Withdrawal of public funds from banks: What consequences?
August 22, 2013 | Filed under: Analysis | Posted by: Editor

The French have a phrase “déjà vu” which literally translates to, we have been here before or more colloquially “ here we go again, which appropriately applies to the recent move by the Central Bank of Nigeria ( CBN ) to withdraw public funds from the banking system.

In one of the best policy moves by the military administration of General Babangida, a decision was made to open up the economy by licensing more private banks and privatizing the 3 big banks then; First Bank, Union Bank and United Bank for Africa, owned largely by the Federal Government. This was a very popular move, because at the time, the banking system was closed and did not serve the economy. The directors were appointed by government as favours to their friends or paramours. Loans were given only to those who belonged to the old boys’ network. For the ordinary man, withdrawing your money from the bank was serious business. It was the era of the famous “Tally Number” a system that required you to spend the whole day in the Bank to collect your cash or alternatively, if you were short of time, to drop your cheque and collect a tally number and come back for your cash when you closed from work. If you were lucky, your cash would be ready upon your return, but sometimes it could be the next day.

So it was a great relief when private banks opened their doors and customers started experiencing service for the first time, they quite naturally, flocked to these banks. The liberalized environment encouraged many young bankers to move out and start their own banks. As is with all things in Nigeria, everyone wanted a license, instead of a gradual approach to licensing these new banks; it soon became a flood, reaching eighty nine (89) banks at its peak. This then prompted the Government to officially announce a stop to new licenses. Those who wanted one and could not get, went for the next best thing, a finance company license, which again was mismanaged as the CBN gave licenses to anyone who could spell their names and walk.

The sudden appearance of all these financial institutions meant that the competition for deposits became fierce. Government institutions like The Customs, NPA, NNPC and the like that collected revenues became the target of bank employees for deposit mobilization. Then stories started going around about the corruption that was going on, permanent Secretaries and directors of these institutions were becoming rich including the banks’ go-between.

In June 1989, the government suddenly withdrew all government deposits from banks and instructed that they should be deposited with the CBN. The impact was immediate, most of the banks suddenly found themselves without deposits to support their operations. The era of “girls in skirts” who sought for deposits at all costs was born. Even the CBN which was before then a sleepy institution suddenly became a commercial bank, that had to pay salaries to government employees from the police to prisons staff, thrusting them into a new role and they too became beneficiaries of reverse corruption. The policy which was supposedly to curb corruption in one area, quickly expanded it and the Nigerian banking system was never the same again. The Treasury function in every bank suddenly became the most important function and those responsible for bringing in deposits were suddenly given accelerated promotions, in some cases promoting them into positions they did not deserve and became “prized fools “ in those banks and promoted mediocrity. In no time, some of those banks started to fail, and the poor Nigerian depositors were the losers. By the time the policy was reversed, things were already irreversibly changed.

The question is why is the Central Bank doing this again? Are there no better ways to check this rampant corruption? Did the CBN not learn any lessons from the past? Well, Nigeria is not a place you learn lessons, because policy making is not a rigorous exercise where studies and surveys are done to measure impact of policies positively or negatively before they are implemented.

This time I am a bit taken aback because the current Governor of the CBN was in the banking system then, and knew what transpired. By the time this is over, all the gains made in the economy and the banking system reforms in the last few years will be gone and we will have another 3 to 5 years to start to fix it again. Though this was limited to 50% of government deposits, the impact is still negative, we have already started seeing interest rates climb, loan disbursements have slowed and inflation is rising after it took over 5 years to finally have inflation under control from its previously double digit number.

We may even see some banks fail if we are not careful. Any bank failure is a bad dream for the economy, the confidence eroded takes years to come back. The Stock market which has just started recovering will experience another round of tight liquidity as it competes with banks for high returns, compared to the high interest rates the banks will have to offer depositors to retain their deposits. The respite we have in the form of foreign investment flow may soon slow down considerably as the economies in the West recover and their Central Banks like The Federal Reserve Bank of the United States and others start to withdraw the huge liquidity pumped into their system to revive the economies. The fund managers who sought better returns flocked to the emerging markets to earn slightly better returns despite the risk, will now have a rethink.

Of course, since the money was there, many of the banks went for it. Those who could not raise the money in the second round, made up the figures, so that the public would perceive them as strong and solid institutions. The result was one of the most massive frauds that reverberated in the stock market leaving many small investors devastated and throwing the economy into a tailspin for almost 3 years.

Sanusi, who has a few more months left in his tenure, will at best be leaving his successor a basket case of an economy. We will have to find a more constructive way to fight our corruption battles. My suggestion will be to make things a little more transparent without the drama. Requiring banks to report the sources of their larger deposits and Government departments to also report all placements with banks to the CBN to be published monthly in all Nigerian newspapers will go a long way in showing up those behind these corruption schemes. Light they say is the best disinfectant.


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