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LAGOS, NIGERIA.     Tuesday, April 08 2003






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NDIC chief identifies causes of credit default
By Bukky Olajide

INCIDENCES of credit defaults and poor borrowing culture have been held responsible for the sluggish growth of the economy.

The Managing Director and Chief Executive of Nigeria Deposit Insurance Corporation, Mr. Ganiyu Ogunleye made this known at sixth yearly Banks' Branch Manager's seminar organised by the Lagos branch of the Chartered Institute of Bankers of Nigeria (CIBN) in Ogun State last week.

Ogunleye said that the sluggish growth of the economy after many years that it remained in the doldrums, has continued to pose a major challenge to banks as many businesses are left prostrate with the attendant increase in the incidences of credit defaults.

According to him, of equal concern is the poor borrowing culture among the banking public by which some borrowers, with the wherewithal failed or neglected to service their loan obligations to their banks.

"Such loans are probably seen by those recalcitrant borrowers as their own share of the 'national cake". Ironically, even where such loans are collaterised, foreclosures are often difficult due to legal and administrative obstacles some government related loans have become hardcore debts in some banks while some banks continue to violate CBN circular on lending to government related activities," he said.

The managing director also stated some of the challenges facing, a dynamic and competitive business environment of the Nigerian banking industry which he said are quite enormous.

According to him, the immediate experience of bank failures in the country revealed that most of the affected institutions failed not because of market dynamics or exogenous factors but the various acts of insider abuses perpetrated by directors, principal owners and their cohorts contributed significantly to bank failures.

"A weak corporate governance structure would manifest in, among others, unorthodox and unprofessional balance sheet management, under provisioning for load losses, non-performing insider credits, transactions in ineligible foreign exchange and arbitrary charges levied on account of customers to boost income.

"Infact some banks even engaged in the declaration of paper profit in order to portray viability. It is not only imprudent but irresponsible for bank to book unrealised income only to make dividend and tax pay out from such unearned income," he said.

Ogunleye continued to state that there is no short cut to building a strong and virile banking institution.

He said: "The cosmetic management approach adopted by some banks that often cover up their internal weaknesses through creative accounting would not help them. What those banks failed to realise is that those weaknesses they surreptitiously cover are still internal to the business and its is only a mater of time before they crystallise.

"Internal weaknesses can only be cured if identified on time for remedial actions. Timely identification of weakness also presupposes that there exist internal mechanism to identify, quantify, monitor and control significant business risks on an on-going basis. Even though risks are inevitable in business, a good portfolio manager is expected to study the characteristic of each risk and design mitigants to reduce their adverse effect on business entity," he said.

The managing director explained that one of the best strategies for mitigating the negative impact of risk is portfolio diversification. Prudent resources management requires skilful balancing of profit making with long-term viability of the business entity."

He continued further that risk avoidance could also be the most optimal strategy where the banks involved do not have core competence or the financial leverage to create certain class of portfolio.

He also said that another reason why some banks have either failed or are weakened considerably has to do with a symmetric information, a situation whereby a borrower has superior knowledge of the risk of the credit bank is financing. Also, the high risk of appetite of wishing to carry alone a portfolio that could have been finance by a consortium of lenders has wrecked some banks.

He said further that another competitive content of the emerging order is in the ability of banks to carve a niche for themselves in terms of product offering and delivery.

"Banks would need to be more innovative which requires focus on chosen core competence in conjunction with customer value. As a corollary to that, banks would need to understand their customers' needs and preferences so as to be able to develop cost-effective products and services to meet those needs.

In his paper titled "Treasury and cash Management Services: Strategies and Control" a Treasurer with Wema Bank Plc, Mr. Folarin Ogunbanjo stated that the onerous responsibilities of the Treasury & Financial Services Department makes it the life-wire of the bank as it deals with management of the bank's entire balance sheet to achieve desired risk objectives.

He therefore added that it must be jointly ensured that the bank attained the desired level of deposit target which the management has fixed and this should be at a cost that would live a reasonable margin to the bank when invested.

The chairman of CIBN, Lagos branch, Mr. Wale Adeyemi observed that today's banking has moved away from armchair posture to a very dynamic one necessitating different levels of aggressiveness and innovations to attract and retain customers who gradually have become very knowledgeable in banking.

According to Adeyemi, one of the evolving tasks of this new development - universal banking is the need to branch prudently and extensively for more business opportunities in locations that they strategically align to corporate and business objectives of the banks.

He said: "The branch profitability is measured against set-targets, compared with the performance of other branches in the same bank and performance level of branches of competing banks in the same environment."

The chairman therefore advised that mangers should uphold ethical standards and ensure compliance and adequate discharge of regulatory responsibilities in striving to achieve acceptable performance and not to drag their banks to disrepute with the regulators and frustrate today's improving image of bankers.


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