BusinessDay... the voice of business: Banking investment and its impact on the real economy

Banking investment and its impact on the real economy
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ESEOHE IGHILE on 27 April, 2008 02:00:00
 
Researchers over the years have been interested in the relationship between
financing and growth. Schumpeter (1911), a famous economist, argued that the
financial sector, more specifically its stage of development, affects a
country’s growth rate. Other economists have explained the role of the
financial institutions as imperative for economic development, in Nigeria for
instance, market research reports from leading International researchers have
revealed that to bridge the divide in the country-which will lead to great
economic empowerment of the people – the economy would need a huge influx of
investment capable of influencing the real sector of the economy.
At the end of the consolidation most Nigerians had hoped that stronger banks
would spur a chain reaction able to transform the life of poorest individual in
the country.  In retrospect the greatest challenge facing the banks is that of
making profits sufficient to satisfy the shareholders who stumped up the new
capital needed by each of the 24 banks.
The shareholders have high expectations but if you are a bank CEO, faced with
having $200 million plus to invest in a safe and profitable manner in Nigeria
you face an overwhelming task. Industry watchers have argued that on the part of
the bank, it remains hard to find borrowers of repute with adequate security to
offer. The blue chip and multi-national companies that all banks feel
comfortable to assist have little or no appetite for loans. Investment into
other sectors like micro credit, education, power has suffered thus far.
Bola Adeniji, a financial analyst with the Nigerian stock exchange has
explained it thus, “the consolidation era strengthened our financial
institutions raising the profile of Nigeria in the financial circles of the
world, I think the next question right now is of what benefit is this to the
ordinary Nigerian. The banks are strong, yes but are they strong enough to steer
the country out of a 70 percent poverty index? I think this is where the problem
lies as banks cannot continue to get bigger without a resultant effect on the
economy.”
Most people are of the belief that banking investment should start from the
bottom up, and not the other way round. Speaking to Business Day, Ronke Ojo, a
micro credit beneficiary from one of the newly launched micro finance banks,
said that it is only when the banks pay attention to avenues like this that the
huge poverty index will be used. Another respondent, Dupe Olatunji, expressed
his frustration saying: “I actually came up with an idea that would bring
cheap technologies to Nigerian student on campus, that is cheap laptops, cheap
internet facilities, etc. we had actually gone as far a obtaining the necessary
papers from relevant authorities that would have made this possible, although at
the core of all this planning is the need for funds.
Although this is meant to be a profitable venture, the Nigerian banks are yet
to go beyond their comfort zones and explore new areas of investment, and so I
wait until I can get money to finance this project”. Where the banks have made
provisions for investment into such areas they tend to favour large established
firms. At this moment the question arises on whether Nigerians are not credit
worthy.
As Kelvin Akugbe a banker put it, banks make investment decisions based on
profitability and risk intensity. “Banks have to take calculated decisions
when trying to figure out where to invest depositors money, yes this has not
always resulted in the type of investment decisions that would be popular among
ordinary Nigerians, but they have been a few that have benefited Nigerians, a
good example is SMIEIS (Small and Medium Enterprises Equity Investment Scheme),
a few Nigerians have benefited from this scheme.
The scheme, which is a voluntary initiative of the Bankers’ Committee whose
membership includes all the managing directors and chief executive officers
(MD/CEOs) of banks in Nigeria, which require all licensed banks in Nigeria to
set aside 10 percent of their Profit Before Tax (PBT) for equity investment in,
and promotion of Small and Medium Enterprises (SME). He went further by saying
that “when viewed from this point the banks are doing quite well.”
The most vibrant sector of the Nigerian economy no doubt are the down-stream
oil and gas, banking, insurance, telecom and finally the food and beverages.
These sectors for now seem to be attracting the most investment but for the
benefits of these investments to have a broader effect on the populace,
authorities may have to step in.
The launch of the microfinance policy is a step in the right direction,
analysts are watching however to see if government would give this initiative
the necessary support for its success.