Of banks and warehouses

Credit is the vital air of the system of modern commerce. It has done more, a thousand times, to enrich nations than all the mines of the world   – Daniel Webster (1834)

 

Today’s piece is along the lines of finance, one of the thrusts of this column. It largely addresses the practice of banking in Nigeria in relation to the economy.

A friend recently told me of his experience with one of the banks at the zenith of the banking industry in Nigeria. His company had previously maintained a healthy account with a turnover of over N10billion in one year with this bank. Then the company decided to take a bridging loan of less than N20million to finance some expenses while awaiting payment for a job it had executed for a client. In time, with interest, the loan had grown to almost N25million. Then the bank insisted that the money had to be paid back. All of it at once. All entreaties fell on deaf ears. My friend showed evidence of a forthcoming payment that was several times the amount owed but the bank would have none of that! It would be payment or nothing. And it went ahead to give counsel, “If you cannot raise the money, sell the company!” My friend was flustered. His reminder to the bank about the state of the account over the years fell on deaf ears. Shortly thereafter, the big amount was paid. With one cheque, he liquidated the credit facility and closed the account, moving the funds to another bank. They have been on his neck to return to them but he has bluntly told them that he would not touch them even with a ten-foot pole!

One of the greatest problems of enterprise development in Nigeria is the average budding entrepreneur’s inability to access finance. And when he does, it is usually with choking conditions and cut-throat interest rates that make most small businesses unsustainable. When that happens, the banks simply move in as undertakers to liquidate the business to recoup their money.

I often tell my banker friends to stop calling what they do banking. When they ask me what then to call it, I waste no time in telling them that what banks do in Nigeria is called financial warehousing. A warehouse is a place where goods or grains are stored pending evacuation to the appropriate market or user. The only problem with the banking industry in Nigeria is that the money is collected from the owner and stored in their vaults while they find all kinds of means to literally ‘punish’ the depositors through arm-twisting bank charges. Jumbo profits are declared every year even when little contribution is made by the banks to invest in the real sector of the economy. Nigerian banks operate like islands of prosperity in an ocean of poverty. In developed climes, banks practically beg people to take credit. On a trip to the USA, I went for a transaction in my bank. I was stunned when the officer who attended to me told me that the bank was giving me a credit line of a thousand dollars. I never applied for it. I collected the credit card, started using the credit line and of course, I always pay back before due date. A year later, on another visit, another credit line was offered for three thousand dollars. This was done without prejudice to the already existing line.

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Historically, banks have always been known to lend money to the rich to invest and make more money. The result of that in any economy is the creation of a class of wealthy people that continue to get richer. According to Charles Richards in his book The Psychology of Wealth – Understand Your relationship with Money and Achieve Prosperity, this was the pattern in the early years of the evolution of the American economy. Things however began to change in the early years of the 19th century when banks began to extend credit to middle-class business owners and later, small business owners. This opened up opportunities to more individuals to flourish. By extension, the national economy was transformed. New businesses sprang up and more people became wealthy. The consumer credit revolution began in the mid-1800s with the Singer Sewing Machine Company, makers of the Singer sewing machines. The company introduced what it called “a dollar down, a dollar a week” to acquire a sewing machine and pay in one dollar per week installments until the cost was liquidated. This deal was largely facilitated in collaboration with the banking industry. This was a pioneering idea that helped in no small way to produce a new class of women attaining financial independence.

As the trend continued and was extended to both the production and acquisition of other consumer goods, the direct impact of this on the economy both at micro and macro levels was phenomenal. In the book, Richards also gave a distinction between consumptive credit and production credit. Both are necessary to fast-track economic growth. Unfortunately, it appears that even in the 21st century, Nigerian banks are still largely locked in the pre-19th century operating mode. For a long time, our banks have been sustained by cheap funds from deposits by various government agencies and overinflated contracts, a development that gave rise to armchair banking with little or no interest in growing the economy. So, there has never been a strategic proactive banking tradition. Money is ploughed from easy deposits into the hands of many wealthy people who are already over-exposed to credit. Many of such debtors become largely delinquent in the servicing of the loans essentially because of the crippling interest rates. When this happens, it is as if the banks have been waiting for that moment. They simply move in and bury what remains of the debtor company through liquidation. I recently read about one company alone being exposed to loans totaling N20billion and not paying back. I imagine how many small and medium scale businesses half of that money would have helped to kick start in different parts of the nation!

The current system where banks make their jumbo profits from fleecing their customers through frivolous charges without significant interventions that build the productive sectors of the economy is simply outrageous and unsustainable. It is inimical to economic growth.

To grow an economy, the banking sector as a critical stakeholder must become more proactive and initiate programmes that encourage and develop local enterprise in a way that creates a win-win for all. I suggest they take a cue from the German model that appoints a representative to monitor and participate in the management of loaned funds and the business until the loan is liquidated. The representative can even recommend that more funds be released if the debtor organization is having challenges that could hamper its ability to pay back!

When a cancer cell feeds and grows big long enough on its host, the host eventually dies. And so does the cancer!

Remember, the sky is not your limit, God is!