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Monday, May 9, 2011

FOREIGN INVESTORS AND NIGERIA MURKY BANKING WATERS


    As we entered the year 2011, international investors are bound to review their investment plans. New investments in newer portfolios will come on stream, while previous year investments will be reviewed to divest non performing portfolios and strengthen the profitable portfolios. Investment in most occasions is a risky undertaking, to reduce the riskiness of their investment international investors diversify their investments between different sectors, regions, and countries. One important diversification strategy is diversification into emerging economies that comprises the developing countries of Eastern Europe, Asia, Africa and Latin America. It is argued that emerging economies sometimes move in opposite directions of the developed economies. This it is belief help in reducing the overall risk involves in any diversified investment portfolio. Nigeria fall into this group of emerging markets, specifically endowed with large population, abundant natural resources, and huge investment potentials. Over the last few years, Nigerian banks have attracted the attention of international investors resulting in the investment of Billions of Naira into the Banking sector. As sub Saharan Africa second largest economy Nigeria’s banking sector is second only to that of South Africa, this place her in a strategically important investment position. The consolidation of the sector in 2005 has help to produce some of Africa’s largest banks, helping to increase the amount of foreign investment coming into the sector. But the mess that surfaced at the peak of the global economic crisis has put fear into the mind of global investors wishing to put their monies into Nigeria’s banks. The level of decay unearth by Sanusi Lamido banking sanitization has further tinted the image of Nigeria’s banks as typical of highly corrupt third world countries financial sectors.


     Foreign investors are not philanthropies, majority of them are greedy capitalists bent on maximizing the returns they will get from any one Dollar they invested. Put your self in the shoes of an international investor with the whole world as where to invest your money, as an enlighten investor you will be expected to first considered the safety of your investment, then the returns that your investment can fetch for you unless you are a high risk lover. Looking at the past scandals in the Nigerian banking industry how sure are you your investment will not depreciate instead of appreciating. Yes surely even those that put their money in the United States’ Wall Street have reasons to complain on the way their money was utilize before the crisis, but that have taught them an important lesson to be wary of people in charge of their investment. The absence of effective corporate governance and strong risk management regime in the past few years have left many questions begin for answers. For example, is the Nigeria banking sector good enough, compared with other emergent markets banking sectors, for the next round of foreign capital inflow? The Central bank of Nigeria governor or the twenty something managing directors of our banks will tell you yes the environment is now clear. But you should remember that it is your money not theirs that they will be managing, because of that you will look further to make sure there are other safe guards to protect and maximize your investment. The CBN governor has done a lot to improve the level of corporate governance in the industry but still more need to be done. The composition of the board of directors in most of our banks is still the reflection of what was obtainable before the crisis. Where board members are answerable to the executive director; executive director still has powerful influence over appointments into audit and compensation committees; and former managing directors and chairmen employ other indirect ways to be in charged of these institutions. In most Nigeria’s banks there is little regard for minority shareholders rights, major shareholders always have their ways. Though, Sanusi has done a very good work in breaking the previous cases of family or personal banks, but some controlling shareholders still stand in the way of corporate governance.

 
     The establishment of Asset Management Company of Nigeria (AMCON) has help in boosting confidence in foreign investors, by signaling to them that the government is ready to bear responsibilities for the pass mess. Like wise the tough regulatory regime been put in place by CBN, but that is still a work in progress. It is belief by many observers that CBN doesn’t have the manpower and technology to effectively manage Nigeria’s banks. It takes a highly trained and coordinated team to uncover some of the accounting shenanigans perpetrated in some Nigeria’s banks. But the fact that Sanusi is an insider in the industry has help in this regard unlike Soludo who come from the academia. But that doesn’t means the existing banks will not invent other methods to beat the current governor, Nigerian banks employ some of the most brilliant minds you can find in the country. Models that allow capital ratios to be gamed by understating assets’ risk and off balance sheet vehicles are example of ingenious ways employ by banks to side step tough regulation. An important means by which foreign investors verified the riskiness of their investments prior to making them are international ratings giving to a particular institution, and on a macro level the rating received by the host country. Because investors will not rely on what the receiving institution and country will be telling them they need independent views, that is where international ratings agencies like Standard & Poor and Moody comes in. International ratings give investors some knowledge of the risk they are taking by putting their money into a particular institution. The rating received by Nigerian banks in 2010 is nothing to write home about, most Nigerian bankers are hoping that investors will side step those ratings. The fact that Nigeria’s economy is one of the fastest in emerging markets in the last half of 2010, should be something to make Nigeria’s bankers more optimistic about their prospects in 2011. The current hike in oil price in the world market is expected to boost Nigeria’s economic growth which is expected to translate into more business for the banking sector. Like wise the reforms put in place in the banking sector during the last one and half years are expected to start yielding fruits this year. Considering the impact of the financial crisis on the bank’s capital base, Nigerian banks are not in any position to turn their back on foreign capital; they need it as much as they need to be regulated by the apex bank. The time to start courting foreign investors is now, not after when the world economy is fully back on its track.