Nigerians overrate themselves. Who do we think we really are? How come things that work elsewhere fall flat on their faces here? We seem to think that we are from a different planet from the rest of humanity. It is the same mentality that is preventing non-interest banking from taking off in Nigeria, that is responsible for our inability to have energy, potable water and so on. The litmus test should have been to determine whether such an innovation will help the economy. And if it does, we should not hesitate to do it. But here, we have turned ourselves into the last bus stop of religious upheavals, proving more Christian than the Pope and more Islamic than the Imams of the Holy Mosque of Saudi Arabia… and what do we have to show for it? A banal economy, and a depressing society!
I will proceed now to elucidate my view on non-interest banking. I am first of all an Economist. But I also hold a Masters Degree from a UK university, in Financial Markets and Derivatives. I understand the remit of financial innovation. But I taper my understanding of high finance with the responsibility and broad-mindedness of an economist. To that extent, I am able to tell if a financial innovation will have ill-effects on the larger society. I am also enamoured of the many dastardly failures of financial innovations in global markets, which has since plunged the world into what is now referred to as the Great Recession.
According to Professor Paul Krugman of Columbia University in the USA, two things usually put emerging economies in trouble by creating for them, currency, financial, and ultimately, economic crises. These two factors, according to the Nobel Prize winner in Economics, are Moral Hazards and Adverse Selection. Both of them occur as a result of a fixation with interest rates in such economies. This is a position paper written by an all-white American, and not anyone else! Krugman states that moral hazard is a scenario where lending is done simply because of interest accruals, not minding if the transaction can rightly pay the interest on the lending. This leads to a situation where most of the lending done in an emerging economy, where the focus is on the maximization of interest rates, becomes delinquent. From the perspective of the depositor too, there is a tendency to put hard-earned deposits into investments with banks that are not-so-strong, because those are the ones who can afford to pay fantastic interest rates. Many readers will remember the ‘wonder-banks’, pseudo financial institutions, who pay as high as 20% flat per month on investments. I even know of proper bankers who kept money in those places. The allure is the almighty ‘INTEREST RATE’. And people often get their fingers burnt.
Adverse selection, the other economic term in focus, states that because of moral hazard on the part of banks in an emerging economy, banks will usually select risky transactions, which are the ones that usually promise high rates of return. A normal transaction will probably have a rate of return of 10%, but a very risky one will promise to pay say 50%. If the banks consistently choose to fund those risky transactions, most of their funds will be lost. The reason why we have an organization in Nigeria today called AMCON, is because in those heady days of ‘cowboy banking’, most of the transactions financed were the very risky ones that promised to pay crazy interest rates. For example MARGIN LOANS, where people felt their stock market investments could double in a month (100% returns). The banks pumped in money because of the greed (moral hazard), and promptly lost trillions of Naira and had to be bailed out by the taxpayer. Should we let this continue to happen? Let’s leave the pronouncements of Krugman for a while…
On the local scene we are faced with an economy full of inconsistencies. One of them is that inflation rate hovers around 12% to 13%. Therefore there is no sense in investing in Nigeria for an annual return that is below the inflation rate. This is because the inflation rate is an indication of the devaluation of one’s wealth in a given year. At 12% Inflation, an investment of N1million principal becomes N880,000 effectively at the end of the year. You have to get an interest accrual that is higher than N120,000 in order to even break even. In spite of this high inflation rate, Federal Government Bonds pay about 7.5% and Treasury Bills about 6.5%. But the local banks, throw interest rates of 1.5% to 3.5% in the faces of their customers. Say, why on earth will local banks raise money at a lesser rate than the Federal Government which is meant to be almost riskless? Are local banks stronger than the Federal Government?
On the lending side, Nigerian banks interests as high as 25%, thereby making a spread of at least 22% between deposit and lending (the highest in the world). The low interest rate they offer on deposit is a key reason why there is too much money in circulation, outside the coffers of the banks. Why would anyone keep his money in fixed deposit in Nigerian banks, some of whom are having serious management problems anyway, only to get a few kobos at the end of the year?
Non-interest banking is a great palliative out of these paradoxes. The bank and the customer will have to perform proper ‘KYC’ (know-your-customer) on each others’ businesses. The bank partakes of the customers’ businesses by sharing profit, so it really has to care about what the money is being used for. The customer also wants to be sure that the bank is not financing drugs, arms, alcohol etc. This may offer us an opportunity at recreating this economy, if the intentions of the progenitors are pure. I am aware of the non-interest banking practiced solely throughout in the UAE and it is always a delight how they offer investment solutions that take customers’ funds into global markets, helping people invest in the bond markets, in energy markets, in stock markets and in commodities amongst others. That is how banking should be, not the current philistinic type that we have in Nigeria where one of my account officers in the banks told me he has been given a target to open 10,000 accounts this year! Anyone asking him to open 10,000 accounts is insulting the customers, because no one can manage 10,000 accounts. In fact, what that means is that in today’s banking, all customers are mere account numbers and nothing more!
I believe if Nigerian banks are as smart, this non-interest option ought to have been started since, and all of them should have had windows for it. But they were too busy making mega profits and oppressing their customers. British, American and Europeans banks have since had these products. Still I have refrained from writing on this earlier, because I believe Nigeria faces bigger problems today, that writing about what kind of banking we should practice, seems like leaving leprosy to start a combat with ringworm. We should be more concerned about helping this country survive, than caring about what kind of banking it practices. And if there are faith-based universities, why not banks?
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