Regulation Induced Bank Failure Looms | Independent Newspapers Limited
Newsletter subscribe


Regulation Induced Bank Failure Looms

Posted: Jun 27, 2016 at 2:00 am   /   by   /   comments (0)


By Chris Enyinnaya

Niccolo Machiaveli (1469 -1527) in his famous, or is it infamous book, “The Prince” postulated that the practical politician could develop scientific states craft if only he could learn from history. It was particularly necessary to do this , he thought, in times of special crises…..He thought that one could learn from history, and that if one studied all the attempts made to assassinate a king, one could discover the pitfalls that a conspirator ought to avoid.

This writer wishes that the APC government in particular would learn from banking history on the issue of Treasury Single Account (TSA) and aver the looming bank failure.

Historically speaking, during the regime of General Ibrahim Babangida, the government enacted a decree centralising receipts of revenue to a single Federation account domiciled with the Central Bank Of Nigeria (CBN). At that time, the CBN was under the Federal Ministry   of Finance that issued banking licenses and undertook some aspects of monetary policy. That was why in May 1989, the Accountant General of The Federation, in a bid to fight inflation and curb perceived excess liquidity in the system that caused banks ability to lend, unrestricted with public sector funds as deposit base, ordered Ministries, Agencies and Departments to close their accounts with deposit money banks and transfer same to the CBN by the end of June 1989. The MDAs promptly complied.

The result was severe liquidity crisis in the banking system so much so that interbank deposit rate went up to as high as 30% per annum for 90-day deposit and 25% per annum for call money.

The order by the Accountant General of the Federation ignored the well known banking principle, even in developed economies, that the major source of finance for the corporate sector , of which the deposit money banks is the major beneficiary, is money made available by public sector, that is, by the government. In assuming this role, the government is acting as a financial intermediary.  Introduction of TSA means that government, the largest owner of stable deposits in Nigeria is no longer acting as a financial intermediary. In other words, government is engaging in financial dis-intermediation on one hand.

On the other hand, government is borrowing from the domestic market via the issue of Treasury Bills, Treasury Certificates, Development Stocks and Bonds. In borrowing, they are competing for scarce funds and increasing demand for these funds in the domestic market without, I repeat, without increasing supply thereby forcing up interest rate. How then can deposit money banks lend at single digit rate?

In accounting sense, bank deposit is working capital of banks and its withdrawal from the system in May 1989 resulted in Banks showing signs of failure by second quarter of 1990 due to weak balance sheet engendered by sudden withdrawal of funds. It is instructive that banking is a highly leveraged business that draws its strength and stability from large deposit base.

What happened in re-introducing TSA in 2015 is the depletion of banking system working capital, thereby denying them the needed raw materials, so-to-speak, to support their lending  and other activities and keep the Nigerian economy going.

The staff retrenchment going on in banks since the re-introduction of TSA a year ago is in response to reduced working capital that translates to reduced business and reduced earnings In fact the break-even –point of all banks in Nigeria has gone downwards creating excess capacity that can only be absorbed by cost reduction via cutting personnel costs since banks can no longer make profit by increasing turnover.

It is thus very clear that APC government has failed to learn from history. They want to fight corruption with TSA but that policy is causing unemployment and instability in the banking system. For a regime that seeks to create employment, this is one policy that will make them fail woefully in achieving that goal.


The point must be made, however, that the APC led government is strangulating banks; the wheel that drives the Nigerian economy as a whole. The Nigerian economy cannot expand when banks are not lending, or put purely, being denied the opportunity to lend. If APC government does not think out a more creative way of fighting corruption other than warehousing over N3 billion in the CBN so public servants do not steal, in a few months from now, bank failure would occur due to technical insolvency. If that is allowed to happen, then corruption fight would have killed Nigeria instead of Nigeria killing corruption.

Like Niccolo  Machiaveli said, politicians should learn from history. President Muhammadu  Buhari (PMB) promised to fight corruption and he is doing so to the best of his ability. But it is clear that a simulation on the impact of TSA on the Nigerian business environment since ours is an economy where The government is very rich and the Nigerian business units and individuals relatively poor with deposits was not carried out . That is why PMB led government must learn from history.

The time has come for APC to come out with a workable economic policy or blueprint. Nigerian economy is too important to be managed with ad hoc and often not well thought out policies. In particular, they should review the performance of the Federal Ministry of Finance (FMF). The fiscal policy of FMF does not seem to compliment the monetary policy of CBN          which is why we have a stationary economy, an economy where nothing is working.

PMB please gives Nigerians good work men and women who understand their job; not this trial and error Ministers who have not demonstrated the pedigree to get Nigeria out of her economic woes. Party politics and party supremacy in the appointment of key Ministers has brought Nigeria to her knees. That is not the change Nigerians voted for.