A banker receives interest on loans, the same way a landlord collects rent from his property. But if the banker sells foreign currency, or the landlord sells his property, they both will make profit. So, interest comes from rent, while profit comes from sale. Adam Smith argues that the price of any product (that must include money and property) reflects wages, rent of land and profit of stock or ownership, which compensates the capitalist for risking his resources.
He must mean that profit, which the Igbo call, “the one wey climb on top,” is the motive of business. You could add that profit expands an economy or the Gross Domestic Product of a nation. Those who know a thing about money expansion through cash, cheque, and other financial instruments, (sometimes called M1, M2, M3…) will tell you how it works. Indeed, profit is the magic wand by which capitalism trumps other systems like communism, Marxism, or other paternalistic economic systems.
If such a manufacturing plant is sitting idle because public infrastructure like electricity, or rail and road networks are inadequate, it takes an awful long time to recover capital outlay and return on investment. That explains why Nigerian lenders or bankers, invest in municipal bonds, whose returns are sure and predictable, and bypass the brick-and-mortar sectors that need time and the cooperation of infrastructure to yield returns.
The longer supplies, raw materials, and finished goods stay in storage, and become obsolescent or spoilt, the slower the turnaround of capital, the longer it takes to repay loans, the higher the unit cost of production, and the lower the return on investment. This depresses the economy, and explains why even the Central Bank of Nigeria is allowing banks to increase provisions for bad debts in their financial reports.
But where infrastructure is adequate, high capacity machinery works faster and produces more at lower unit costs. This guarantees quicker turnaround because unit selling price is relatively lower. Infrastructure must be one of the fingers of the Invisible Hand that Adams Smith suggests sorts out resource allocation. A company with quick turnover can generate quick cash to repay its loans.
There is, however, an irony of sorts: As more successful businesses become cash cows, bankers have “too” much money in their vault, and then have the “good” problem of finding borrowers. With a higher supply of cash, relative to the demand for cash, bankers resort to all kinds of gimmick to lend out money.
You may have heard of American banks that throw education loans at students, and sometimes give loans to fresh graduates to rent an apartment, and ask only for a photocopy of their diplomas and letters of employment as collateral. The sundry credit cards, like American Express, Visa Master Charge, Diners’ Club, and Playboy, are some of the special purpose vehicles used to push money into the hands of consumers.
Some supermarkets, top fashion shops, or petrol stations issue instant credit cards that can be used before the ink dries up on the form. The only collateral needed is a mere telephone call to a faceless employer, who confirms that the applicant is indeed their employee who earns a (usually fictitious and bogus) salary.
This aggressive competition to push funds out turns out to be a virtuous cycle that constantly upgrades infrastructure and manufacturing machinery, finances research and development, spins out new products at high volumes at relatively lower costs and selling prices, and yields more cash.
Scarcity and high price of goods in the so-called emerging markets of Russia, the Pacific, Central Europe, Africa, and Latin America are caused by insufficient and cranky infrastructure that limits throughput on the production line. That explains why Nigerian banks obtain Eurozone loans at relatively lower rates, and disburse at extortionate rates above 20 per cent to Nigerian borrowers.
If you ask those textile companies that took the so-called Federal Government soft interventionist loans at six per cent rate, they’ll tell you that the acceptance fees and other invisible charges they had to pay upfront eventually ramp up the interest rate at the end of the day. The dispensing bank is not taking any chances.
Nigeria’s hostile economic environment, with its dearth of infrastructure, will never guarantee low interest rate, even if the CBN Monetary Policy Committee brings a legal sledgehammer to enforce lower interest rates. Well, of course, a generous inflow of revenue from the mining sector that generally comes with its own infrastructure may cause excess liquidity. As recently as September, the CBN pumped some cash into the system.
A state, like Zamfara, that theoretically cannot go broke (it can always tax people), has defaulted in meeting its loan obligations, and was barred by a Lagos Federal High Court from accessing funds from its bank accounts.You may be interested to know that 57 per cent of bad loans, estimated at N1.8tn, are due from only 12,000 debtors.
The CBN recently disclosed that banks’ total credit to both public and private sectors is between N13tn and N14tn. The CBN also adds that three per cent of banks’ total credit portfolio (between N390bn and N420bn) are non-performing; and it is dangerously inching towards the five per cent industry threshold.And there are no credible repayment plans in sight, one may add.
The Assets (it should have been Loans) Management Corporation of Nigeria strutted into the fray with threats of legal action if the debtors fail to pay up their debts. A more realistic AMCON later offered a loan restructuring option. If you recall, AMCON was set up in 2010 to absorb non-performing, or toxic, loans in exchange for government bonds, after the Lamido Sanusi-led CBN injected $4bn to rescue nine banks from collapse some six years ago.
When the Banker’s Committee, made of bankers, could not get themselves to heed their own directive to recover non-performing loans, the CBN implored them to resort to diplomacy. The debtors said, “No. Can’t do.”Government owed most of the money, and inadequate infrastructure is causing low and slow return on investment.
After immense pressure by the CBN, banks published the names of some defaulters. The tactic didn’t work; many customers still owe huge debts to the banks. Suggestions by the likes of Group Managing Director of United Bank of Africa, Phillip Oduoza, that biometric data, garnered through the recent Banks Verification Number exercise, will help track debtors that may be thinking of absconding without repaying their loans, quite miss the point.
No matter the brilliant ideas coming out of the Monetary Policy Committee, they won’t work if they are not accompanied by massive upgrade of infrastructure that will guarantee high volume production at high speed. In an economy like Nigeria, whose real sector is unproductive, and revenue from its petroleum mining sector has gone down south, the CBN interest rate policy will never be proactive; it will always be a reaction to forces beyond its control.
PUNCH
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