Giving The Dog A Bad Name/

Sometime last week, the Federal Government of Nigeria hinted that the Power Sector is no longer attractive to investors, both foreign and local. Some fellows and I got engaged on that topic later that day. Though most of them knew I had always maintained that the buying power of the majority of the people in Nigeria, presently, cannot afford steady public utility electric supply, they still felt that the government could do more. To start with, unless there are good returns on investments in the power sector, it will not be attractive to investors. The majority of Nigerians, today, cannot afford the reflective tariffs for uninterrupted power supply, because the domestic consumption of electricity, like in any other developed economy, is only a fraction of industrial demands - known as maximum demand consumers. Its the fallouts of the industry demand that subsidises domestic tariffs. 

My take is that until our industries wake up (increased installed capacity utilisation) or woken up, there will not be huge demands for electric energy that will attract investors in the power sector. Increase in installed capacity utilisation has its own drawback. It will not happen if there are no guaranteed markets for Nigerian goods, which is made worse by importation into the country of all sorts. Investors know that unless there are huge demands for made-in-Nigerian goods that will require huge electrical energy to produce, even if electrical power is made available without developing markets for those goods, the industries will shut down their production process the moments their warehouses are full of unsold goods. What then will happen to their investments? It appears our lifestyle of love for imported finished goods has its consequences after all; it is paying back big time. You need energy to finish goods in modern economy and where those processes are done is where investors in power will invest. 

To buttress a point, someone among us ventured into the issue of high interest rates that are stunting developments in Nigeria; that is my point of discussion in this write-up. The accusation was that Nigerian banks are greedy. How? I could not figure that out. To me, this is like giving the dog a bad name. This piece is not an advocate for Nigerian banks, because there are enough shady dealings going on in the banks that will send bank managers behind bars for life. It is, however, about why the banks cannot adhere to government directives on interest rates as constituted and still remain in business. First and foremost, the money in the banks does not belong to the banks, but to depositors - yours and I. Secondly, the government does not have any constitutional rights on what the largest depositors (you and I) can ask as interest for our deposits in the banks. And who pays the piper dictates the tune! Yes, the government issues the banking licences, but they do not have the leverage. To have a leverage in what banks must charge as interest, you need to have an influence on the deposits. 

The weakening of government influence on lending rates was heightened by the implementation of TSA (treasury single accounts). By withdrawing government money from the commercial banks, the Federal Government of Nigeria unwittingly diminished its overbearing influence on commercial banks’ deposits. Since banks will not survive without deposits, the banks will have to dance to the tunes of depositors, who now dictate what percentage of interest they want for their deposits. The largest depositors will always dictate the cost of borrowing - right now it is the pension funds and some few individuals. The pension funds represent the interest of only a small percentage of the Nigerian economy and as such have introduced an imbalance. Those that want to create more wealth (manufacturers and farmers) are being hindered by having to borrow at higher interest rates.

In its bid to stem the frauds of hidden multiple accounts that were rampantly perpetuated by the MDAs (ministries/departments/agencies of government), the single treasury account was implemented. The implementation, by withdrawing government money from the commercial banks and depositing with the Central Bank (CBN), was the usual “throwing the baby away with the bath water”. The CBN was not designed to operate as a commercial bank, but a banking regulator. If government money had remained in the commercial banks, its deposits would have added to government’s influence on deposits in the banks. This could have been used, by the government, as a leverage to influence its directives on the cap to what banks could charge as lending rates. One other means could have been if the Insurance Industry in Nigeria was viable. We all know that in the developed economies, the banks are even owned by the insurance industry. 

In capitalism, one of the ways the government influences its directives on interest rates is through the insurance industry. Unlike the banks, whose working capital belongs to the depositors, the capital in the insurance industry belongs to the insurance industry; accumulated through premiums compelled through legislations. In successful capitalist economies, the insurance industry is usually the largest depositors in local commercial banks and therefore has influence on lending rates. The insurance business is mostly legislative, hence government influence on its deposits in the commercial banks. In doing so, government leverage on its directives on caps for the cost of borrowing becomes effective if either its deposits or and in addition that of the insurance industry become the largest deposits in the local commercial banks. The insurance industry knows the influence of government on their business will only abide by government rules for interest rates for their deposits. Consequently, other smaller depositors will have no choice but to dance to government directives on interest rates, since the banks would be able to bluff the small depositors.

We need to save the banks by strengthening the insurance industry. Banks are not supposed to take unnecessary risks with people’s money; only the insurance industry that can do that. In government procurements, there is a clause for advance payment guarantee (APG) before the government can release the mobilisation fee to the contractor. This is one of the reasons why most government contracts have dragged on for too long and why there are so many uncompleted contracts that litter the Nigerian landscape. This guarantees ought to be by bonds issued by the insurance industry instead of banks that in most cases hold onto the contract working capital where there are no collaterals. This one of the reasons why the insurance industry can contribute to national development. In doing so, the insurance fee for bonds will buoy the insurance industry’s deposits in the Nigerian commercial banks, which in turn will aid in the control of interest rates as directed by the CBN.