Global financial crisis and bank management practices in Nigeria: survey findings.
This research provides a survey of hank management practices in Nigeria in periods following the 2007/2008 Global Financial Crisis. The interdependencies between banks and other financial markets have provided further constraints to bank portfolio management under uncertainty. This study uses the questionnaire and interview schedule to obtain the opinions of senior risk managers in the 24 Nigerian Deposit Money Banks (DMBs). The relevant responses were ranked with the Spearman's Rank Correlation Coefficient tested at the 5% level of significance. The results show that the stock market meltdown had the highest impact on banks' liquidity profiles in Nigeria. The employment of loose monetary policy regimes characterized by significant reductions in Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR) and Minimum Liquidity Ratio (MLR) provides further portfolio constraints on banks' balance sheets. The results show that most Nigerian banks entered the global crisis era with a high record of prudential breaches and disclosure lapses. The current adoption of the International Financial Reporting Standards (IFRS) for the purpose of implementing industry best practices came after the event. Although most banks continued to target asset growth and then adjust the source of funds as needed, they still relied more on purchased funds to meet liquidity and lending requirements after the global financial crisis.
Key Words: Global financial crisis; Nigerian; Bank portfolio constraints
JEL Classification: B41, C82, E58, F01, G24, 055
The recent 2007-2008 Global Financial Crisis has obviously exposed the lapses in our understanding of bank management. One fundamental cause of the crisis was a change in the business model of banking, mixing credit with equity culture. Coupled with a poor regulatory framework, the current crisis became inevitable. Stiglitz (1) has argued that America's financial system failed in its two crucial responsibilities: managing risk and allocating capital. It is also argued that failures in financial markets have come about because of poorly designed incentive structures, inadequate competition, and inadequate transparency.
The global banking system has seen more than US $20billion write-downs since the beginning of the financial markets crisis in 2007 (Omofaye) (2). The developed markets have been worse hit, especially the big banks such as Citigroup (more than US $24billion), Merrill Lynch (aboutUS $ 25billion), UBS (more than US $27billion). A report by Komolafe quoted the International Monetary Fund (IMF) as stating recently that losses tied to distressed loans and securitized assets occasioned by the recent crisis would reach US $4.1trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions. It is expected that banks will shoulder about 61 per cent of the write-downs, while insurers, pension funds, and other nonbanks would assume the rest.
The emergence of internationally active banks in Nigeria, including the internationalization of the stock market have provided definite channels through which the 2007-2008 Global Financial Crisis is impacting on the balance sheets of Deposit Money Banks. Egwuoniso has shown recently how banks in Nigeria balance risk assets with strong capital and collaterized lending:
In total, the estimated bad debts in the industry is put at N1.2trillion but the capital base as at December 2008 was over N4trillion, which leaves the industry with a balance of over N3 trillion even if they have to write off all by virtue of provisioning requirements (3).
Bank management is defined as the simultaneous planning of all asset and liability positions on the bank's balance sheet under consideration of the different bank objectives and legal, managerial and market constraints, for the purpose of mitigating interest rate risk, providing liquidity and enhancing the value of the firm. The critical question is: What should be the composition of a bank's assets and liabilities on average given the corresponding returns and costs, in order to achieve certain goals, such as the maximization of the bank's gross revenue? This need has led banks to determine their optimal balance among profitability, risk, liquidity and other uncertainties. The optimal balance between these factors cannot be found without considering important interactions that exist between the structure of a bank's liability and capital and the composition of its assets. Asset and Liability Management (ALM), as Bank Management is often called, is heavily dependent on the movement of interest rates in the market. The history of ALM suggests that it is very important for a financial institution to measure, manage and control interest rate risk.
In the past, mathematical models have been extensively applied in resolving the cross purposes of liquidity and profitability within a risk-return framework. The works of Toby (4) highlight the liquidity management practices of Nigerian banks in response to the policy shocks that characterized the banking distress era (1993-2003). The current study surveys actual bank management practices in the period of the 2007-2008 Global Financial Crisis. The empirical relationships observed would assist both academics and practitioners to redefine bank management under global economic uncertainty.
The major research questions in this study are
* What factors impacted most on banks' liquidity profiles in the wake of the 2007-2008 Global Financial Crisis?
* What are the effects of Central Bank of Nigeria (CBN's) (5) recent prudential regulation initiatives on banks' liquidity, profitability and risk?
* How do banks assess their prudential compliance with their peers?
* What are the likely effects of the recent interest rate cap on bank balance sheet and the banking industry? * What are the obvious characteristics of bank funds management in the present volatile financial markets?
* What is current management strategy in dealing with identified liquidity and solvency problems in the banks?
* What is the impact of the recent global financial crisis on the Nigerian stock market and the Nigerian economy?
* How are the critical pressure points ranked before and after the 2007/2008 Global Financial Crisis?
* How adequate are CBN's recent initiatives in tightening regulation and supervision?
* What are the likely survival strategies adopted by Nigerian banks in dealing with critical pressure points in times of crisis?
* What is the banks' asset management strategies before and after the 2007/2008 financial crisis?
* What are the characteristics of banks' liability management strategies before and after the recent global financial crisis?
The major research null hypotheses are:
H[0.sub.1]: There is no significant association between constrained liquidity profiles and banks' prudential compliance.
H[0.sub.2]: There is no significant difference in the ranking of critical pressure points before and after the recent global financial crisis.
H[0.sub.3]: Current management strategy in dealing with identified liquidity and solvency problems does not differ significantly from sound funds management strategies.
H[0.sub.4]: Constrained financial markets do not correlate positively with constrained bank liquidity profiles.
H[0.sub.5]: There is no significant association between regulatory adequacy and prudential compliance
H[0.sub.6]: There is no significant association between regulatory adequacy and bank survival strategies.
2007-2008 Global Financial Crisis
The recent global financial crisis started in the U.S.A. in mid-2007, as a result of increasing default rates and the devaluation of real estate property and of financial assets linked to the US subprime mortgages. The unfolding of the crisis has put in question on the very survival of many financial institutions, posing a threat to the current financial architecture. Some researchers have argued that a large number of poorly regulated and badly supervised financial institutions became the counterparty of the credit risk transfer from the banking system and started to hold increasing risks.
One view is that the bubble-like conditions that set the stage for the sub-prime mortgage crisis of 2007 were created by low U.S. interest rates during 2003-2006, whether because of easy monetary policy by the Fed, a savings glut among foreigners, or under-perceptions of risk by investors in general (Brunnermeier (6); Diamond and Rajan (7); Taylor (8); Taylor and Williams (9)). The resulting search for yield during this period sent waves of money into alternative assets, including high-interest foreign currencies, commodities and especially housing (Pojarliev and Levich (10); Frankel (11); Aizenman and Jinjarak (12)). It is reported in Wikipedia (13) that the crisis in real estate, banking and credit in the U.S.A. had a global reach, affecting a wide range of financial and economic activities and institutions, including:
* Overall tightening of credit with financial institutions making both corporate and consumer credit harder to get (Whitney (14));
* Financial markets (stock exchanges and derivative markets) experienced steep declines;
* Liquidity problems in equity funds and hedge funds;
* Devaluation of the assets underpinning insurance contracts and pension funds leading to concerns about the ability of these instruments to meet future obligations;
* Increased public debt finance due to the provision of public funds to the financial services industry and other affected industries, and the
* Devaluation of some currencies and increased currency volatility.
Schuermann explaining why banks were better off in the 2001 recession concludes as follows:
Banks entered the 2001 downturn with better profitability, more robust balance sheets, significantly lower non-performing loan ratios than they had shown at the start of the recession. We argue that this improved performance stems in large part from better risk management on the part of the banks, although such was a contributing factor (15).
Stiroh and Rumble (16) show that banks' income from non-interest sources--such as service charges, fiduciary income, trading revenue and fees-rose steadily before the recession. We need to find out if risk management tools are being integrated more effectively in bank decision-making, and whether banks have improved their ability to price the risk they assume.
Current Outlook of the Nigerian Banking Industry
The Central Bank of Nigeria (CBN) was recently quoted of putting banks' exposure to margin loans at N800 billion. The monetary authorities have disputed allegations that banks' exposure to the margin facility contributed significantly to the instability in the financial system. With a strong capital base it would be difficult for the downturn in the capital market to affect the stability of the banking sector. It is further argued that even if the loans were to be written off the banks would still command a good measure of capital adequacy. Between March, 2008 and March, 2009, fifteen out of a" total of 19 banking stocks quoted on the Nigerian Stock Exchange lost N5.252 trillion in capitalization. The loss by the banks represented 68.2 per cent of the total loss in the capital market (Table 1).
Global Risk Consultancy Eurasia was recently quoted of warning the CBN on continued condoning of banks sharp practices by flouting minimum liquidity requirements and exceeding the loan-deposit ratios beyond the industry requirement (Omachonu (17)). An examination of loan-to-deposit ratios at the end of the boom cycle in early 2008 (before banks became skittish about disclosures) shows some interesting patterns. As of early 2008, a CBN Banking Supervision Report confirmed that some banks were not even maintaining the prescribed minimum 40 per cent liquidity margin and others had grown their loan-to-deposit ratios in excess of the 80 per cent ceiling set by the CBN. By December 2007 (two full years after the banking sector consolidation) three unnamed banks had still failed to meet the prescribed capital adequacy ratios of 10 per cent.
In the face of the preceding facts one wonders at the degree at which the overleveraged banks were able to de-lever in an atmosphere of market panic and declining asset prices. For a bank with a generally historically low non-performing loan to total loan portfolio, the increased search for deposits may be pre-emptive to stave off a worsening liquidity crunch or may be a sign that the hitherto solid loan book, may have started showing some signs of weakness. The panicked decision by the apex bank to re-introduce interest rate caps could be as a result of concerns that the recent abnormal percentage increases in the rates may indicate that the ongoing liquidity crisis may be worsening. The CBN and bank chief executives have agreed that with effect from April 1, 2009, market controlled rates will be adopted with deposit and lending rates fixed at 15 and 22 per cent respectively.
The International Monetary Fund (IMF) has recently expressed concern over Nigerian banks whose lendings were not fully covered by their deposit base. The growth of credit has been relatively fast for the past few years. The areas of concern are current account balance, average real credit growth over the last five years and the loan/deposit ratio. The IMF Report shows that the current account balance of banks in Nigeria was -9.0 per cent of the GDP. The average real credit growth over the past five years on year-on-year per cent was 34.2 per cent. The cut-off values were -5.0 for current account balances as a percentage of GDP. Net external liabilities to BIS reporting banks was about 10 per cent of GDP and the average or real growth of credit to the private sector more than 30 per cent year-on-year.
An assessment of the health of the banking sector in the CBN's Half-yearly 2008 Report (5) using Capital Adequacy, Asset Quality, Management Earning, Liquidity and Sensitivity (CAMELS) ratings indicated that the banks were sound. The average Capital Adequacy Ratio (CAR) of the banks was consistently above the stipulated minimum of 10.0 per cent. The industry-wide liquidity ratio also exceeded the 40.0 per cent minimum requirement. Banks' earnings, in absolute terms, equally improved in the review period, although the ratio of both the returns on assets ad equity declined, owing largely to the phenomenal increase in total assets and capital. The ratio of non-performing credit to industry total credit was 6.3 per cent, compared with 7.7 per cent recorded at end--June, 2007. The ratios were below the acceptable contingency threshold of 20.0 per cent for the industry.
Verification exercise on compliance with the Code of Corporate Governance for banks issued in April, 2006 was conducted by the CBN through the appraisal of the banks' monthly reports as well as periodic on-site examinations. The exercise revealed varying levels of compliance. For instance, thirteen (13) banks failed to comply with the code of succession plan, six (6) on board performance appraisal, fourteen (14) on appointment of independent directors, nine (9) on whistle blowing, five (5) on reporting line of the head of internal audit. The CBN notified all the affected banks to effect strict compliance. An independent analysis of the asset side of banks' balance sheet showed that it comprises mainly short-term securities like government securities at 50 per cent of total assets, which implies low risk exposure of the banks, because such securities are secured on repayments.
On the liability side, loan portfolios in banks are small, with the net loans exposure at only 29 per cent of total assets, while deposits dominate their source of funds. This accounts for 62 per cent of total shareholders' funds and liabilities, as well as a loan-to-deposit ratio of 48 per cent.
Shareholders' funds are also viewed to be significant at 16 per cent of total assets, with equity growth (at 93 per cent per year) over the past three years faster than asset growth at 74 per cent per year.
However, investors are warned to be wary of some downside risks on banks' balance sheets such as asset risks involving margin loans and high non-performing loans. Banks' margin loan exposure, constituting 20 per cent of total loans in the industry, has been described by some analysts as a huge risk to the banks, strength, especially as some of them continue to shy away from disclosing in full the extent of individual exposures, thus leaving investors to speculate.
Meanwhile, non-performing loans increased by only 32 per cent per year compared with gross loans increase at 73 per cent per year between 2005-2008. This is on account of an improved macroeconomic environment in times past which is currently being threatened by projected slows. The forecast is that consequent upon slows in the economy, banks face higher risk of increased non-performing loans. Currently, most banks are under renewed pressure over the December common year end deadline. With the month to month loan already declining due to banks' aversion to risks, expected decline in interest income as a result of the capping of lending rate at 22 per cent, banks would likely intensify their efforts at hoarding deposits and thereby worsen the moribund interbank transactions. With full disclosure of margin loan commitment amounting to N276 billion (Table 2), it means that only 34.5 per cent of the industry's margin loan expose is known. The current interest rate capping and the liquidity crunch occasioned by the 2007-2008 global financial crisis may further constrain the interest income potentials of banks. Table 3 shows a mild decline in the interest income to gross revenue ratio from 68.4 per cent in 2003 to 67.1 per cent in 2007, with possibilities of dipping further in 2009 and 2010 if the current global recession persists. Although the industry witnessed a radical decline in the non-performing loans (npls) ratio from 21.96 per cent in 2007, it is most likely that the npI ratio would have experienced radical increases in the 2008-2009 period.
Wikipedia defines the term 'financial crisis' as broadly applying to a variety of situations in which some financial institutions or assets lose a large part of their value. Toby (18) distinguishes between traditional and asymmetric information approaches to explaining financial crises. The Keynesian approach attributes the origin of financial crises to a decrease in demand. According to this school of thought, the assessment of financial risks should therefore take account mainly of the development of the components of aggregate demand, measured either directly or, preferably, via indicators which are more readily available. The monetarists trace the starting point of a financial crisis to the rise in interest rates, reflected in a cumulative decrease in the monetary multiplier. In the absence of a sufficiently expansionary monetary policy, the money supply therefore decreases rapidly, leading to a recession.
Some economists such as Mankiw (21) and Mishkin (22) have put forward the concept of asymmetric information to explain the occurrence of financial crises. In their view, moral hazards and adverse "selection may, beyond a certain level, lead to a break in the intermediation channels, as these two phenomena may greatly obscure the information available to the banks on the quality of debtors. This may lead to a veritable rationing of credit, which may be damaging to the most solvent debtors even when they are willing to put up with interest rate conditions which are profitable for credit institutions. Hence, Mishkin defmes financial crisis as a disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to channel funds to those who have the most productive investments. Very briefly, adverse selection refers to perverse mechanisms of choice of co-contractors or partners which lead to a biased risk structure. A moral hazard exists when an inadequate inventive structure induces a contractor to involve himself, after the conclusion of the contract, in activities which are liable to impede the successful progress of that contract.
Critics have argued that the recent global crisis occurred because the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the shadow banking system, derivatives and off-balance sheet financing (see Stiglitz (19); Ekelund and Thornton (20); Kmgman (21)). The spread of the crisis throughout the global banking system is well documented in Kose, et al. (22). Cetorelli and Goldberg (23) study the globalization of U.S. banks and the international propagation of domestic liquidity shocks to lending by affiliated banks abroad. An analysis of market-judged credit worthiness of banks by Eichengreen, et al. (24) shows that international interdependence rose from the outbreak of the subprime crisis in 2007 through the rescue of Bear Steams, and that it attained a new high with the failure of Lehman Brothers in the Fall of 2008. The crisis also resulted in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities.
Earlier studies in the area of bank management have applied deterministic and stochastic mathematical models (Kosmidou and Zopounidis (25)). Deterministic models use linear programming, assume particular realizations for random events, and are computationally tractable for large problems. The works of Chambers and Charnes (26) provide the pioneer application of the deterministic linear programming model in Asset-Liability Management (ALM). The Chambers and Charnes' model corresponds to the problem of determining an optimal portfolio for an individual bank over several time periods in accordance with requirements laid down by bank examiners which are interpreted as defining limits within which the level of risk associated with the return on the portfolio is an acceptable one. Cohen and Hammer (27), Robertson (28), Lifson and Blackman, Fielitz and Loeffler (29) have realized successful applications of Chambers and Charners' model (26). Even though these models have differed in their treatment of disagregation, uncertainty and dynamic considerations, they all have in common the fact that they are specified to optimize a single objective profit function subject to the relevant linear constraints.
Eatman and Sealey (30) developed a multiobjective linear programming for commercial balance sheet management considering profitability and solvency objectives subject to policy and managerial constraints. Giokas and Vassilogou (31) developed a goal-programming model for bank asset and liability management. They supported the idea that apart from attempting to maximize revenues, management tries to minimize risks involved in the allocation of the bank's capital, as well as to fulfill other goals of the bank, such as retaining its market share and increasing the size of its deposits and loans. Conventional linear programming is unable to deal with this kind of problem, as it can only handle a single goal in the objective function. Goal programming is the most widely used approach that solves large-scale multi-criteria decision making problems.
In addition, several stochastic models have been proposed since the 1970s. These models, including the use of chance-constrained programming (Charnes and Thore (32); Pogue and Bussard (33)), dynamic programming (Samuelson (34); Eppen and Fama (35)), sequential decision theory (Wolf (36); Bradley and Crane (37)), and Stochastic linear programming under uncertainty (Cohen and Thore (38); Booth (39); Crane (40); Kallberg, et al. (41)), presented computational difficulties. The stochastic models, in their majority, originate from the portfolio selection theory of and they are known as stochastic mean-variance methods. Pyle (42) and Brodt (43) adapted Markowitz's theory and presented an efficient dynamic balance sheet management plan that considers only the risk of the portfolio and not other possible uncertainties or maximizes profits for a given amount of risk over a multiperiod planning horizon respectively.
Wolf proposed the sequential decision theoretic approach that employs sequential decision analysis to find an optimal solution through the use of implicit enumeration. An alternative approach in considering stochastic models, is the stochastic linear programming with simple recourse. Kusy and Ziemba (44) employed a multi-period linear program with simple recourse to model the management of assets and liabilities in banking while maintaining computational feasibility. Their results indicate that the proposed ALM model is theoretically and operationally superior to a corresponding deterministic linear programming model and that the computational effort required for its implementation is comparable to that of the deterministic model. Another application of the multistage stochastic programming is the Russell--Yasuda Kasai model (Carino, et al. (45), which aims at maximizing the long term wealth of the firm while producing high income returns.
Mulvey and Vladimirou (46) used dynamic generalized network programs for financial planning problems under uncertainty and they developed a model in the framework of multi-scenario generalized network that captures essential features of the various discrete time financial decision problems. Mulvey and Ziemba (47) present a more detailed overview of various asset and liability modeling techniques, including models for individuals and financial institutions such as banks and insurance companies. Also, many models have been developed in the area of financial analysis and financial planning techniques. Kvanli (48), Baston (49), Sharma, et al. (50), among others have applied goal programming to investment planning. Booth, et al., Seshadin, et al. (51) presented bank models using goal programming. The limitations of models and modeling are espoused in Toby (52), including methodological inconsistencies in the study of X-efficiencies and scale economies in banking (Toby (53)).
[FIGURE 1 OMITTED]
The works of Zukauskas and Neverauskas (54) present an organizational perspective of bank management. The bank is seen as a network organization and the structure of the bank as an organization should therefore, be analyzed from organization's point of view (Vilkas & Stoncikas (55)). A number of other studies have focused on the influence of the bank as a global organization, importance of resources and abilities of individual members, reciprocal communication and exchange (of information), continuously improving nonhierarchical structure, striving for the common objective and benefit, ensuring sustainability and competitiveness, safety of risk and social relationships (Alstyne (56); Henderson and McAdam (57). In this vein too, Akintoye and Somoye (58) have studied the impact of corporate governance structures on the sustenance of shareholder value.
Figures 1 and 2 provide theoretical and operational models for understanding bank management under certainty and uncertainty conditions. Figure 1 presents a theoretical model of bank management highlighting the application of deterministic and stochastic ALM models in addressing the conflicting goals of returns, liquidity, solvency and expansion of deposits and loans under certainty and uncertainty assumptions. Figure 2 shows another bank management model under Global Economic Uncertainty (GEU). In this model bank management is now shaped by critical X-Y relationships given global economic uncertainty and domestic policy uncertainty via interdependencies in financial markets.
[FIGURE 2 OMITTED]
The data for this study were generated through the administration of copies of structured questionnaire on five senior risk managers in each of the 24 consolidated Deposit Money Banks in Nigeria as at January 1, 2009 (see Table 4). The structured questionnaire was complemented with an interview schedule intended to highlight more specific answers on issues raised in the questionnaire.
The selected senior risk managers are conversant with asset-liability management and current global issues shapping the Nigerian banking industry. Their identities are not disclosed in the study as strict confidentiality was promised in the process of generating the data.
Out of a total of 120 copies of the questionnaire administered, 86 copies were retrieved, giving a response rate of 71.7 per cent. The author had the privilege of distributing some copies of the questionnaire at selected
venues of advanced banking courses held in Lagos in 2008 and early 2009. The others were distributed to some senior risk managers in Port Harcourt. Most of the interviews concentrated in the regional offices in Port Harcourt.
Pilot validation and reliability test of the questionnaire was earlier conducted with selected Senior Risk Managers in top-rated banks. The bank managers helped us to redesign the questions in terms of content, relevance, validity and reliability. Irrelevant technical analyses were avoided. A number of inconsistencies have been noted in the literature regarding the theory and practice of questionnaire validation (Bland and Airman (59); Bland and Altman (60); Atkinson and Nevillm (61); Schmidt and Steindorf (62)). Similar inconsistencies have been shown in the use of the Crombach's alpha as a measure of internal consistency and reliability; Crombach (63); Allen & Yen (64); Crombach (65). Our test-retest reliability exercise shows that repeating the test/ questionnaire under the same conditions would produce the same results with minor differences.
The major study X-variables are Constrained Liquidity Profiles (CLP), Critical Pressure Points before Crisis (CPPBEFORE CRISIS) Overall Management Strategy (OMS), Constrained Financial Markets (CFMs), and Regulatory Adequacy (RAQ). The Y-variables are Banks' Prudential Compliance (BPC), Critical Pressure Points after Crisis (CPPAFTER CRISIS), Banks Funds Management Strategy (FMS), Constrained Liquidity Profiles (CLPs) and Banks' Survival Strategies (BSS).
The X/Y variables were ranked from the questionnaire to test the following hypothesized relationships:
(1) CLP = f (BPC) (2) [CPP.sub.BEFORE CRISIS] = f ([CPP.sub.AFTER CRISIS]) (3) OMS = f (FMS) (4) CFMs = f (CLP) (5) RAQ = f (BPC) (6) RAQ = f (BSS)
The Spearman's Rank Correlation Coefficient was computed in line with Equation (7),
(7) [[GAMMA].sup.1] = 1 - 6 [SIGMA][D.sup.2] / n([n.sup.2] - 1)
Note that D is difference between ranks of corresponding pairs of X and Y, n is number of observations, and S is symbol of summation. Our null hypothesis is accepted if the computer [[GAMMA].sup.1] (rank correlation coefficient) falls within the region of [+ or -] 1.96 / [square root of n-1] as proposed by Freund and Williams.
Koutsoyiannis (66) has noted two points of interest when applying the rank correlation coefficient. Firstly, it does not matter whether we rank the observations in ascending or descending order. However, we must use the same rule of ranking for both variables. Second, if two (or more) observations have the same value we assign to them the mean rank.
The data in Table 5 show that stock market meltdown had the highest impact on banks' liquidity profiles (90.7 per cent), followed closely by drying up of offshore financial lines of credit (84.9 per cent). Other factors impacting bank liquidity positions are slump in crude oil prices (69.8 per cent), depleting funds from the public sector (67.4 per cent), and shutting down of the Inter-Bank Foreign Exchange Market (61.6 per cent). The decline in banks' holding of Federal Government Securities had the lowest impact on the liquidity profiles of most of the banks (50.0 per cent). The banks likely to be worse-hit are those reasonably exposed to the stock market in terms of margin loans, and those highly dependent on offshore credit lines of credit. Equally affected adversely are those banks dependent on the oil industry and public sector deposits. Already, there is a directive to all tiers of government including government parastatals to reduce their deposits in Deposit Money Banks (DMBs) to 10 per cent. The full implementation of this directive is likely to expose weak banks to acute liquidity crisis.
Table 6 summarizes the view of senior risk managers on the effects of recent CBN's prudential regulation initiatives on liquidity, profitability and risk profiles. The introduction of the expanded discount window facility (EDW) appears to have a high impact on liquidity (73.3 per cent). Moreover, 70.9 per cent per cent of the respondents also agree that the option to expand lending facilities to banks up to 360 days has a high impact on bank liquidity position. The reduction of MLR from 40 per cent to 30 per cent provides a positive impact on liquidity (59.3 per cent). In addition the reduction of the CRR from 4.0 per cent to 2.0 per cent also has a high positive impact on liquidity (50.0 per cent), Banks' Liquidity position is also boosted under a regime of reduced MRR from 10.25 per cent to 9.25 per cent. The option given to banks to restructure margin loans up to December, 2009 did not seem to impact bank liquidity positively.
Overall, the reduction in MRR, CRR and MLR by the CBN did not seem to improve profitability in the banking industry, as most banks reduced their loan portfolios aggressively and rather invested more in low-yielding but safer treasury securities. The books of some of the banks reflected higher profitability as a result of the option to restructure margin loans up to December, 2009. Without full provisions for the margin loans, we might have returned to the era of paper profits. Albeit, the rebound of the Nigerian Stock Market is sluggish and does not promise early repayment of the margin loans. The option to expand lending facilities to banks up to 360 days and the introduction of expanded discount window facility marginally boosted profitability as banks increased their portfolio of purchased funds to finance loans to prime borrowers.
The reduction of MLR from 40 per cent to 30 per cent helped to minimise liquidity risk exposure. However, the reduction of MRR and CRR did not significantly minimise credit risk exposure due to a high build-up of bad loans and possibly banks risk aversion in a constrained operating environment. The option to restructure margin loans up to December 31, 2009 only minimised credit risk exposure in the short run.
Debiting the profit and loss account with the full provision for bad margin loans would confirm this. The expanded discount window facility and the option to expand lending to the banks up to 360 days are inconsequential to altering banks' risk profiles because increasing cost of funds is not matched by increasing returns, particularly in terms of interest income.
Table 7 shows the outlook of banks with respect to prudential compliance. Most of the banks operated with above-average loan to deposit ratios, although the extent of bad loans portfolio is at the average level. Most of the banks had liquidity ratios that exceeded the average. Overall, it appears most Nigerian banks entered the global crisis era with a history of non-compliance with basic prudential indictors. The average position in terms of bad loans portfolio could have been influenced by very few strong banks with good books. The liquidity ratios of most of the banks seem to be above the industry average and by implication above the prudential Minimum Liquidity Ratio (MLR) of 40 per cent. What is not clearly visible is the extent an excessively liquid banking industry creates credit in the economy particularly in the critical petroleum, manufacturing and SME sectors.
The opinions of senior risk managers on the likely effects of the recent interest rate cap on bank balance sheets and the banking industry as a whole are summarized in Table 8. It is the opinion of 70.9 per cent of the respondents that a reduction of maximum deposit rate to 15 per cent has a negative effect on banks balance sheet. Moreover, only 67.4 per cent of the respondents agree that the reduction in deposit rate has a negative effect o the banking industry as a whole. It is the opinion of 55.8 per cent of the respondents that the reduction of maximum lending rate to 24 per cent, including charges, has a negative effect on the balance sheet. 59.3 per cent of the risk officers agree that the reduction of maximum lending rate has a negative effect on the banking industry as a whole. While 61.6 per cent of senior risk officers agree that CBN's lending to the banks for a maximum of 90 days at 14.75 per cent has a positive effect on their balance sheet, 69.8 per cent of the respondents agree such an action has a negative effect on the banking industry as a whole.
The senior banking officers argue that a reduction of maximum lending rate could contract drastically the portfolio of Certificate of Deposits (CDs) and increase the cost of purchased funds to finance loans. Lending particularly to high-risk customers and SMEs could contract further as the capping of lending rate at 24 per cent favours only prime borrowers. CBN's lending to banks for a maximum of 90 days at 14.75 per cent could favour banks that are lucky to access this facility, but in the medium-term could have a negative effect on the industry as the unfavoured banks still have to purchase funds at a higher cost.
The characteristics of bank funds management in the present volatile financial markets are summarized in Table 9. It is the opinion of 55.8% of the responding banking officers that the goal of funds management in these volatile financial markets occasioned by the 2007/ 2008 global financial crisis is not the maximization of profits consistent with liquidity and capital constraints. Most of those interviewed that the goal now is survival and sustainability in the face of harsh prudential constraints. Retaining their liquidity profiles while minimizing loan loss provisioning are currently driving fund management strategies. It is also the opinion of 67.4 per cent of the responding risk officers that dealing exclusively with default risk on loans is a critical funds management. Strategy in these volatile banking markets.
Other critical funds management strategies include dealing exclusively with interest rate risks, decreasing the GAPs as interest rates turn low and increasing voluntary reserves to accommodate deposit with demands. It appears most of the banks still pursue the strategy of maintaining stable earnings growth over the cycle of interest rates. Their focus is to stabilize earnings over the credit cycle rather than to maximize earnings in the short-run and thereby risk significant earnings in the next segment of the cycle.
The management strategies in dealing with identified liquidity and solvency problems are shown in Table 10. It is sometimes the practice that banks access CBN's Term Loan Facility as a strategy for dealing with chronic liquidity problems. It is always the practice to access the interbank market in times of chronic liquidity crisis. Most banks employ target examination to deal with chronic liquidity crisis. It is always the practice in most of the banks to restructure the balance sheet and management if liquidity crisis becomes chronic.
When dealing with identified solvency problems, it is sometimes the practice to change management or consider the recapitalization option. It is not the practice to consider the possibility of merger or acquisition. However, it is always the practice to strengthen and review bank specific contingency plans.
The impact of the recent 2007/2008 Global Financial Crisis on the Nigerian Stock Market and the Nigerian economy is summarized in Table 11. The highest impact on the stock market is reduction of capital inflows and investments. However, downturns in global stock, indexes, global corporate bankruptcies, and explosion in Residential Mortgage-Backed Securities (RMBS) showed lowest impact on the Nigerian Stock Market. Foreign investors had to pull out their funds from the Nigerian stock market to shore up their positions at home where the global crisis had crippled their investments. The stock market collapsed with the exit of the foreign investors because the market was driven more by sentiments than fundamentals.
The global financial crisis produced a 'confidence trap' in the stock market, leading to a very high portfolio of non-performing margin loans which have been re-scheduled to December 31, 2009. The CBN is currently carrying out an audit on the Nigerian banking industry to determine the extent of exposure to non-performing loans with a view to implementing full provisioning in a new risk management strategy. The global crisis also produced associated 'wealth effect' on domestic aggregate demand capable of affecting adversely the cash flow profiles of companies with various banking relationships. The resulting high demand pressure in the FX Market and the decumulation of foreign reserves are likely to limit liquidity and profitability of the banks. The collapse of oil prices must have adversely affected those banks that are heavily dependent on statutory allocations from the Federations Account.
The ranking of the critical pressure points on bank balance sheets before and after the 20078/2008 global financial crisis are summarized in Table 12. The critical pressure points that have the highest impact before the recent crisis are lower profitability (1), liquidity pressure, (2) capital flows (5). The raining changed after the global financial crisis as follows: Liquidity pressure (1), potential toxic assets due mainly to capital market lending (2), constrained capital flows, higher loan loss provisioning (4) and lower profitability.
The result in Table 13 show the opinions of senior bank managers on the CBN's recent initiatives in tightening regulation and supervision. Regulatory adequacy is ranked from the review of contingency planning (1) to greater emphasis on enforcement of the Code of Corporate Governance (6). The greatest emphasis on contingency planning could have been motivated by acute liquidity shortages occasioned by the recent global financial crisis. 59.3 per cent of the respondents ranked 'advise banks on risk management' in the second position because of the increasing riskiness in risk-sensitive assets and liabilities and the need to reflect all risks appropriately in determining the net worth of banks. Only 20.9 per cent of the respondents ranked emphasis on corporate governance as adequate. The strengthening of institutional coordination through the Financial Sector Regulatory Coordinating Committee (FSRCC) is ranked as inadequate. Regulatory objectives and actions are not clearly harmonized among the Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC) and the National Insurance Commission (NIC). For instance, the current audit of the Nigerian banking industry to reveal its total risk exposure is not matched by similar audits in the capital market and insurance industry.
The likely survival strategies adopted by the banks in dealing with critical pressure points are shown in Table 14. It appears most banks have adopted extra conservatism in managing bank assets and liabilities in a constrained financial services industry. The is also emphasis on size is least likely because of the existence of a largely under-banked market. The adoption of the International Financial Reporting Standards (IFRS) and Basel II by most of the banks are likely, although analysts are still studying the impact of adopting such soft laws on the long-term survival of the banking industry.
Some of the banks have publicly announced their commitment to implementing industry best practices across their global businesses. As a result they have made some changes to their financial reporting, governance, risk and control architecture.
Although the CBN has set 2012 as the deadline for Basel II implementation in Nigeria, some banks are currently integrating Basel II with key business practices, such as risk appetite management, loan pricing, loan portfolio management, performance management, customer segmentation and product planning as key differentiators in business model success. The results in Table 15 show that 54.7 per cent of the respondents held more bank loans than investment securities, apparently due to their profit maximization motives. However, the quest for more investment securities than bank loans after the recent 2007/2008 Global Financial Crisis could be driven by greater emphasis on liquidity. The results show that 67.4 per cent of the respondents indicate their banks held more short-term than long-term investments after the financial crisis. Most respondents (61.6%) indicate their holdings of primary reserves subject to the cash reserve requirements in the wake of the global financial crisis, possibly due to constrained liquidity profiles. Before the global financial crisis, most banks seemed to minimise their holdings of primary reserves due to lost income. Overall there seems to be the desire of most banks to maximize their holdings of secondary reserves in their asset portfolio before and after the global crisis. More banks hold the minimum amounts of primary and secondary reserves consistent with bank safety.
The adoption of liability management strategies in dealing with liquidity problems before and after the Global Financial Crisis is summarized in Table 16. More bankers (79.1 per cent) favour targeting asset growth as given and then adjusting the source of funds as needed. Since liability management argues that banks can use the liability side of their balance sheets for liquidity, it appears the use of purchased funds to meet liquidity and loan requirements became more rampant after the recent global financial crisis. Most of the banks seem to treat the liability structure as a fixed pool of funds in the short-run, albeit at a higher cost of funds. Before the 2007/ 2008 Global Financial Crisis, most banks boosted their liquidity by raising the interest rates on rate-sensitive liabilities. This became highly constrained after the global financial crisis due a return to the regime of interest rate caps by the regulatory authorities (CBN). The depletion in their CDs portfolio restrained most banks in using liability management to counteract the effects of deposit variability.
Hypothesis Testing Results
The hypothesis testing results are summarized in Table 17. The results show a rank correlation coefficient of 0.43 between constrained banks' liquidity profiles (CLP) and Banks Prudential Compliance (BPC). Since this value falls within the region [+ or -] 0.59, we accept the null hypothesis of no significant association between CLP and BPC. With a computed rank correlation coefficient of 0.01, and cut-off scores of [+ or -] 0.65, we find that the senior bankers are indifferent in the ranking of critical pressure points before and after the 2007/2008 Global Financial Crisis. Infact, no significant association is observed in the ranking of the critical pressure points. A rank of correlation coefficient of 0.93 falls outside the critical region of [+ or -] 0.43. This shows a significantly positive correlation between overall management strategy and banks' funds management strategy.
The results indicate that constrained financial markets (CFMs) significantly lead to constrained liquidity profiles in the banks. Hence, our calculated 1 of 0.72 falls outside the critical region of [+ or -] 0.48. At the 5% level of significance, we reject the null hypothesis of no significant relationship between FMs and CLPs. With a calculated rank correlation coefficient of 0.75 falling outside the critical region of [+ or -] 0.54, we find a significantly positive association between regulatory adequacy (RAQ) and compliance (BPC). Similarly, with a rank coefficient of 0.76 lying outside the region of [+ or -] 0.54 at the 5% level of significance, we find a positive association between regulatory adequacy (RAQ) and bank survival strategies (BSS).
The 2007-2008 Global Financial Crisis has necessitated a radical review of our understanding of bank management theories and practices. The inter-linkages between stock and credit markets have provided further constraints to optimal portfolio management in the banking industry. Specifically, the collapse of major banking markets across the world necessitated the exit of foreign investments from the Nigerian stock market to store up positions elsewhere. On banks' balance sheets, we observe the existence of toxic assets due to high margin loan losses.
The pursuit of loose monetary policy direction in response to the global financial stress is marred by conflicting objectives. From the regulator's point of view, interest rate caps is intended to facilitate growth in the real sector and facilitate inter-bank lending. From bank management perspective, both liquidity and profitability will be constrained under the regime of interest rate caps. Both regulatory and bank management objectives can never converge, especially now that we have greater emphasis on requisite disclosure and transparency under the International Financial Reporting Standards (IFRS) and Basel II. In the short-run (1-2 years after global financial stress), banks will battle to maximize solvency and safety in their asset and liabilities management (ALM).
Full provisioning for marginal loan losses would surely minimize profitability and possibly dividend payouts. Banks with weak capital base could be worse hit, and may need to re-capitalize through an appropriate business combination (merger, acquisition or takeover). The margin of safety lies in increasing the gilt-edged securities portfolio to maintain liquidity and solvency levels. The inadequacy in corporate governance and institutional coordination requires greater attention.
Implications for Policy
This part of the paper summarizes our questionnaire and hypothesis testing results. Stock market meltdown had the highest impact on banks' liquidity profiles. The increasing interdependencies among financial markets, institutions and instruments are critical in managing banks' balance sheets, particularly in times of global financial crisis. The banks that are worse hit are those banks that are extensively exposed to the stock market in terms of margin loans, and those dependent on external lines of credit.
The option to reschedule margin loans up to December, 2009 did not seem to impact bank liquidity positively. In this context, full disclosure and provisioning for these toxic assets is the most professional option.
Significant reductions in selected monetary policy tools like Minimum Rediscount Rate (MRR), Cash Reserve Ratio (CRR) and Minimum Liquidity Ratio (MLR) did not seem to improve profitability as banks managed to sustain liquidity and solvency levels. The introduction of the Expanded Discount Window (EDW) facility and the option to expand lending by the Central Bank of Nigeria (CBN) to banks up to 360 days hoosted profitability marginally and insignificantly. These options are also inconsequential to altering banks' risk profiles. The results also show that most Nigerian banks entered the 2007-2008 global crisis era with a history of noncompliance with basic prudential guidelines. Coupled with a lack of requisite disclosure and possible paternalistic behaviour from the CBN, this noncompliance might have been condoned at the expense of sound books.
Interest rate caps produced a possible negative effect on banks' balance sheets. It also appears that CBN's lending to the banks for a maximum of 90 days at 14.75 per cent has a positive effect on few banks' balance sheets, but at the industry level a negative effect is expected. The drastic reduction in maximum lending rate could contract drastically the portfolio of Certificates of Deposit (CDs) and increase the cost of purchased funds to fund loans. Lending particularly to high-risk customers and SMEs could contract further as the capping of lending rate at 24 per cent favours only prime borrowers.
The driving banks' funds management strategies include maximization of profits subject to liquidity and capital constraints, minimization of loan loss provisioning and dealing exclusively with default risk on loans. There is also the strategy of controlling the size of GAPs as interest rates fluctuate. Current management strategy in dealing with chronic liquidity and solvency problems still relies on accessing the inter-bank market, while strengthening and reviewing the banks' specific contingency plans. The 2007-2008 Global Financial Crisis led to a reduction of capital inflows and investments in the Nigerian stock market, producing a 'confidence trap' and a build-up of non-performing margin loans. The global crisis also produced associated 'wealth effect' and decumulation of foreign reserves. Banks have to manage lower profitability and mounting liquidity pressure, particularly after the recent crisis.
Most of the respondents have ranked as inadequate the emphasis on corporate governance and institutional coordination. The banks seem to have adopted extra conservatism in managing their portfolios in constrained financial markets. Compliance with the International Financial Reporting Standards (IFRS) is likely to take full effect in all banks by December 2009. The emphasis on regulate disclosure and dynamic loan loss provisioning would replace moribund Nigerian accounting standard and help banks implement industry best practices in financial reporting, governance, risk and control architecture. The quest for more investment securities than bank loans could have been driven by rising liquidity pressures. Most banks continue to target asset growth and then adjust the source of funds as needed. The use of purchased funds to meet liquidity and loan requirements became more pronounced after the recent global crisis. It appears most banks hosted their liquidity by raising interest rates on rate-sensitive liabilities before the crisis. However, under a regime of interest rate caps, it has become difficult to use CDs to counteract the effects of deposit variability.
There is no significant association between constrained liquidity profiles (CLPs) and banks' prudential compliance (BPC) because both variables are driven by different objectives and managed independently by the banks, particularly in times of financial stress. The banks are indifferent in their ranking of critical pressure points before and after the recent global financial crisis. However, banks' funds management strategy is significantly integrated into overall management strategy. There is also a significantly positive relationship between constrained financial markets (CFMs) and constrained liquidity profiles (CLPs) of banks. In addition, regulatory adequacy (RAQ) relates significantly and positively with banks' prudential compliance (BPC) and bank survival strategies (BSSs).
It is likely that continuation with loose monetary policy direction in the medium term would restore confidence in the financial markets, although most banks still argue that the capping of interest rates has constrained both liquidity and profitability. The current management at the CBN has adopted a new strategy of providing guarantees for inter-bank credits to check the rising lending rates now capped between 21 and 22 per cent. The CBN seems to be pursuing an interest rate regime that supports growth, especially in the private sector. The high interest rate is attributed to the craze by banks to accept placement at a very high rate. Measures to bring down inter-bank lending rates improve liquidity in the financial system, and remove restrictions on foreign capital movements. Hence the wide divergence between inter-bank rates and the Monetary Policy Rate (MRR) exerts pressures on the lending rates. To ensure convergence the CBN has recently reduced the MPR from 8 per cent to 6 per cent per annum. Inter-bank rates are driven by perceived counter-risk. The CBN is currently addressing this problem through proper bank audits, appropriate resolution framework and enhanced disclosures and transparency in financial statements.
The CBN has also re-introduced the interest rate corridor of plus or minus 200 basis points, with the rate on the standing lending facility at 8 per cent and the rate on the standing deposit facility at 4 per cent. This may likely be followed by reduction in bond yields in the short-term, but the re-introduction of the interest rate corridor will limit any impact on treasury bills rates. A condition of the guarantee is that pricing must reflect the credit enhancement it provides. Overnight placements shall be priced more than MPR + 2 per cent. A maximum spread of 300, 400, and 500 basis points above the MPR shall be maintained for tenors of up to 30, 60, 90 days respectively. This is intended to lay the foundation for evolving a risk-free yield curve at the short end.
The objective function of a bank's assets and liabilities portfolio mix is now constrained by a wider range of issues that have been earlier studied. The dynamics characterizing the directions of monetary policy and an appropriate regulatory framework are more unpredictable in times of financial stress. Overall the maximization at least a few years after a major global financial crisis. The internal issues affecting good corporate governance in Nigerian banks include difficulty in changing management, conflicts of interest, weak risk management, lack of reliable mechanisms to get information to the Board, and lack of transparency on directors' remuneration. The monitoring capacity of the regulatory agencies and the relevant professional bodies should be enhanced to minimize corporate governance abuses. Regulatory adequacy should also be enhanced if banks' prudential compliance is expected to improve. The particular areas of concern include strengthening prudential regulation, disclosure rules and supervision. Those banks with a trade record of prudential breaches and disclosure lapses are likely to experience more constrained portfolios at least one or two years after the recent global financial crisis.
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ADOLPHUS J. TOBY, Ph.D.
Department of Banking and Finance
Rivers State University of Science and Technology
Port Harcourt, NIGERIA
The author owns full responsibility for the contents of the paper.
TABLE 1 CHANGES IN BANK VALUATION IN NIGERIA: MARCH 10, 2008-MARCH 10, 2009 S/No Company/Symbol (March 10, (March 10, 2008) 2009) 1 First Bank of Nigeria (FBN) 914,279 308,295 2 Zenith Bank PLC (ZEN) 828,633 217,682 3 United Bank of Africa (UBA) 810,588 139,340 4 Guaranty Trust Bank (GTB) 501,916 135,969 5 Union Bank PLC (UBN) 502,561 127,148 6 Intercontinental Bank (ICB) 817,202 102,232 7 Bank PHB PLC (PHB) 454,650 92,294 8 Fidelity Bank (FID) 320,918 81,385 9 Oceanic Bank (OCB) 320,096 78,584 10 Access Bank PLC (ABL) 352,862 76,677 11 Stanbic IBTC Bank PLC (STB) 280,669 70,870 12 First City Monument Bank (FCM) 300,830 70,454 13 Diamond Bank PLC (DIA) 260,523 59,217 14 Sky Bank PLC (SKY) 126,360 30,162 15 Sterling Bank PLC (STL) 65,497 15,091 Total 6,857,585 1,605,399 Total NSE Market Cap 12,539,416 4,835,963 Bank Mkt Cap/NSE Mkt Cap 54.70% 33.2% Total Bank Loss/NSE Loss S/No Company/Symbol Change in Change in Value (N) Value (%) 1 First Bank of Nigeria (FBN) (605,984.36) -66.3 2 Zenith Bank PLC (ZEN) (610,951.42) -73.7 3 United Bank of Africa (UBA) (671,247.55) -82-8 4 Guaranty Trust Bank (GTB) (365,946.84) -72.9 5 Union Bank PLC (UBN) (375,413.26 -74.7 6 Intercontinental Bank (ICB) (714,970.24) -87.5 7 Bank PHB PLC (PHB) (362,356.25) -79.7 8 Fidelity Bank (FID) (239,533.48) -74.6 9 Oceanic Bank (OCB) (241,512.22) -75.4 10 Access Bank PLC (ABL) (276,185.04) -78.3 11 Stanbic IBTC Bank PLC (STB) (209,799.41) -74.7 12 First City Monument Bank (FCM) (230,375.33) -76.6 13 Diamond Bank PLC (DIA) (201,306.20) -77.3 14 Sky Bank PLC (SKY) (96,197.77) -76.1 15 Sterling Bank PLC (STL) (50,406.80) -77.0 Total (5,252,186.17) -76.6 Total NSE Market Cap (7,703,453.49) -61.4 Bank Mkt Cap/NSE Mkt Cap Total Bank Loss/NSE Loss 68.2% Data Source: www.broadstreetlagos.com TABLE 2 DISCLOSURE OF SOME BANKS' MARGIN LOAN EXPOSURE VALUE Disclosure Banks (N'bn) Date Source FCMB 7.5 31-Jan-09 Bank Interim Result GT Bank 11.8 29-Feb-08 Standard and Poor's UBA 44.8 30-Sep-08 Bank Interim Results Zenith Bank 5.1 30-Sep-08 Standard and Poor's Access Bank 55.7 30-Sep-08 Bank Interim Results Diamond Bank 23.7 31-Jan-09 Bank Interim Results First Bank 66.1 31-Dec-08 Standard and Poor's Stirling Bank 16.3 30-Sep-08 Bank Annual Report Intercontinental Bank 45.0 29-Feb-09 MD's Interview on CNBC Total 276 Source: Businessday (Monday 04, May, 2009) TABLE 3 INTEREST INCOME SENSITIVITY AND NON PERFORMING LOANS EXPOSURE IN THE NIGERIAN BANKING INDUSTRY: 2003-2007 Year Interest Income Non-Performing to Gross Loans Ratio Revenue (%) (%) 2003 68.4 21.96 2004 69.1 21.60 2005 68.1 18.12 2006 66.5 8.76 2007 67.1 8.44 Source: Businessday, Monday 04, May, 2009 TABLE 4 PROFILES OF NIGERIAN DEPOSIT MONEY BANKS USED IN THE STUDY Sr. Bank Head No. of No. of No. office Copies of Question- Investment naire Distributed Retrieved 1. Access Bank Nigeria Plc Lagos 5 2 2. Afribank Nigeria Plc Lagos 5 2 3. Citigroup Lagos 5 1 4. Diamond Bank Plc Lagos 5 3 5. Ecobank Nigeria Plc Lagos 5 5 6. Equitorial Trust Bank Ltd Lagos 5 5 7. Fidelity Bank Plc Lagos 5 5 8. First Bank of Nigeria Plc Lagos 5 5 9. First City Bremulant Bank Plc Lagos 5 3 10. FIN Bank Plc Lagos 5 5 11. Guaranty Trust Bank Plc Lagos 5 5 12. Stanbic IBTC Lagos 5 5 13. Intercontinental Bank Plc Lagos 5 5 14. Oceanic Bank International Plc Lagos 5 4 15. Bank PHB Lagos 5 5 16. Skye Bank Plc Lagos 5 3 17. Spring Bank Plc Lagos 5 1 18. Standard Chartered Bank Lagos 5 1 Nig. Ltc 19. Stirling Bank Plc Lagos 5 3 20. Union Bank of Nigeria Plc Lagos 5 5 21. United Bank for Africa Plc Lagos 5 5 22. Unity Bank Plc Abuia 5 2 23. Wema Bank Plc Lagos 5 1 24. Zenith Bank Plc Lagos 5 5 Copies Distributed = 120 Copies Retrieved = 86 Percentage Retrieved = 71.7% TABLE 5 IMPACT OF RECENT GLOBAL FINANCIAL CRISIS OF BANKS' LIQUIDITY PROFILES IN NIGERIA Sr. Total Impact No. Factor Score Ranking Percentage 1 Shutting down of the Inter-Bank Foreign Exchange Market Highest Impact 53 (5) 61.6 Lowest Impact 25 (3) 29.1 2 Slump In Crude Oil Prices Highest Impact 60 (3) 69.8 Lowest Impact 26 (2) 30.2 3 Drying up of off-shore financial lines of credit Highest Impact 73 (2) 84.9 Lowest Impact 10 (5) 11.6 4 Stock Market Meltdown Highest Impact 78 (1) 90.7 Lowest Impact 5 (6) 5.8 5 Depleting Funds from the Public Sector Highest Impact 58 (4) 67.4 Lowest Impact 21 (4) 24.4 6 Decline In banks' holding of Federal Government Securities Highest Impact 35 (6) 40.7 Lowest Impact 43 (1) 50.0 Source: Questionnaire Data, September 2008-March, 2009 TABLE 6 EFFECTS OF CENTRAL BANK O F NIGERIA (CBN'S) RECENT PRUDENTIAL REGULATION INITIATIVES ON BANK LIQUIDITY, PROFITABILITY AND RISK S.No. Prudential Regulation Initiative Liquidity Profitability 1 Reduction of MRR from 10.25% to 9.25% High Impact 38(44.2%) 21(24.4%) Low Impact 20(23.3%) 33(38.4%) 2 Reduction in CRR from 4.0 to 2.0% High Impact 43(50.0%) 32(37.2%) Low Impact 21(24.4%) 42(48.8%) 3 Reduction of MLR from 40% to 30% High Impact 51(59.3%) 38(44.2%) Low Impact 29(33.7%) 41(47.7%) 4 Option to restructure margin loans up to December, 2009 High Impact 23(26.7%) 46(53.5%) Low Impact 43(50.0%) 21(24.4%) 5 Option to expand lending facilities to banks up to 360 days High Impact 61(70.9%) 32(37.2%) Low Impact 12(14.0%) 31(36.0) 6 Introduction of expanded discount window facility High Impact 63(73.3%) 41(47.7%) Low Impact 20(23.3%) 31(36.0%) S.No. Prudential Regulation Initiative Risk Profile * 1 Reduction of MRR from 10.25% to 9.25% High Impact 23(26.7%) Low Impact 38(44.2%) 2 Reduction in CRR from 4.0 to 2.0% High Impact 23(26.7%) Low Impact 52(60.5%) 3 Reduction of MLR from 40% to 30% High Impact 40(46.5%) Low Impact 32(37.2%) 4 Option to restructure margin loans up to December, 2009 High Impact 51(59.3%) Low Impact 12(14.0%) 5 Option to expand lending facilities to banks up to 360 days High Impact 30(34.9%) Low Impact 30(34.9%) 6 Introduction of expanded discount window facility High Impact 25(29.1%) Low Impact 31(36.0%) Notes: * High Impact on risk profile means minimum risk exposure; ** Low Impact means maximum risk exposure. Source: ibid. TABLE 7 OUTLOOK OF BANKS WITH RESPECT TO PRUDENTIAL COMPLIANCE Sr. Total Compliance No. Prudential Compliance Score Percentage Ranking 1 Loan to deposit ratio Discounted by market capitalization Above Average 43 50.0 0 Average 12 14.0 1 Below Average 10 11.6 0 2 Extent of Bad loans Portfolio Above Average 23 26.7 0 Average 38 44.2 1 Below Average 20 23.3 0 3 Liquidity Ratio Above Average 43 50.0 0 Average 20 23.3 1 Below Average 13 15.1 0 Notes: Full Compliance = 1; Non-compliance = 0 Source: ibid. TABLE 8 LIKELY EFFECTS OF THE RECENT INTEREST RATE CAP ON BANK BALANCE SHEET AND THE BANKING INDUSTRY Likely Effect on: Sr. Interest Rate Caps Balance Banking No. Sheet Industry 1 Reduction of maximum deposit rate to 15% Positive 11(12.8%) 15(17.4%) Negative 61(70.9%) 58(67.4%) 2 Reduction of maximum lending rate to 24%, including charges Positive 21(24.4%) 10(11.6%) Negative 48(55.8%) 51(59.3%) 3 CBN's lending to Banks for a maximum of 90 days at 14.75% Positive 53(61.6%) 21(24.4%) Negative 25(29.1%) 60(69.8%) TABLE 9 CHARACTERISTICS OF BANK FUNDS MANAGEMENT IN THE PRESENT VOLATILE FINANCIAL MARKETS Sr. Total No. Bank Funds Management Score Percentage 1 Maximization of profits consistent with liquidity and capital constraint True 13 15.1 False 48 55.8 2 Dealing exclusively with default risk on loans True 58 67.4 False 17 19.8 3 Dealing exclusively with interest rate risk True 43 50.0 False '22 25.6 4 Control of the maturity or duration gap (GAP) True 27 31.4 False 40 46.5 5 Controlling the size of the GAP True 17 19.8 False 41 47.7 6 Accepting large positive GAPs True 31 36.0 False 41 47.7 7 Decreasing the GAPs as interest rates turn low True 48 55.8 False 30 34.9 8 Increasing voluntary reserves to accommodate deposit withdrawals True 50 58.1 False 23 26.7 Sr. Strategy No. Bank Funds Management Ranking 1 Maximization of profits consistent with liquidity and capital constraint True (8) False (1) 2 Dealing exclusively with default risk on loans True (1) False (8) 3 Dealing exclusively with interest rate risk True (4) False (7) 4 Control of the maturity or duration gap (GAP) True (6) False (4) 5 Controlling the size of the GAP True False (2) 6 Accepting large positive GAPs True (5) False (2) 7 Decreasing the GAPs as interest rates turn low True (3) False (5) 8 Increasing voluntary reserves to accommodate deposit withdrawals True (2) False (6) Source: ibid. TABLE 10 MANAGEMENT STRATEGIES IN DEALING WITH IDENTIFIED LIQUIDITY AND SOLVENCY PROBLEMS IN YOUR BANK? Sr. Strategies for Dealing with: Total Strategy No. Score Percentage Ranking Chronic Liquidity Problems: 1 Access CBN's Team Loan Facility Always the practice 17 19.8 (8) Sometimes the practice 38 44.2 (4) Not the practice 20 23.3 (3) 2 Access Inter-Bank Money Market Always the practice 35 40.7 (3) Sometimes the practice 26 30.2 (5) Not the practice 28 32.6 (2) 3 Employ Target Examinations Always the practice 26 30.2 (7) Sometimes the practice 40 46.5 (3) Not the practice 18 20.9 (4) 4 Restructuring of Balance Sheet and Management Always the practice 51 59.3 (2) Sometimes the practice 20 23.3 (6) Not the practice 15 17.4 (5) Identified Solvency Problems: 5 Change Management Always the practice 34 39.5 (4) Sometimes the practice 41 47.7 (2) Not the practice 10 11.6 (6) 6 Consider the Recapitalization Option Always the practice 31 36.0 (5) Sometimes the practice 47 54.7 (1) Not the practice 5 5.8 (8) 7 Possibility of Merger or Acquisition Always the practice 28 32.6 (6) Sometimes the practice 17 19.8 (8) Not the practice 38 44.2 (1) 8 Strengthen and review ban specific contingency plans Always the practice 61 70.9 (1) Sometimes the practice 18 20.9 (7) Not the practice 7 8.1 (7) Source: ibid. TABLE 11 IMPACT OF THE RECENT 2007/2008 GLOBAL FINANCIAL CRISIS ON THE NIGERIAN STOCKMARKETAND THE NIGERIAN ECONOMY Sr. Impact of Global Financial Total Impact No. Crisis on: Score Percentage Ranking Nigerian Stock Market: 1 Reduction on Capital Inflows and Investments Highest Impact 58 67.4 (2) Lowest Impact 20 23.3 (6) No Impact 0 0.0 2 Downturns in Global Stock Indexes Highest Impact 12 14.0 (8) Lowest Impact 51 59.3 (2) No Impact 10 11.6 3 Global Corporate Bankruptcies Highest Impact 18 20.9 (7) Lowest Impact 43 50.0 (3) No Impact 12 14.0 4 Explosion in Residential Mortgage-Backed Securities (RMBS) Highest Impact 5 5.8 (9) Lowest Impact 61 70.9 (1) No Impact 12 14.0 Nigerian Economy: 5 `Confidence trap' in stock market Highest Impact 69 80.2 (1) Lowest Impact 5 5.8 (9) No Impact 0 0.0 6 Associated `Wealth effect' on domestic aggregate demand Highest Impact 57 66.3 (3) Lowest Impact 11 12.8 (8) No Impact 0 0.0 7 Collapse of commodity prices (especially oil) Highest Impact 45 52.3 (6) Lowest Impact 35 40.7 (4) No Impact 4 4.7 8 Demand pressure on the FX market Highest Impact 51 59.3 (4) Lowest Impact 20 23.4 (5) No Impact 11 12.8 9 Decumulation of foreign reserves and pressure on exchange rate Highest Impact 48 55.8 (5) Lowest Impact 13 15.1 (7) No Impact 5 5.8 Source: ibid. TABLE 12 RANKING THE CRITICAL PRESSURE POINTS ON BANK BALANCE SHEETS BEFORE AND AFTER THE 2007/2008 GLOBAL FINANCIAL CRISIS Sr. Critical Pressure Before After No. 2007/2008 2007/2008 Global Global Financial Financial Crisis Crisis 1 Liquidity Pressure 32(2) 53(l) 2 Potential toxic assets (due mainly to 15(9) 51(2) capital market lending) 3 Higher loan loss provisioning 16(8) 49(4) 4 Lower profitability 48(l) 48(5) 5 Depletion of capital 11(10) 46(6) 6 Possible Contagion effects on investor 18(7) 31(10) and depositor confidence 7 Over-priced foreign lines of credit 22(6) 44(7) 8 Exchange rate risks 31(4) 41(8) 9 Counter-party risks 40(3) 40(9) 10 Constrained capital flows 30(5) 50(3) Notes : Ranking is from 1-10: Highest Impact to Lowest Impact Source: ibid. TABLE 13 ADEQUACY OF CBN'S RECENT INITIATIVES IN TIGHTENING REGULATION AND SUPERVISION Regulatory Sr. Total Adequacy No. CBN's Initiative Score Percentage Ranking 1 Greater Emphasis on Enforcement of Code of Corporate Governance Very Adequate 18 20.9 (6) Just Adequate 17 19.8 Not Adequate 43 50.0 (1) 2 Standby teams of target examiners Very Adequate 21 24.4 (5) Just Adequate 18 20.9 Not Adequate 40 46.5 (2) 3 Review of Contingency Planning Very Adequate 53 61.6 (1) Just Adequate 12 14.0 Not Adequate 10 11.6 (5) 4 Introduction of Credit Bureau Very Adequate 38 44.2 (3) Just Adequate 27 31.4 Not Adequate 17 19.8 (4) 5 Advise banks on risk management Very Adequate 51 59.3 (2) Just Adequate 25 29.1 Not Adequate 5 5.8 (6) 6 Strengthening of institutional coordination through the Financial Sector-Regulatory Coordinating Committee (FSRCC) Very Adequate 18 20.9 (6) Just Adequate 17 19.8 Not Adequate 40 46.5 (2) 7 Pushing through the Draft Asset Management Company of Nigeria (AMCON) Bill Very Adequate 28 32.6 (4) Just Adequate 20 23.3 Not Adequate 35 40.7 (3) Source: ibid. TABLE 14 LILLY SURVIVAL STRATEGIES ADOPTED BY BANKS IN DEALING WITH CRITICAL PRESSURE POINTS Sr. Survival Strategy Total Strategy No. Score Percentage Ranking 1 Extra Conservatism during time of crisis Most Likely 51 59.3 (1) Likely 12 14.0 (5) Least Likely 10 11.6 (5) 2 Capital Conservation Most Likely 50 58.1 (2) Likely 18 20.9 (4) Least Likely 12 14.0 (3) 3 Cost minimization Most Likely 48 55.8 (3) Likely 22 25.6 (3) Least Likely 13 15.1 (2) 4 De-emphasis on size Most Likely 38 44.2 (4) Likely 5 5.8 (6) Least Likely 40 46.5 (1) 5 Adoption of International Financial Reporting Standards (IFRS) Most Likely 28 32.6 (5) Likely 36 41.9 (2) Least Likely 12 14.0 (3) 6 Adoption of Basel II Most Likely 14 16.3 (6) Likely 51 59.3 (1) Least Likely 10 11.6 (5) Source: ibid. TABLE 15 BANK ASSET MANAGEMENT STRATEGIES BEFORE AND AFTER THE 2007/2008 GLOBAL FINANCIAL CRISIS Before After Global Global Sr. No. Asset Management Strategy Crisis Crisis 1 We held more investment securities than bank loans True 18(20.9%) 51(59.3%) False 47(54.7%) 22 (25.61/6) 2 We held more short-term than long-term investments True 40(46.5%) 58(67.4%) False 31(36.0%) 30(34.9%) 3 We minimized our holdings of primary reserves subject to the Cash Reserve Ratio True 41(47.7%) 18(20.9%) False 40(46.5%) 53(61.6%) 4 We maximized our holdings of secondary reserves in the assets portfolio True 51(59.3%) 63(73.3%) False 28 (32.6%) 20(23.3%) 5 We held the minimum amounts of primary and secondary reserves consistent with bank safety True 61(70.9%) 68(79.1%) False 10(11.6%) 11(12.8%) Source: ibid. TABLE 16 BANK LIABILITY MANAGEMENT STRATEGIES BEFORE AND AFTER GLOBAL FINANCIAL CRISIS Before After Global Global Sr. No. Liability Management Strategy Crisis Crisis 1 We target asset growth as given and then adjust the source of funds as needed True 61(70.9%) 68(79.1%) False 11(12.8%) 10(11.6%) 2 We treat the liability structure as a fixed pool of funds in the short- run True 48(55.8%) 61(70.9%) False 30(34.9%) 20(23.3%) 3 We boost liquidity by raising the interest rates paid on rate- sensitive liabilities True 61(70.9%) 21(24.4%) False 18(20.9%) 60(69.8%) 4 Negotiable Certificates of Deposits (CDs) constitute the bill of our bank liabilities portfolio True 58(67.4%) 31(36.0%) False 12(14.0%) 42(48.8%) 5 Liability Management is used to counteract the effects of deposit variability True 51(59.3%) 18(20.9%) False 20(23.3%) 50(58.1%) TABLE 17 RANK CORRELATION COEFFICIENTS AND RELEVANT SIGNIFICANCE TESTING No. of Sr. Observations Significance No. Variables (N) [GAMMA] (1) (5% Level) 1 Constrained Liquidity Profiles 12 0.43 [+ or -] 0.59 (CLP) and Banks' Prudential Compliance (BPC) 2 Ranking of Critical 10 0.01 [+ or -] 0.65 Pressure Points (CPPs) 3 Overall Management Strategy (OMS) and 21 0.01 [+ or -] 0.43 banks Fund Management Strategy (FMS) 4 Constrained Financial Markets 18 0.93 [+ or -] 0.48 (CFMs) and Constrained Liquidity Profiles (CLPs) 5 Regulatory Adequacy (RAQ) and Banks' 14 0.72 [+ or -] 0.54 Prudential Compliance (BPC) 6 Regulatory Adequacy (RAQ) and Banks' 14 0.76 [+ or -] 0.54 Survival-Strategies (BSS) Source: Author's computations Based on Ranking Generated from Questionnaire
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|Author:||Toby, Adolphus J.|
|Publication:||Journal of Financial Management & Analysis|
|Date:||Jul 1, 2010|
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