Ngozi Okonjo-Iweala's banking consolidation exercise is meaningless unless it it backed up by a parallel industrial consolidation exercise

By Ayo Akinfe

[1] As we all remember, in 2004, the then finance minister Ngozi Okonjo-Iweala introduced a bank consolidation exercise during which the Central Bank of Nigeria (CBN) increased the minimum capital requirement base of banks to N25bn ($70m) from N5bn. This policy was introduced due to the challenges which plagued the banks including low capital bases, liquidity and poor asset quality. As a result, Nigerian banks were consequently forced to merge

[2] In what was a highly successful exercise, the wave of consolidation in the banking sector led to the reduction of banks from to 21 from 89. This reduced number of banks had more capital to loan out, with the whole idea being that industrialists would have easy and cheap access to finance to spur production and increase output

[3] However, the banking consolidation has not achieved the desired effect because borrowing is still expensive in Nigeria today. For starters, the Central Bank of Nigeria's (CBN) benchmark interest rate stands at a whopping 13.5%. By the time the commercial banks add their own margins on to this, you find out that industrialists end up borrowing from Nigerian banks at about 20%. That is simply not sustainable

[4] If you want to know how impractical this regime is, look no further than the power generation industry. When the National Electric Power Authority (Nepa) was broken up and the various component parts of the Power Holding Corporation of Nigeria (PHCN) were sold off, many investors rushed to the banks to acquire loans to purchase the regional distribution companies (Discos). After borrowing at 20%, several of them had filed for bankruptcy and liquidation after a few years

[5] What went wrong in the sector is that so-called industrialists, who thought they would make an easy killing, found out that the cost of borrowing was so high, they had nothing left at the end of the month to make their bank repayments. Only giant conglomerates like Toyota, Cadbury, Phillips, Ford, Samsung, Apple, Microsoft, etc can afford to take out bank loans at around 20%

[6] When people bought these Discos, they did not realise that they needed to invest in new equipment, build fresh facilities, open offices, etc. They simply did not have the deep pockets to do this, so they went bust and the Asset Management Corporation of Nigeria (Amcon) was called in to take over their operations. Maybe if these guys had borrowed at 5%, the situation would have been much different

[7] In our aviation industry, we are faced with a similar story. Companies like Arik Air, Medview Airlines, Aero Contractors, have all faced one big dilemma. They do not have the capital base to invest in new aircraft and when they go to the bank to borrow money, the rates are so high, their monthly outgoings are more than their profits

[8] For any company, be it an airline, food processor, electricity distributor, automobile manufacturer, insurance company, etc, to remain profitable, it simply has to generate more than it spends every year. Too many industrial concerns in Nigeria do not have the clout to produce their goods and services at profitable rates once they pay for their loans, so are perpetually running at a deficit, which is why Amcon is one of the busiest government agencies in the country today

[9] I want to see the president, vice president, finance minister and trade & industry minister get together and cobble together an industrial consolidation bill, to be forwarded to the National Assembly. It should provide a minimum capital base before companies are allowed to engage in certain core sectors of the economy like aviation, automobile manufacturing, electricity distribution, road construction, railway services, healthcare provision, etc. The idea behind this is to force many of the small operators to merge and create companies that will be competitive

[10] For insurance, when I look at Aba, Ohafia and Abriba and see the number of clothing and shoe companies there, I ask why they cannot consolidate their operations and form a giant conglomerate that can compete with say Bata, Gucci, Luis Vitton, Ralph Lauren, etc. Such a giant would for instance acquire an international patent for the Isiagu and mass-produce it cheaply, then extend its use into other areas such as Ipad covers, Laptop bags, school satchels, ladies handbags, etc. Asking small operators to compete in the cut-throat global marketplace is sending them on suicide missions!

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