Using cash reserve ratio, which was reduced from four per cent to two per cent, what that means is that if a banks says it has N5billion deposit, considering the CBN’s position, 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 N4billion of the total deposit in their vaults.

If the 24 banks have an average of N5billion in their respective vaults, totalling N120billion deposit, the banks can all lend at least N96 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.

A certain source said: “But because some of the banks don’t all have what they claim, that is why the policy is not having the effect it was intended to have.”
According to the source, “you will recall that in reaction to the policy initiative, the Nigerian inter-bank lending rates fell to 10.58 per cent on average from 16.5 per cent, a day after the Central Bank announced a raft of measures to boost liquidity. The secured Open Buy Back rate (OBB) dipped to 9.75 per cent from 10.25 per cent, overnight placement fell to 10 per cent from 20 per cent and the call rate dropped to 12 per cent from 19 percent.”

The CBN had slashed its benchmark Monetary Policy Rate (MPR) to 9.75 per cent from 10.25 per cent, cut banks' cash reserves ratio by half to 2.0 per cent and liquidity ratio to 30 per cent from 40 per cent, helping to ease 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 hit 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.

The source said now that the CBN is not forthcoming with more direct injection, the rates are gradually spiking again. This is another signal that the banking system needs to checked to avoid the US type of tragedy. “It is a worrisome development, I just hope something would be done fast.”
If the above banker would not want to be quoted was mild, a forensic accountant who has dealt with a lot of the banks was more scatting in his analysis of the credit crunch in the system.

Mr. Ori Adeyemo said, “to be frank with you, these banks don’t have money, if anything at all they are just going to restructure the existing facilities. As I am talking to you these banks are broke. When you continue to cook your book, one day it will get done and I tell you the banks’ books are done and that is why they went against the uniform accounting year.”

He continued: “If CBN had allowed the policy to stay, it would have exposed a whole lot of them and their true financial status. The practice in the bank is such that they prepare an account for NDIC and another account for CBN. The account that goes to NDIC is leaner because it has been stripped of deposit, while the one that goes to CBN would be fatter because it has been beefed up with deposits for CBN’s approval and that would be published for the public.

“The third account that is presented to the Federal Inland Revenue would reflect losses. When you see a bank declaring N10billion profit, go and ask FIRS if they have received the tax of the N10billion profit. If I were the director of IRS I would not ask for any question, I will just ask the bank to pay the tax over that profit value straight. Then you will see counter-claims on capital allowances, claims of other incentives to reduce the value of tax payable to the tax agencies.

“The bank cannot counter-claim the tax value on capital allowances because there must be certificate. This was what I used to expose the banks when I got to the National Assembly, I asked the banks to produce the receipts for all the trillion naira assets they claim but none could produce the receipts, so the answer is ‘no’, they don’t really have trillion naira assets. What the banks do is that at their year-end, they get fund from each other to improve their deposit position, and that is when you start to see spurious charges on customers’ accounts, so that they can have good returns to declare at their AGM.

“It is only when you have income coming that is when you can properly manage your expenses, so without deposits banks cannot manage their balance sheets. This is why I am saying that as at now the status of the banks is very bad. Though not all of them have this bad financial position, the problem is that the ones with the problem, just like what is happening in the US now, the issue of financial engineering in the banking system may bring down our banks to their knees.

“The global picture is just a reflection of what we will soon go through in Nigeria, if the banks are not forced to start playing the game straight. What is happening at the Nigerian Stock Exchange is the barometer of what is happening inside our banks. Remember that the banks drive the Nigeria Stock Exchange. Now if the fundamentals of the banks are right it should support the capital market fundamentals but just because a margin policy initiative was muted what do we noticed the capital market started nose-diving.

“Now, the way things are going, check out the approval just granted by the CBN that banks can now reschedule the margin facilities given to market operators, what you will see is that the market will still not pick up as being expected, but will further dip as against what is being experienced now. You will see that at the end of the whole one year, some banks will be willing to hands up and ask for bail out.

“The banks will to point to the fact that financial system credit crisis may be inevitable and what that means is that some of the banks will start asking for bail out from the CBN and Federal Government. The credit crisis would be tied around the issue of default in repayment of margin facilities. But as you can see most of the things you will start to see and hear is to soften the ground for eventual bail out arrangement for the banks.

“With what I know about the Nigerian banks and what is obtainable presently, I tell you the banks would soon come asking for bail out. At first they would not want to be identified as being cash crunched but once any of them ask for bail out and the bank gets it, that is it, others would queue up for the same treatment.”

On the contrary, Executive Secretary of the Money Market Association of the Nigeria, Mr. Wale Abe, he categorically denied the fact that the banking system is experiencing cash crunch. He said “if there was any form of credit or cash crisis in the system, then the rates would reflect it but as today (Friday), the secured Open Buy Back rate (OBB) stands at 0 per cent, and Call still hovers around 14 per cent.
“It has remained stable since after the CBN introduced the intervention policy to inject close to N1.2trillion into the system. I don’t think the banks really need any bail-out now. What the system needs is just more injections and this should not be confused with what is going on outside there in the developed economies.

“It is a normal thing in any financial system to have credit crunch. If the financial system is in dire situation by now the rates would have been back at the pre-intervention level but the rates have been stable over the past few weeks, after the MPC intervention in the financial market.”
It would be recalled that the CBN injected about N150billion directly into the economy while another N1trillion was made available immediately to the economy.